Globalization And Employment

Globalization and Employment Globalization and Income Distribution: From the Lecture “Globalization and Employment” by Jeffrey Sachs, Geneva, March 1996 First, I would like to reiterate my belief that globalization will lead to higher overall growth rates for almost all economies and that there will not be a trade-off between faster growth for some and slower growth for others. Where distributional problems arise they are within income classes or between different skill levels but not between economies which grow more or less rapidly as result of the international economy, with obvious exceptions of countries that are disadvantaged by poor structures. For example, special measures would be needed to assist the poorest landlocked countries which do not have an objectively difficult time keeping up with world economic growth. On the whole, however, the developing countries have a good chance of achieving convergent growth rates. In addition, if the developed countries called the right policies, that is if they have flexibility, moderate rates of taxation and the like-something which is eluding most of Western Europe right now-they might also benefit from global economy by being able to export their differentiated high technology products to a much larger world market. In sum, the issue of distribution centres, not on whether some countries gained and others lose, but rather on income distribution within societies. This is my first point. My second point concerns the division of income between capital and labor. I would guess that the post tax income, of capital is privileged relative to the post tax income of labor as a result of globalization and especially globalization that leads to openness of financial markets and not just of trade. For example, both the evidence and the theoretical logic to make it quite clear that union wage premia are driven down by the openness of the world financial system and that the ability of capital to move offshore really does pose limits on the

1

Globalization and Employment wage-setting or wage-bargaining strategies of trade unions which are restrained in their wage demands by the higher elasticity of labor demand. Similarly, I think that, overtime, the evidence would show that the burden of taxation falls increasingly on labor and less and less on capitol as a result of these changes given that taxation inevitably falls on the fixed factor and is, as inevitably, escaped by the highly mobile factor. At the end of the day, the fact that labor cannot move into the low capital income taxation countries suggests that we will find in implicitly, both in terms of the incidence, and in terms of choice of tax system, a movement towards a heavier burden on labor taxation and away from capitol taxation and taxation of factor incomes. Capital can still be taxed, not directly as a tax on capital, but indirectly through a tax on overall income or consumption. For example, movements towards progressive consumption taxation may be constant and other mechanisms to tax capital income, if I am correct in assuming that the burden of the corporate income taxation is likely to diminish given the increased ability of the capital to escape taxation through international mobility. This is purely conjectural because the data has yet to be closely examined, but is not inconsistent with existing evidence. It is also true, I hasten that add, that the direct evidence of income going to capital as against labor in the national accounts shows modest, rather than large, shifts in the direction of the share of labor falling and that of capital rising. My guess is that if one were to look at post tax capital and labor income, one would find this trend even more strongly evident in the data. The third distributional shift is within labor itself, between skilled and unskilled workers. Economic theory suggests that increased globalization will lower the relative wage of unskilled labor in the advanced countries and raise their relative wage of unskilled labor in the developing countries when these two groups began to trade with each other after a period

2

Globalization and Employment of autarky. This is the famous Stoker-Samuelson theorem, or rather an implication of it, or more correctly, of so-called factor price equalization. We now find ourselves in a very odd situation with respect to this most standard and central of all economic theories in that many of the leading theorists who propound it doubt that it is actually applicable to present circumstances. I have my doubts about their doubts. After studying international trade theory, including factor price equalization, with Professor Bhagwathi, I confess that I cannot just dismiss it. Although he contends that it does not apply at all to the international scene, my own feeling is that it does. To begin, let me mention quickly the major caveat to the theory. If the developed and the developing countries have such unequal endowments-so much skilled labor in the advanced countries and so much unskilled labor in the developing countries-that they actually specialized, then factor price equalization cannot follow. Indeed, and set cases of specialization, being outside the cone of factor price equalization would mean that the increased export capacity of the developing countries would simply raise all incomes in the developed countries by bringing in the goods in question more cheaply. Thus, in terms of trade, the rich countries would enjoy an improvement that was a pure consumer gain for everyone. Globalization and Labor Standards I feel that if we are to respond to the developments as I described earlier we must look to better tax systems, or zero tax systems and other mechanisms, but not to (and here I know I use a loaded phrase) imposing minimum conditions of work or even institutional strategies for collective bargaining on developing countries. In my opinion the cost of such

3

Globalization and Employment conditions and strategies could be quite substantial for the developing countries and bring modest, if any, gains to the advanced countries. This being said, I would like to stress that there should not be any argument about the so-called core human standards, or core labor standards, if we could agree exactly on what constitutes such a core. There must, indeed, the core conventions that are very strong, closely monitored and taken quite seriously on such issues as slavery and other forms of involuntary servitude or coercive labor, especially coercive child labor, on freedom of association, freedom to bargain, and the like. However, I would draw the line at dictating the institutional details in these standards, particularly on such issues as the nature of our bargaining structure, and so forth. Their basic strategy should be comfortable for all because they really are the underpinnings of free societies. I do not think these standards are ideologically loaded between the left and right and, as believers in individual liberties and freedoms, trade economists should be able to accept them just as much as everyone else. Where many of them demur is on other kinds of labor standards such as minimum wages, conditions of work, hire and fire terms, industrial relations systems, the nature of collective bargaining, and the like. Globalization, Wages, Jobs and Myths: by Gerard Jackson In the present we find that opposition to globalization invariably turns out to really be opposition to free markets. Overall, the kind of changes leveled against the alleged evils of globalization turn out on closer examination to be no different from those leveled against the free market. In other words, attacks on globalization are really masking attacks on capitalism. In the words of Bob SantaMaria, one of Australia’s most prominent interventionists and monetary cranks, "Capitalism is the real enemy". Geoffrey Barker is

4

Globalization and Employment another statist fundamentalist with an obvious loathing of economic reasoning. A journalist with the Fairfax stable, Barker's usual ideological tactic is to dismiss market economic analysis as "free market fundamentalism". This approach, apparently, is all that is needed to demolish any free-market agreement. Unfortunately, much of the economic rot that Barker is well noted for regurgitating seems to be largely accepted by the public. So when a bigoted economic illiterate like Barker uses the Australian Financial Review (9/12/97) to parrot antiglobalization propaganda, you can bet your bottom dollar he is preaching the equivalent of the party line. Drawing on an article by a Rodrik ("Sense and Nonsense in the Globalization Debate", 1997 summer edition of their Journal of Foreign Policy), Barker tells us that Rodrik sets out the globalization issues "with splendid clarity". (Coming from Barker, this kind of praise amounts to the kiss of death). Fortunately Rodrik's argument contains the bones of all anti-globalists' points. Rodrik claims to have found a relationship between unemployment, globalization and increasing demands for more welfare. This is just not true, particularly in the case of welfare. Increasing demand for welfare in Europe and America since the end of World War II has had nothing to do with foreign trade. No policy party ever proposed increased social spending to compensate for the alleged costs of free trade. Does anyone really believe that it was the rising volume of foreign trade and capital flows that caused Johnson to implement his big spending "Great Society" programs? Observers should also take note of the fact that an increasing amount of social spending is going to pensions, health and education. None of which have anything to do with foreign trade. Quite frankly, this argument has no merit at all, except for anti-market journalists looking for a club with which to beat the market. That anti-market likes of Barker make a particular point of ignoring, if

5

Globalization and Employment not actually denying, the enormous role of that union-created unemployment plays in expanding the demand for more welfare. Behind the welfare argument is the belief that globalization (free trade) raises the level of unemployment in high-wage countries and lowers living standards. This is an old anti-free trade agreement argument that has no substance at all. They can never be sufficiently stressed that free trade does not raise the volume of unemployment. (our unions do that). What it does do is reallocate labor and capital to more efficient lines of production. It is this increased efficiency that raises welfare by providing cheaper goods and services thus increasing purchasing power. Protectionists, in all their guises, argue that by opening up our markets real wages, especially of the unskilled, will be driven down by cheap foreign labor and capital out flows to cheap labor countries. The first argument is based on the assumption that by importing cheap goods we are, in a sense, actually importing cheap labor which is therefore in directly competes against unskilled domestic labor hence driving down its price. This is a very plausible line of reasoning and is obviously based on the fact that the price of similar goods, including factors of production, tend to be equalized by the market process. The error here is the failure to realize that the prices to be equalized goods and factors of production must be free to move. This error has resulted in many people, including a number of economists, confusing the product of labor with labor services. It is quite possible, however, that in some circumstances certain types of foreign unskilled labor can compete directly with similarly domestic labor without migrating. For example, the nature of computer technology has made it possible for Western companies to directly bid for the services of Indian programs. So theoretically technology has made it possible to combine national markets for the services of this type of labor into a single international marketplace

6

Globalization and Employment in which incomes will tend to be equalized because labor services will be hired directly instead of their products just being bought. Proponents’ Views of Globalization: from “Writing the Constitution of a Single Global Economy: A Concise Guide to the Multilateral Agreement on Investment – Supporters’ and Opponents’ Views” by Michelle Sforza, Scott Nova, and Mark Weisbrot For proponents of globalization, the process is not only inevitable-since it is seen as a direct product of the steady march of technological innovation-but overwhelmingly beneficial. Proponents acknowledge that not everyone gains from the increasing integration of the world economy-unskilled manufacturing workers in high wage countries, for example, may be displaced. But they argue that the gains from increasing competition and that more efficient allocation of resources are far greater than the losses faced by any particular group. In the proponent’s scenario, globalization increases efficiency and competition. Greater efficiency allows for continued economic expansion and the creation of new jobs and other economic opportunities. Competition yields benefits to consumers in the form of lower prices. Foreign direct investment (FDI) is viewed as vital to this process. FDI subjects national industries throughout the globe to the most advance competitors who can establish productive facilities within each national economy. There are also gains from increasing trade, as different products or parts of products are produced wherever this can be done with greatest economic efficiency. Poor countries gain from both inflows of capital and the spread of the most advanced technology throughout the globe. Most proponents of globalization recognize that unregulated markets do not always produce the best outcomes and that government intervention is sometimes necessary. However, they argued that most existing regulatory practices-for example, restrictions on

7

Globalization and Employment foreign investment, which the MAI (Multilateral Agreement on Investment) would prohibit actually cause "distortions." By "distortions" they mean economic outcomes that are less efficient than those that would occur if in the absence of regulation. In their view, an investment agreement like the MAI can't establish clear rules that would eliminate a host of distortions and inefficiencies that have been written into law through the efforts of special interests-yielding benefits for the general public. Opponents’ Views of Globalization Critics of globalization, of course, see things very differently. They note, for example, that a sharp increase in inequality has coincided with the acceleration of the process of globalization. In the U.S., the partial equalization of income and wealth that took place between 1945 and 1970 has since been reversed. In the last decade, almost all of the income gains from national economic growth went to the top 5 percent of American families. The majority of U.S. workers have actually seen their real wages decline since the 1970’s. On a global scale, over the last 30 years the richest the 20 percent of the world's population has increased their share of world income 70 percent to 85 percent, while the share captured by the poorest 20 percent has declined from 2. 3 percent to 1. 4 percent. Globalization’s detractors argue that these two trends-increasing economic integration and growing inequality-are causally related. In their view, that increasing mobility of transnational corporations enables them to play countries and localities against each other, bidding down wages and other labor standards in a global "race to the bottom. " Environmental standards, workplace safety rules and similar safeguards are also weakened, they assert, as governments come under increasing pressure to accede to the demands of highly mobile corporations will can always find another place to produce.

8

Globalization and Employment In this view, democracy itself is undermined as the real power to make crucial economic decisions is increasingly removed from elected officials. This includes not only the ability to regulate in the interests of workers, consumers, and the environment, but also be the ability to pursue fiscal, monetary, and industrial or planning policies that once assured relatively stable and equitable growth and national economic development. The inability to make these policy decisions and the national interest has, from this perspective, contributed greatly to the dramatic slowdown in global economic growth that occurred during the second half of the postwar period, with more than a billion people now unemployed or underemployed worldwide. Globalization’s critics also claim that key policy decisions are increasingly becoming the province of unelected, unaccountable institutions whose role has grown in tandem with the power of transnational corporations: the G-7, the General Agreement on Tariffs and Trade (now including the World Trade Organization), NAFTA, the International Monetary Fund, and the World Bank. Some of these institutions have the power to review decisions of national governments and demand they be altered under penalty of economic sanctions. For the critics, the MAI is one more such undemocratic institution and another large step in the wrong economic and political direction. Does Trade With Low-wage Countries Hurt American Workers? by Stephen Golub There are gaping disparities in wages and benefits around world. In 1996, average hourly earnings of production workers in manufacturing were $31. 58 in West Germany, $17. 20 in the United States, $1. 51 in Mexico, and less than $0. 50 in India and China. How can such huge wage differences exist? Are American workers wages and benefits forced down by competition from low-wage countries? Are trade barriers the solution? While there are some

9

Globalization and Employment genuine problems raised by trading with low wage countries, this article will try to show that popular fears are based on misunderstanding of the causes and effects of wage disparities. The following quotation, from the concluding article in September 1996 Philadelphia Inquirer series "America: Who Stole the Dream?" by Donald Barlett and James Steele, forcefully expresses the widely held view that competition from goods produced in low-wage countries is unfair and detrimental to the American workers. “Companies that produce goods in foreign countries to take advantage of cheaper labor should not be permitted to dictate the wages paid to American workers. " "A solution: imposed a tariff or tax on goods brought into this country equal to the wage differential between foreign workers and U.S. workers in the same industry. That way competition would be confined to a who makes the best product, not who works for the least amount of money. “ Thus, if Calvin Klein wants to make sweat shirts in Pakistan, this company would be charged a tariff or tax equal to the difference between the earnings of a Pakistani worker and a U.S. apparel worker. . .

10

Globalization and Employment "If this or some similar action is not taken, the future is clear. Wages of American workers will continue to slip, as well as their standard of living. " These arguments ignore a fundamental point: differences in wage rates between countries largely reflect differences in labor productivity (output per hour worked). For example, wages are lower in India because productivity is low. Thus, the cost of producing goods are not as different across countries as wage rates suggest. Indeed, the United States as a whole benefits from international trade, irrespective of the wage levels of its trading partners, by specializing in what we do well and importing goods that are more efficiently produced elsewhere. By increasing efficiency, international trade, like technological change, increases the size of the economic pie available to the nation. Granted, international trade does adversely affect some industries and individuals, especially in the short run, but there are more than offsetting benefits to the rest of the economy. Rather than hobbling the efficiency of the American economy with trade restrictions, it is better to ease the burden on the minority of Americans who are adversely affected. Magnitude of International Differences in Wages and Benefits Labor costs in the industrialized countries are much higher than those in the developing countries, although labor costs vary greatly within

11

Globalization and Employment each group, too (Table 1; Figure1). U.S. manufacturing wages are well below those of Germany but above those of the United Kingdom. For many medium-income countries like Korea, labor compensation levels in manufacturing have reached nearly half of those in the United States, while lowincome countries such as Sri Lanka, India, and China have labor costs that are less than 5 percent of U.S. levels. The Principles of Comparative and Absolute Advantage Popular discussions confuse the relationships between international trade, wages, and labor productivity. Wages are determined by the overall productivity of labor (absolute advantage) and are therefore not an independent source of international competitiveness. Trade patterns dependent on comparative advantage: industry-by-industry differences in productivity across countries. We will first consider these basic principles before turning to the evidence. The important distinction between comparative and absolute advantage, first put forth by David Ricardo in 1817, is best explained with a simple example (Table 2). With no international trade, the United States demonstrates higher productivity than

12

Globalization and Employment Mexico in both industries in this example, but the productivity ratio is greater in computer chips (10 to 1) than in shirts to (2 to 1). To produce more shirts, a country must sacrifice chip output and vice versa, given a limited supply of workers. The number of chips that must be giving up to produce, say, one more shirt is what economics call "opportunity cost" of a shirt. Since a worker in the United States can produce ten chips or two shirts, the opportunity cost of one shirt is 5 chips. In Mexico, since a worker can produce one chip or one shirt, the opportunity cost of one shirt is one chip. Thus, the opportunity cost of shirts is higher in the United States than in Mexico. Therefore, Mexico has a "comparative advantage" in producing shirts, since it has a lower opportunity cost: that is, producing shirts "costs" fewer chips. Similarly, the United States has a comparative advantage in producing chips, since its opportunity cost in that industry is lower. As the examples suggest, the determination of comparative advantage depends only on the ratio of productivity in the two industries within each country. For example, if Mexican productivity were to double, so that each worker could produce either two chips or two shirts, the opportunity cost would be unchanged, and Mexico would retain its comparative advantage in producing shirts. A related concept is that of absolute advantage. A country is said to have an absolute advantage in producing a good if a worker in that country can produce more of the good than a worker at in the same industry in a different country. In the example above, the United States has an absolute advantage in producing both chips and shirts because a U.S. worker could produce more of either good than a Mexican worker.

13

Globalization and Employment Despite this absolute advantage, however, the total output of the world economy-and the standard of living in each country--will be higher if it is the U.S. workers produce more of those items in which they have a comparative advantage and Mexican workers do the same, and the two countries trade. In general, absolute advantage determines the overall level of wages in each country, and comparative advantage determines trade patterns. To put this concept simply, let's suppose wages in the United States are five times those in Mexico--as they were before Mexico's currency crisis in 1994--in both the shirt industry and the chip industry. Since U.S. workers can produce ten times as many chips as their counterparts in Mexico, but their wages are only five times as high, the United States will lower labor costs per chip. Similarly, since U.S. workers produce only twice as many shirts as Mexican workers, but their wages are five times is high, the United States will have a higher labor costs per shirt. So, ideally, Mexico should produce more shirts, United States should produce more chips, and the two countries should trade. Such a transaction produces more goods at low cost because it allows each country to produce more goods in the industry in which it has a comparative a advantage. Both countries’ living standards will increase from trading according to comparative advantage because the resulting world pattern of production is more efficient than if each country produces only for its own market. The United States can attain shirts more cheaply from Mexico than by producing shirts itself, paying for these shirt imports with chip exports. International trade does not cost U.S. jobs, but it does change the industry mix of U.S. output and employment. American production of chips will expand while shirt production contracts, resulting in corresponding shifts in labor demand. The reversed happens in Mexico.

14

Globalization and Employment There are two qualifications to this characterization of the benefits of trade. First, relocating workers between the shirt and chip industries may be difficult in the short run, resulting in some unemployment of former shirt workers in the United States. Second, this kind of trade may reduce unskilled workers real wages in the United States, even after workers are relocated, if the chip industry employs a higher ratio of skilled to unskilled workers than the shirt industry. In the United States, as chip production expands and shirt production falls, the demand for skilled labor rises, while the demand for unskilled labor declines. The proper response to these distribution effects is not to restrict trade but to ease the transition by retraining displaced workers. These days, international trade, which is often conducted by multinational corporations, increasingly takes the form of trade in intermediate products, but the basic gains from trade are unaffected. American companies locate the similar parts of their production processes in developing countries, while the more sophisticated components are produced at home. For example, 21 months after the North American Free Trade Agreement (NAFTA) went into effect, the Key Tronic Co., a large manufacturer of computer keyboards, laid off 277 workers in Spokane, Washington, as it relocated some of its assembly jobs to a plant in Cuidad Juarez, Mexico. But the Key Tronic’s chief financial officer reported that employment in its Spokane plants actually increased overall because many of the components used in the keyboards are made in Washington, and the lower cost of assembly in Mexico enabled the company to lower prices and increase sales. Other studies show that economic integration with Mexico has entailed a boom in manufacturing production in U.S. cities along the border because Mexican factories specialize in assembly, which makes intensive use of unskilled labor, while border regions in

15

Globalization and Employment the United States specialize in high technology tasks such as production of components and product design. This international division of labor follows the principle of comparative advantage. The United States is likely to have an absolute advantage in all stages of the production process, because American workers are, on average, more skilled and educated than those in developing countries, and infrastructure in United States is superior. But the United States advantage in terms of efficiency is likely to be greatest in high technology production processes, for which a highly skilled work force is critical. The United States gains from the increase in efficiency resulting from the global division of labor, just as in the simple chip/shirt example. In fact, the chip/shirt example illustrates a key point: low wages most likely reflect low productivity. Furthermore, if low wages were all that mattered in international trade, countries with rock-bottom labor costs, such as Bangladesh, Bolivia, and Burundi, would be major exporters. Yet, popular concern often focuses on countries such as Mexico and South Korea--countries with wages well above those in Africa and South Asia. Clearly, labor productivity matters, too. Some people worried that as low-wage countries acquire technology and capital, their productivity will rise, giving them a competitive edge. But there are two reasons not to be concerned about this. First, as productivity in a country rises, wages tend to rise as well, so the competitive edge lessons. Second, other factors, such as low levels of human capital (knowledge and skills) as well as poor public infrastructure and transportation services, tend to hold down productivity in low-wage countries, even when they acquire new physical capital (computers and factories). Except for products and production processes that require

16

Globalization and Employment large amounts of unskilled labor, these factors offset the appeal of low wages or companies considering relocating their production to poor countries. In addition, developing countries may have higher costs of other inputs, such as capital, energy, and raw materials. Prices of these inputs are more likely than wage rates to be similar across all countries, because, unlike labor, nonlabor inputs can be moved across borders in response to the international price differences. Nonetheless, capital, energy, and raw material costs per unit of output could be higher in developing countries if these countries use nonlabor and inputs less efficiently than developed countries. In summary, both developed and developing countries can benefit from specializing in what each produces relatively efficiently, regardless of the overall level of labor costs, because low wages do not necessarily mean lower production costs across the board. Low wages may be offset by either low labor productivity or higher costs of nonlabor inputs such as capital, energy, and raw materials. Only in low-skill industries and unsophisticated production processes are developing countries likely to have lower average costs of production and, hence, a comparative advantage.

References:

17

Globalization and Employment

Does Trade with Low-wage Countries Hurt American Workers?, Stephen Golub Globalization and Employment, Jeffrey Sachs, http://www.ilo.org/public/english/130inst/papers/publecs/sachs/index.htm Globalization, Wages, Jobs, and Myths, Gerard Jackson, http://www.newaus.com.au/econ46c.html Writing the Constitution of a Single Global Economy: A Concise Guide to the Multilateral Agreement on Investment-Supporters’ and Opponents’ Views, Michelle Sforza, Scott Nova, and Mark Weisbrot, http://www.preamble.org/MAI/maioverv.html

18