Deindustrialization: Causes and Implications


WP/97/42-EAWP/97/42
Deindustrialization: Causes and Implications


Increased globalization--the international integration of markets for goods,
factors, and technology--has coincided in the past two decades with a shift in
labor demand away from less-skilled workers toward those with more skills. This
shift in labor demand has widened the gap in wages between the two groups of
workers and has raised income inequality and unemployment, primarily among
low-skilled workers. This paper summarizes research on the connection between
globalization and labor markets in the advanced economies.


Much of the concern about the effects of globalization has focused on the
impact of imports from developing countries on wages, employment, and income
inequality. However, the consensus of empirical research suggests that
increased trade accounts for only about 10 to 20 percent of the changes in
wages and income distribution in the advanced economies. The more important
influence on labor markets in the 1980s and 1990s has been a technology-driven
shift in labor demand away from less-skilled workers and toward more-skilled
workers. This shift has resulted in increased wage inequality in some
countries, and in lower relative employment among unskilled workers in others.


Increased capital mobility, including the .outsourcing. of production to
low-wage countries, as well as immigration from developing countries to the
advanced economies, appears to have had only modest effects on labor markets in
the advanced economies. Nonetheless, further globalization can increase the
sensitivity of wages and employment to external shocks and thereby contribute
to greater job insecurity. Policymakers must keep in mind potential social
dislocations from these changes and ensure that those who are displaced do not
become marginalized. It is important, however, that any policy actions do not
impede adjustment, but rather provide incentives for workers and firms to
adjust to and therefore gain from changes in the global economic environment.