Jobs and globalisation: Towards policies that work

While the size of the impact of globalisation on job losses is often exaggerated, there is an impact nonetheless. How must public policy respond?

Not long ago the term globalisation was held high as a positive force, a rallying cry for nations of all shapes and sizes to come together to build a safer, cleaner, more prosperous world. Today, to many, it is a byword for all things negative, not least for the "delocalisation" (or relocation) of jobs to low-wage countries. Take the debates over EU enlargement and increased trade with China and India. There are diverse concerns animating these discussions, but the impact of globalisation on jobs is one that commentators and ordinary people keep repeating.

Whether globalisation is good or bad is an endless and distracting debate, but the bottom line is that policymakers certainly face a challenge. As for employment policy, three concrete questions matter: Does globalisation really cause job losses? If so, to what extent? And how can we respond?

In so far as globalisation can be represented by international trade and foreign direct investment (FDI), the first answer is yes, some jobs in OECD countries (particularly in the manufacturing sector) are lost because of growing international competition, offshoring or other pressures generated by the international marketplace.

But the answer to the second question is also important: the proportion of job losses caused by globalisation per se is far lower than many claim. Data from North America and Europe suggest between 4-17% of job displacements or layoffs are caused by international trade and investment. Other culprits include outdated technology, capital or skills, or just plain bad business management. Moreover, the other side of the ledger includes the fact that growing international trade and investment are associated with a sharp rise in overall living standards, not a fall. And globalisation is also associated with many business opportunities and the creation of new jobs.

These observations should guide the public policy response, both to trade openness generally and to jobs and unemployment in particular. That is not to belittle the very real public concern that surrounds layoffs.

When a firm relocates abroad, for those left behind it is a dislocation. Losing a job can be traumatic, and the very prospect of change can cause anxiety and disruption in the lives of individuals, families and whole communities. Even if a displaced worker finds a new job, the transition remains an ordeal that must be managed.

In other words, while the true impact of globalisation on job losses is often exaggerated, there is a real impact nonetheless, and so public policy is needed to enhance the capacity of the market to enable adjustment. Indeed, when displacement results from deliberate policy decisions to liberalise trade and investment flows, like removing tariffs, policy measures to manage adjustment become a duty of good governance. The number of job displacements may be less than some claim, but the policy difficulties should not be underestimated.

What can governments do? The first thing is to accept that protection for certain vulnerable industries is not an option-that would be like building castles in the sand and would simply postpone possibly more painful, costly adjustment later on. Consider those displacement rates again. While white-collar jobs are also affected by international trade and investment, especially in business services and IT, trade-related job losses are proportionately higher in manufacturing than in the services sector. In general, most job losses that are associated with trade/FDI are in areas where comparative advantage is slipping, as in cars or textiles, and where skills are becoming obsolete because of technological change, ageing, productivity, and so on. They mainly affect less skilled workers, who find it particularly hard to find a new job. When they do find one, they may have to take sizeable pay cuts.

Understanding these trends helps us to shift the debate from one about the pros and cons of globalisation, to a pragmatic debate on how to build policies to assist displaced workers more effectively to find new and better jobs.

The policy implications of trade-related job losses vary according to factors such as the length of time people spend out of work, earnings losses in new jobs, and so on. In the United States, 63% of workers who lose their jobs in high-international-competition manufacturing industries are re-employed within about two years, somewhat lower than the 69% rate for the service sector. Reemployment rates are lower in Europe, averaging 57% overall and just 52% in high-international-competition industries within manufacturing.

As for wages, displaced US manufacturing workers experience an average pay cut of 13% once re-employed, with a quarter experiencing earnings losses of 30% or more. In the services sector, the average loss is just 4%. Earnings losses in the new job tend to be smaller in Europe, although finding that job is more difficult than in the US.

Why do workers who lose their jobs in industries facing intense import competition fare somewhat worse than other job losers? Globalisation appears not to be the cause of that. Rather, compared with others, in both Europe and the US, this group tends to be older, less educated and have held down the lost job for longer, characteristics that are associated with above-average re-employment difficulties and larger earnings losses following re-employment. Nevertheless, globalisation may have contributed to the original job loss, and this demands a policy response.

Active labour market programmes, unemployment benefits and other direct measures normally associated with job loss are therefore vital. On top of that, indirect measures are needed to provide an economic environment where workers from declining sectors can find new jobs that make good use of their skills. The overarching need here is for general policies that strengthen job creation, upgrade work force skills and steer workers towards the jobs where they are most productive.

However, apart from these quite standard measures, there may be a case for targeted programmes too. Care should, of course, be taken not to create new inequities by singling out trade-displaced workers for specific assistance, but special measures may be warranted, for instance, in cases where firm relocation or closure can disrupt entire communities, or drive up household poverty in regions that are already struggling economically

While well-designed active labour market policies can be cost-effective, with job-search assistance being among the measures that perform best, they are likely to work better the earlier they become available. Research in the US has shown that workers receiving advance notice spend less time unemployed than workers laid-off without any advance warning. Furthermore, early warnings help in identifying those workers who stand to benefit most from active measures in the first place.

However, the role of training is less clear cut. Normally, policy would expect workers displaced from declining industries to direct their job search towards expanding ones, and offer the training necessary for them to qualify for those jobs. But in practice, the majority of displaced manufacturing workers find new jobs in this same sector and earnings losses are much smaller for workers finding a new job in the same industry It makes sense for some, particularly older, trade-displaced workers to search for new jobs in the same industry, where they can make best use of their experience and skills. Nonetheless, such jobs will not always be available and retraining should be available to those at risk of prolonged unemployment. As to compensation and indemnities, unemployment benefits play an important role in cushioning the income losses that result from trade-related job displacement. But the trap to avoid is to blunt incentives for trade-displaced workers to find a new job rapidly, particularly if a lower prospective wage boosts the attraction of staying on unemployment benefit.

Wage-insurance schemes can help displaced workers offset this possibility Recently introduced in France, Germany and the United States, wage insurance replaces a fraction of the difference between earnings on the old and new jobs. The German and US schemes replace 50% of the wage gap. These earnings top-ups can be time-limited-two years in the case of the French and US schemes. And they can be restricted to certain job losers; the German and US schemes are reserved for workers over 50 years of age.

The experience with wage-insurance programmes is too thin to evaluate their cost-effectiveness with any rigour. Still, a pilot programme in Canada during the 1990s-the Earnings Supplement Project-showed that such schemes can speed re-employment, by making job losers more willing to accept jobs that pay somewhat less than their previous ones. The resulting direct savings in unemployment benefits were not large enough to fully offset the new spending on in-work benefits. However, there may be other indirect savings, such as less recourse to lengthy active measures and a boost to human morale.

As a flashpoint for public anxieties concerning economic insecurity, the perceived impact of globalisation on OECD labour markets currently looms large, and whether exaggerated or not, appears more as a mountain than a molehill to many workers. Assistance to trade-displaced workers can be incorporated into an overall strategy for achieving high employment rates in the context of continuous structural economic change. While there may be various ways of achieving this, the key message remains the same: open markets result in some dislocation in labour markets and policy measures must be put in place that compensate job losers while promoting their re-employment chances. In a sense, workers will accept to swim with globalisation, as long as the policies are there to ensure they do not sink because of it.

References

* OECD (2005), Helping workers to navigate in "globalised" labour markets, Policy Brief, available at www.oecd.org/dataoecd/44/19/35044139.pdf.

* OECD (2005), Employment Outlook, Paris.

* OECD (2005) Trade and Structural Adjustment: Embracing Globalisation.

* Kongsrud, PM. and I. Wanner (2005), "The Impact of Structural Policies on Trade-related Adjustments and the Shift to Services", OECD Economics Department, Working Papers, No. 427, Paris. Available at www.oecd.org/dataoecd/49/29/20686301.htm.

* Website: www.oecd.org/els/employmentoutlook.

Paul Swaim and Raymond Torres, OECD Directorate for Employment, Labour and Social Affairs

Copyright Organisation for Economic Cooperation and Development Jul 2005
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