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Picture This: Globalization of Labor

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 2007
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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 global labor supply has shot up since 1980…

(export-weighted labor force by region, index 1980 = 100)1

Sources: United Nations, Population Prospects: The 2004 Revision Population Database; World Bank, World Development Indicators; and IMF staff calculations.

1National labor forces scaled by export-to-GDP ratios.

2Western Hemisphere, Middle East and North Africa, and sub-Saharan Africa.

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 out-sourcing 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.

…with advanced countries tapping into it in various ways.

(advanced countries, weighted averages)

Sources: OECD, International Migration Data, Input-Output Tables (1995, 2002, and 2006 editions), and IMF staff calculations.

1Weighted using series on GDP in current U.S. dollars. Total imports include both imports of final products and intermediate products (offshoring).

2Offshoring data are limited to select industrial countries.

3Stock of foreign labor force. Weighted using series on total labor force.

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.

Labor compensation has been rising robustly in advanced economies, owing partly to globalization…

(real total labor compensation; index 1980=100)

Sources: Haver Analytics; International Labor Organization, Labor Statistics Database; OECD, Employment and Labor Market Statistics, National Accounts Statistics, and STAN Industrial Database; United Nations, National Accounts Statistics (2004); and IMF staff calculations.

1Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Portugal, Spain, and Sweden.

2Australia, Canada, and United Kingdom.

3Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, Norway, Portugal, Spain, Sweden, United Kingdom, and United States; weighted using series on GDP in current U.S. dollars.

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.

…and in emerging markets, especially in Asia, manufacturing wages have also been rising rapidly.

(percent of U.S. manufacturing wages, constant purchasing power parity dollars)

Sources: United Nations Industrial Development Organization, Industrial Statistics Database (2006); Computer and Enterprise Investigations Conference Asia Database; and IMF staff calculations.

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.

The share of income going to labor has declined in advanced countries…

(labor share as a percent of GDP)

Sources: See Chart 3.

For footnotes, see Chart 3.

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.

…with technological progress the main driving force…

(annual average, percentage points)

Source: IMF staff calculations.

Note: Data are for 1982–2002 or longest period available, except for Japan, where 1986–2001 was chosen because changes in the relative import price in earlier years reflected the yen’s strong appreciation rather than globalization.

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.

…especially in the unskilled sector, leading to a growing earnings gap in Anglo-Saxon countries.

(skilled to unskilled real labor compensation per worker, index 1980=100)

Sources: See Chart 3.

1For analysis by skill level, other Anglo-Saxon economies include Canada and the United Kingdom.

2For analysis by skill level, Europe includes Austria, Belgium, Denmark, Finland, France, Germany, Italy, Norway, Portugal, and Sweden.

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.

Labor market reforms can help protect income.

(difference in labor market indicators between the United States and Europe, percent)

Source: IMF staff calculations.

1Difference between labor compensation indices (index 1980=100).

Prepared by Florence Jaumotte and Irina Tytell of the IMF’s Research Department.

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