Globalization bad for workers (but not too much...) finds IMF (June 2007)

Rethinking Bretton Woods | Thu, Jun 28, 2007

By Aldo Caliari, Matt Linton

Globalization bad for workers (but not too much...) finds IMF 

By Aldo Caliari and Matt Linton As reported by the press, it seems as though the IMF research is finally catching up with some of the negative aspects of free trade and globalization, especially when it comes to unskilled workers.
In the last World Economic Outlook, it admits that due to globalization “traditional trade theory would predict that the integration of these countries into the world economy would exert downward pressure on the wages [corrected for productivity] of workers in advanced economies.” Due in no small part to the Internet, Communications and Technology (ICT) revolution of the mid-1990s, which put a premium on skilled, computer-literate labor and the overall increase in the education of the average worker (higher education workers have increased 50% over the last twenty-five years), the place of the unskilled worker has come down and so, comparatively, have his wages. This is not only a recent trend, as the report admits that “there has been a clear decline [of unskilled labor in labor share] since the early 1980s across developed economies.” In advanced countries (primarily the United States, Canada, Europe, Japan, and Australia) the gap between the earnings of a skilled worker and an unskilled worker see the unskilled worker receiving 25% less income than a skilled worker. This is due to several forces, primarily the exportation of labor to third-world nations where unskilled labor can be paid lower wages without benefits such as health insurance or maternity/paternity leave. The nation suffering most noticeably under this principle is Japan, which has seen most of its unskilled work shipped to other Southeast Asian nations and China. Unskilled workers in Japan and Europe have seen their labor-share drop dramatically (up to 10% in some places) and the United States has also seen a drop though it is less dramatic (between 3% and 5%).
Yet, the IMF still manages to put a positive spin into these findings. The IMF is quick to point out that though there is a loss of labor share “the decline is stronger for the labor share than for the share of employee’s compensation,” so, as the IMF sees it the more imminent threat is actually labor share as opposed to wage erosion. The reader is cautioned to remember that since labor is cheaper abroad and companies are not responsible for the higher third-world wages, prices can be more effectively dropped on goods.  Therefore, though unskilled labor is earning less money in wages they are making up the difference in money saved in cheaper goods.
The IMF report also speaks optimistically about the increase of unemployment benefits in Europe and Japan, which provide unskilled labor a safety-net to hedge against low job security. The IMF report also believes this to be a transition period of sorts where unskilled labor is slowly minimized due to increased global education, mechanization of agriculture and factory industries, and the continued expansion of the ICT field. The ICT field growth also explains the gap between the loss of labor share in Europe and the Angelo-Saxon countries because “technological change has contributed…less so in Angelo-Saxon countries.” 
Immigration patterns in Europe cause a plurality of different labor issues, which the IMF sees as short-term problems that will eventually bring a more prosperous Europe. Nations such as Estonia and Ireland are in desperate need of unskilled labor because of the recent explosion of the ICT field in those nations, their small highly educated and trained populations, and the economic strength of economies developed with EU money. Both nations have seen an influx of immigrants (Poles in the case of Ireland and Russians in Estonia) to fill the unskilled labor void in those nations. One major problem facing Eastern Europe is the immigration of skilled-labor from developing nations into first-world nations where their skills are in high demand and they can be paid higher wages. This leads to a “brain-drain” in developing countries (actually, largely transition countries in Eastern Europe), which is forced to rely heavily on Middle Eastern or imported labor (such is the case of Chinese labor in Romania) and cannot afford to offer the same pricey wages as their first-world counterparts. A second problem with immigration for developed nations is the threat of terrorism and other national security problems on boarders with migrant working populations. With sizeable populations of Muslim immigrants from North Africa and the Middle East filling unskilled labor positions in Europe, Islamic fundamentalism is and will continue to be on the rise in Europe. As has been the case in England, since migrant populations are often ostracized to ghettos in Europe by nativist populations there is fertile ground for terrorist organizations to grow in developed countries. Thirdly, this has also led to immigration quotas and bans in Europe (most notably Germany), which has eroded the cultures formerly nomadic peoples such as the Rom and Laplanders who are barred from movement.
The study is not out of line with other recent reports. A study released by the OECD a few months ago highlighted that globalization could "permanently increase" job insecurity for workers and that said salaries had been shrinking as a proportion of national income in the US, Japan and Europe, perhaps reflecting the weakened bargaining position of workers in pay negotiations. In 16 out of 19 OECD member countries for which data were available, the earnings of the best-paid 10 per cent grew faster than those of the lowest-paid 10 per cent between 1994 and 2005. Yet, the report held economic globalization was an overall positive force.
Moreover, in addition to the growing gap between haves and have nots, a study released by Merrill Lynch and Capgemini last June showed a growing gap between the super-rich and those who would normally consider themselves wealthy. In other words, a relatively very small number of people is controlling an ever growing amount of wealth globally, a fact closely associated to the financialization of the global economy. According to the report, for instance, the assets of those with more than $30m dollars to invest expanded by 16.8 per cent while people with assets of $1m-$5m saw their wealth grow by 6.4 per cent.
Also in academic circles that the disquiet about the impact of globalization is reaching longstanding “free traders.”. Alan Blinder was one of such economists who recently startled many with his prediction that, only in America, some 40 million jobs may be lost to offshoring. Still, he says the process is, in the whole, good. Lawrence Summers, a promoter of globalization under the Clinton administration, says people who argue globalization is inevitable and retraining is enough to help displaced workers offer "pretty thin gruel" to the anxious global middle class.
In this light, an observer of the IMF report could find the globalization of labor section to be extremely repetitive, droll, and not breaking any new ground. The report failed to really confront the short-term problems of globalization in regards to third-world brain drain, immigration exploitation, and outsourcing, instead choosing to focus on the long-term gains that will be made as a result of globalizing. Though the IMF admitted that the wage gap between skilled and unskilled workers was increasing (and at an alarming rate) they decided that this was more a short-term symptom of technology as opposed to a dangerous symptom of a rapidly splitting population (especially in the United States). What is especially frustrating about how the report deals with the loss of labor share, focusing on the positives of falling prices on the poorer, unskilled working population than closely examining the risks of such a labor share loss. With the global market putting more and more emphasis on technological expertise, unskilled populations would see their share of the promises of globalization shrink further. Inequalities could not only grow but also solidify, as the less-educated find themselves condemned to a vicious circle of low-education and low-income, one that weakened state educational structures will hardly be able to break. In many ways these admissions by the IMF are only shocking because of their lateness in addressing a key issue and in comparison to the even more pro-globalization WB. It seems that the IMF and the WB are content to watch the labor market split into the haves (skilled workers) and the have-nots (unskilled laborers), following the traditional and comfortable line that “globalization is here to stay” rather than globalization as an economic policy choice, one in which they share responsibility.
Full text of the World Economic Outlook is available at