Globalization of Labor
Over the past two decades, labor has become increasingly globalized. The integration of China, India, and the former Eastern bloc into the world economy, together with population growth, has led to an estimated fourfold increase in the effective global labor force, which could more than double again by 2050.
The bigger labor pool is being accessed by advanced countries through imports of final products, offshoring of the production of intermediates, and immigration. Although offshore outsourcing has received much attention, it is still small in relation to the overall economy. For example, offshored inputs make up only about 5 percent of gross output in advanced countries.
Integrating workers from emerging market and developing countries into the global labor force has produced big benefits for advanced economies—where, contrary to fears that globalization is driving down wages, total labor compensation has grown by a cumulative 60 percent on average since 1980. This is in part due to globalization as export opportunities have risen, while productivity and output have benefited from lower input costs and better production efficiencies. The decline in traded goods prices over the past 25 years has generated an estimated 6 percent increase in both output and real labor compensation on average in advanced economies.
In early Asian developers, such as Korea, Singapore, and Hong Kong SAR, real wages have been converging rapidly toward U.S. levels and are relatively high. Wages in other Asian countries, including China, have been converging at a slower pace, although accelerating in recent years.
Despite these benefits, the share of income accruing to labor (as opposed to capital) in advanced economies has fallen by about 7 percentage points, on average, since the early 1980s, with the drop being largest in Europe and Japan.
Rapid technological change has had the biggest negative impact on labor's income share, followed by labor globalization. Countries adopting reforms to lower the cost of labor to business (by lowering the tax wedge—the difference between the payroll cost to a firm and the net take-home pay of workers) and improve labor market flexibility have generally had a smaller decline in labor share.
Technological change has especially depressed the share of income going to unskilled labor, and growth in total real labor compensation in unskilled sectors has hence been sluggish. In the United States, the United Kingdom, and Canada, this was reflected in very small increases in real labor compensation per worker and a growing earnings gap between skilled and unskilled sectors while unskilled employment held steady. In Europe (excluding the United Kingdom), in contrast, real compensation per worker in unskilled and skilled sectors has grown broadly in line with each other, but employment in unskilled sectors has contracted.
Globalization is a vital force sustaining world growth, but policymakers need to ensure that all people benefit by strengthening access to education and training, adopting adequate social safety nets, and improving the functioning of labor markets. Steps to reduce tax wedges and ensure that unemployment benefit replacement rates do not deter workers from seeking jobs can help protect labor income in the face of the pressures of globalization.