The Effects of Globalisation on Labour Markets, Productivity and Inflation

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The Effects of Globalisation on Labour Markets, Productivity and Inflation

Nigel Pain, Isabell Koske OECD
Meeting of Heads of National Economic Research Organisations at OECD Headquarters June 15 2007, Paris.

Over the past decades international economic integration has proceeded rapidly. Trade in Goods and Services
Exports plus imports to GDP (current US$)

Foreign Direct Investment
Assets plus liabilities to GDP (current US$)

300% 250% 200% 150% 100% 50%

World OECD

60% 50% 40% 30% 20% 10% OECD

World

Non-OECD

Non-OECD

0% 1980 1985 1990 1995 2000 2005

0% 1980 1985 1990 1995 2000 2005

Globalisation has been proceeding for many years. The pace of economic integration has been particularly marked since the mid1990s – suggesting structural changes in the impact may have occurred. 2 2

New developments that may have affected the impact of globalisation on OECD economies The marked increase in the extent and pace of integration since the mid-1990s The integration of China and India into the global economy – significantly boosting global labour supply Development of international production networks: the fragmentation of production across borders via international outsourcing and offshoring; international trade in tasks

Foreign competition spreading into previously sheltered sectors and occupations via ICT-enabled offshoring and market entry. Financial globalisation Such developments, common to all OECD economies, have prompted a re-assessment of the impact of globalisation. Globalisation now affects particular tasks and occupations as 3 3 well as firms/sectors.

The Globalisation and Structural Adjustment Project 2005-07 This had three main components:
The macroeconomic effects of globalisation labour markets, inflation, policy challenges from the future evolution of globalisation. The sectoral impact of trade on labour markets The effects of the outsourcing of business services

The project examined the policy challenges from:
The spread of global trade & production networks and IT-enabled global sourcing. The impact of non-OECD economies on commodity markets and competition pressures in the OECD. Financial globalisation.

A final report was provided to Ministers in May 2007
4 4

The current phase of globalisation has coincided with structural reforms in OECD labour markets The impact of globalisation is occurring against a background of widespread reforms to labour market institutions (see the Restated OECD Jobs Strategy) – for example: Reductions in product market and labour market regulations Activation of the unemployed Increased responsiveness of wage setting to supply/demand pressures Reductions in tax wedges

All these affect wage and employment outcomes. Other things being equal, they should have acted to reduce structural unemployment. Attempts to quantify the impact of globalisation have to allow for other (potentially endogenous) sources of structural change. 5 5

The labour share of GDP has fallen, but real wages have grown robustly in most OECD countries. Labour Income Shares
0.7 0.65 0.6 0.55 0.5 0.45 0.4 1980
1 2

OECD economies (weighted average)

Real Compensation per Employee
150 140 OECD1 USA JPN FRA 110 100 DEU 1980
1

Income share of labour 1

130 120

Income share of employees2

1985

1990

1995

2000

2005

1985

1990

1995

2000

2005

Dependent employees and self-employed. Dependent employees (private and government sectors).

Weighted average; country coverage varies according to data availability.

The decline in the labour share began before the mid-1990s. In accounting terms, the labour share decline is due to labour productivity rising faster than real wages. 6 6

Real wage growth over the past decade is not correlated with trade openness. 5% 4% GRC POL ISL CZE NOR TUR PRT SWE GBR USA FIN DNK NZL KOR AUS CAN FRA CHE AUT JPN ESP DEU ITA MEX SVK HUN IRL BEL NLD

Real wage growth1

3% 2% 1% 0%...
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