Janine BergILO-Brasilia

Understanding and Responding to the Labour Impact of Globalization

RIAL Workshop “Labour Dimension of Globalization”Santo Domingo, Dominican Republic

27 July, 2010

Guiding Questions for the Panel

1. What has been the impact of globalization on employment and

wages in the region?

2. What are the key characteristics of a country that determine or

can anticipate these impacts?

3. How can labour market institutions help in meeting the

challenges of globalization?

How is globalization manifested?

Foreign Investment

MigrationTradeEach one is affected by both internal and external factors and each

has an impact on the other.

World trade opening (mean tarrifs %)

1980 1985 1990 1995 2000 2005 Change (p.p.) 1980-2005

East Asia and the Pacific

31.9 24.3 25.2 24.8 13.2 9.0 -22.8

East Europe and Central Asia

44.0 26.0 18.2 18.2 8.8 6.2 -37.8

Latin Am. & the Caribbean

37.9 35.6 23.6 23.6 10.6 8.0 -30.0

Middle East & N. Africa

25.1 20.5 22.9 22.9 22.4 11.7 -13.4

South Asia 63.0 62.9 57.9 57.9 25.1 14.9 -48.2

Sub-Saharan Africa

28.3 28.7 25.2 25.2 14.1 12.7 -15.6

Total, Developing Countries

38.4 33.0 28.8 28.8 15.7 10.4 -28.0

Developing Countries

13.7 9.5 10.5 10.5 6.7 5.4 -8.3

Source: McMillan & Verduzco, 2009.

50.0

80.0

110.0

140.0

170.0

200.0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 a/

Exportaciones Importaciones

Latin America: Index of Volume Traded, 2001 – 2009

(Index 2000=100)

Source: ILO, based on information from IMF, April 2010 and ECLAC. Information on Latin America based on 18 countriesNote: a/ ECLAC forecast.

Trade and employment: What does the theory tell us?

Neoclassical theory tells us that free trade will lead to a shift in

production towards the more abundant factor.

For developing countries, this factor is low-skilled labour (or natural

resources).

The demand for the factor increases, and as a result, its price.

In the case of low-skilled workers, the increase in demand will lead

to a reduction in the wage gap between high-skilled and low-skilled

workers.

But theory isn’t a good guide…

“There is no area of economics where

there is a greater gap between

orthodox theory and actual problems

than in the theory of international

trade.”

-- Joan Robinson, 1971

Why?

Because it depends on…

The structure of the world economy (trade in tasks, trade

agreements, multinational policies, commodity prices)

Conditions specific to the country (the exchange rate,

economic conditions, the cost of credit, the availability and

quality of infrastructure, tax laws, labour market institutions,

access to other markets)

What does the data tell us? Evolution of industrial employment

Employment (1,000 workers)

1980 1985 1990 1995 2000 2005

East Asia & the Pacific

26,834 32,635 59,527 64,747 55,254 69,356

China 24,390 29,743 53,040 58,255 44,927 59,353

Eastern Europe & Central Asia

6,067 5,678 11,125 24,205 21,006 17,646

Latin America and the Caribbean

9,605 10,374 8,297 7,525 8,598 9,438

Middle East & North Africa

2,363 2,526 2,749 3,273 2,250 2,125

South Asia 7,866 7,671 9,236 10,986 8,928 8,180

Sub-Saharan Africa 2,653 2,427 2,539 2,915 1,764 1,531

Total, Developing Countries

55,388 61,310 93,472 113,651 97,799 108,275

Developed Countries

61,214 56,420 59,212 60,909 62,616 53,975

Source: McMillan & Verduzco, 2009.

And within Latin America? Some stylized facts

• In Mexico, Central America and the Caribbean, trade opening has increased output and employment of labour-intensive goods, but traditional manufacturing that had existed prior to liberalization suffered. Although there has been an increase in manufacturing jobs, the new jobs pay less than the jobs in traditional manufacturing. (Other sectors such as agriculture have suffered strong job losses resulting in an increase in informality and international migration).

• In South America, exports have concentrated in natural-resource-intensive goods, whose production is typically capital intensive.  The manufacturing sector was negatively affected by import competition, causing a net loss in jobs and an increase in informality. During 2003-2008, the increase in commodity prices and a competitive exchange rate helped to strengthen the internal market and develop national industries. There was an increase in formality rates in Argentina and Brazil, buoyed by policies that increased the value of the minimum wage and strengthened the internal market.

Increase in Informality in Latin America

Informality (%)

(PREALC definition)

1990 42.8

1995 46.1

2000 46.9

2005 48.8

2008 46.2

Source: ILO, Labour Overview, several years.

Urban unemployment, Latin America Latina and the Caribbean, 2000-2009

10.4

11.4

10.5

8.8

8.17.5

11.410.5

9.2

8.5

4

5

6

7

8

9

10

11

12

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*

Source: ILO, Labour Overview, 2009.

Responding to the impacts of globalization

Different areas to address

Monetary and exchange rate policy

Industrial policy

Labour market policies and institutions

Tax and redistribution policies

There is a need to protect workers, but how should it be done?• Public policies specifically designed for workers affected

by trade

– US: “Trade Adjustment Assistance” Programme (TAA)

– Wage subsidies for displaced workers above the age of 50 (France, Germany)

• Traditional labour market policies, both passive as well as active

Spending on Labour Market Policies (% GDP): The Americas compared with Europe

4.94.4 4.3

3.0 3.02.5

1.9 1.8

0.8 0.6 0.5 0.5 0.41.0

0.2

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Source: OECD, IDB.

Active Labour Market Policies as an Automatic Stabilizer

TrainingSubsidies for hiring

Direct employment creation programmes

Source: Based on Quiggin (2001).

Job shedding

Job creation

But there is also a need for unemployment insurance

0

17

13

41

0

2

4

6

8

10

12

14

16

18

969 - 3940 3941 - 6912 6913 - 9883 9883 -12855 >12855

International Geary Khamis dollars, 1990

Nu

mb

er

of C

ou

ntr

ies

Source: Berg and Salerno (2008).

The importance of the State

To benefit from globalization, a stronger State is needed. Investing in physical infrastructure, improving the

educational system, professional training, and social protection systems (unemployment insurance, pensions, health care), requires the collection of taxes. The tax systems should be made progressive.

The importance of tax policy

With the exception of Brasil, tax collection on the part of Latin American governments is very low.