Globalization Workforce

Globalization is the process by which markets integrate worldwide. Over the past 60 years, it has accelerated steadily as new technologies and management expertise have reduced transportation and transaction costs and as tariffs and other man-made barriers to international trade have been lowered. The impact has been stunning. More and more developing countries have been experiencing sustained growth rates of 7-10 percent; 13 countries, including China, have grown by more than 7 percent per year for 25 years or more. Although this was unclear at the outset, the world now finds itself just past the midpoint in a century-long process in which income levels in developing countries have been converging toward those in developed countries. Now, the emerging economies' impact on the global economy and the advanced economies is rising rapidly.

Not surprisingly, people often link increased globalization to the decline in relative wages of less-skilled workers in the advanced economies. But does increased international trade, especially with developing countries, in fact worsen income inequality? There are two approaches to answering this question. One focuses on the role of the price of imports in lowering the prices of products and thus lowering wages. The second uses the quantity rather than the price of imports as a measure of the intensity of import competition.

Data on U.S. trade flows have been analyzed to infer the quantities of labor embodied in trade flows. The United States tends to export skilled-labor-intensive products and to import unskilled-labor-intensive products, so that the growing importance of trade in the U.S. economy has increased the effective supply of unskilled labor in that country relative to the supply of skilled labor. Analysis suggests that trade accounted for around 15 percent of the total rise in income inequality during 1980–85, but that effect diminished in later years. Further studies have shown, for the advanced economies as a whole, that trade with developing countries has led to about a 20 percent decline in the demand for labor in manufacturing, with the decline concentrated among unskilled workers. The results of these latter studies are subject, however, to some uncertainty because of the influence of labor-saving technology in the advanced economies. Other studies have estimated that shifts in product market demand, including the effect of imports, account for less than 10 percent of the increase in wage differential.