The Great Doubling - Essay Example

The Great Doubling Introduction In the past few years, the greatest threat to the average worker in most industrialised countries is competition arising from the entry of huge numbers of workers from India, China into the global economy, dubbed by Freeman (2006, p.1) as “the great doubling”. The period beginning from 1980 has been described as the era of globalisation and has been characterized by an unprecedented increase in foreign direct investment, goods and services trade as well as large financial flows steaming from improved economic activity. According to Freeman (2008, p.6), this growth was mainly driven by entry of women workers into the manufacturing industry, and immigration (global movement of labour). During this time, innovations in communication and innovation made it easier for offshoring and the global migration of workers (Grossman & Rossi, 2008, p.1987). The new wave of globalization that has swept the world has brought about both actual and perceived labour market insecurities in industrialised countries. Over the past 15 to 20 years, the number of workers who have been displaced by foreign trade and investment as well as labour inflows from India and China has increased considerably. “The Great Doubling” was a term coined by Richard Freeman to describe the increase of the global labour pool from about 1.46 billion in the 1990s to about 2.93 billion currently (doubling). Freeman (2006, p.11) argues that if the US and generally other industrialised countries are able to adjust well to this great doubling, people from these countries can be able to benefit from having all people on the same economic status. The “great doubling” compliments well with Baldwin’s (2006, p.45) great unbundling where he argues that globalization means the great unbundling and is set to be a dominant factor in the economic field. Globalization applies pressures to organization to relocate their resources. Before globalization reached its apex, economic interactions were bundled together such that transport costs were minimize or in some situtions eliminated completely. Due to this, the amount of wages to be paid plus the cost of goods was determined by local market and not the global market. Globalization is set to bring major changes to this and thus will affect the wages of skilled and unskilled workers in both low wage countries and advanced countries. Economic Insecurity in Industrialised Countries The period spanning between 1950 and 1973 is referred by most as “the golden age” as it was a period of great economic security for people in industrialised countries (Milberg & Winkler, 2009, p.287). During this period, countries in the OECD experienced rapid growth in real GDP, increasing median wages, improvements in median family income and improvements in the social protection systems in most countries (OECD, 2007). The period spanning from 1973 however, brought with it several challenges that saw a decrease in the growth of most industrialised countries as the productivity growth has decreased. The decrease in productivity growth occurred due to the process of deindustrialisation in most industrialised countries, and in many cases the rate of deindustrialisation accelerated (with the exception of Germany). Table 1: Economic performance, golden age versus post-golden age, selected countries. Denmark France Germany Japan UK US Gross Domestic Product 1950-1973 3.8% 5.0% 6.0% 9.3% 2.9% 3.9% 1980-2007 2.1% 2.0% 2.2% 2.3% 2.5% 3.0% Labour Productivity 1950-1973 2.9% 4.7% 4.7% 7.5% 2.4% 2.3% 1980-2007 1.7% 1.5% 0.8% 1.8% 2.1% 1.6% Employment-to-Population-Ratio Average 1960-1973 48.5 41.0 45.1 48.1 45.4 38.9 1980-2007 50.9 40.2 45.9 49.9 44.8 47.4 Unemployment Rate Average 1956-1973 1.1% 1.9% 1.3% 1.5% 1.8% 5.0% 1980-2006 7.2% 10.1% 7.6% 3.3% 7.9% 6.2% Source: Milberg, W., & Winkler, D. 2009 The average rate of unemployment in most industrialised countries has been significantly higher in the period after 1980 compared to the golden era. The cases of long term unemployment also rose over the post-golden era in many industrialised countries. The decrease in GDP and productivity growth has not only resulted in high unemployment rates, but has also brought about a decrease in the growth of wages (Krugman, 1999). After 1980, the labour share of national income started to decline in many industrialised nations. Since a large percentage of the labour force participants are not capital owners, this trend in labour shares encapsulates in a broad manner the increasing economic insecurity in industrialised countries (Jensen, & Kletzer, 2008, p.5). Generally speaking, there are two main turning points in labour shares. The first turning point occurred at the start of the 1980s whereby the increases in the labour shares from the golden age (early 1970s) begin to level off (Milberg & Winler, 2009, p.288).. The second turning point takes place in the 1990s, where a distinct downward trend in labour share was witnessed in most industrialised countries. This can be attributed to the development of four new aspects of trade that include: the rise of intra trade, slicing of the value chain by producers, emergence of super traders and the emergence of large exports of manufactured goods from low-wage to high wage countries (Krugman, 1999, p.332). According to the IV strategy developed by Auer and Fisher, when Low Wage Countries (LWC) manufacturing output grows, their exports to Europe increase in labour intensive sectors as compared to capital intensive sectors (Auer, Besse, & Méda, 2006, p.12). Imports from Low Wage Countries such as China and India are heavily concentrated in the labour intensive industry. Import competition in low wage countries, has over the last 20 years shaped the evolution of the European industry (IMF, 2007). This import competition has been shown to have only a minor impact on the relative wages of production workers, zero impact on the margin of many companies, but a large impact on the average productivity of a company (Rodrik, 1997). Competition from Low Wage Countries has also been shown to have significantly decreased employment in the manufacturing sector. Estimates have shown that between 1995 and 2007, the surge in LWC import competition may have decreased employment in the manufacturing sector in the UK, France, Sweden and Germany by 10%. This translates to about 1.3 million workers in this industry (Auer, Degen, & Fisher, 2011, p.5). Blinder (2006, p. 113) argues that while the migration of low wage service sector jobs from advanced countries to low wage countries may be a minor occurrence at the moment, it has the ability to become a major issue in the next few years. This phenomenon has the ability to usher in a new industrial revolution with the East being the major economic powers. Krugman (2008, p.108) notes that the countries where growth in trade is occurring today have even lower average wages than those where the growth was occurring in the early 1990s. “At Risk” Services The impact of the great doubling is dependent on the type of services that are tradable. Economists have long held that most services are non-tradable as they require face-to-face interaction. Over the years, services that do not require face-to-face interaction have increased due to the spread of internet use. Industries in the manufacturing sector have a tendency to be geographically concentrated as compared to the service sector. Industries that exhibit such high levels of geographical concentration are usually tradable and are thus offshoring is very likely. Recently, development in transportation and communication technologies has weakened the link between specialization and geographic concentration in manufacturing (Grossman & Rossi-Hansberg, 2006, p.64) and as such different tasks can be carried out anywhere in the world. The fear about many service jobs shifting to low wage countries such as India and China is driven mainly by the actual and perceived wage differential between many industrialised countries and these Low Wage Countries (Amiti & Wei, 2005, p.18). In the U.S., for example, the number of jobs at risk to offshoring to low wage countries is estimated to be about 15 to 20 million with about 40% of these jobs belonging in the manufacturing sector (Blinder, 2007, p.4). Factor Price Equalization Another fear arising due to the great doubling is the aspect of factor price equalization. According to (Freeman, 1995, p. 16), there are fears that the wages of low-skill workers in advanced country will be driven down due to competition from low wage countries. The modern world is defined by an economy where producers have access to the same technology. Over the past few years, China and India have been investing their capital on improving the technology used in production. This creates a situation where trade flows between these countries and the advanced countries is mainly dependent of trade factor availability. Factor price equalization is based on the notion that advanced countries that are composed of more skilled workers as compared to unskilled workers will generally import goods and services manufactured in low wage countries that are composed of many unskilled workers as compared to skilled workers. On the other hand, low-wage high labour countries require certain goods and services that can only be produced by high skilled workers in advanced countries. This interaction leads to price equalization of goods and services between the two. The equalization of goods is based on the assumption that the all unskilled workers are in the low wage countries. However, the presence of low skilled workers in advanced countries bring about a problem as when the price of product equalizes, the wages derived from these goods will have been set with respect to what the majority of low skilled workers are earning i.e. wages in less advanced countries. The wages of those low-skilled workers in advanced countries will thus be affected by what their counterparts in low-wage countries are earning. Heckscher Ohlin theory The Heckscher Ohlin theory holds that countries export those goods and services which need, for their production, relatively intensive use of productive factors that can be found locally in relative abundance (Blaugh, 1992, p.286). As such a low wage labour abundant country will export products that are labour intensive while a country that has an abundance of capital will export capital-intensive products. The theory assumes that the two countries under consideration are equal, except for the variances in resource endowments. The availability of the various factors of production (capital, land and labour) determines the comparative advantage of a country. Wood and Ridao-Cano (1999, p.91) considered the initial Heckscher-Ohlin (H-O) model with two countries (developed and developing), two factors (skilled and unskilled labour), and two goods (skill-intensive machinery and labour-intensive clothing). They found out that the developed country has a relatively large supply of skilled labour, giving it a comparative advantage in machinery, while the developing country’s relative abundance of unskilled labour gives it a comparative advantage in clothing. Countries usually have comparative advantage in those products in which the factors of production are in abundance. This is due to the dependence of profitability of goods on the input costs. As such, a country in which land and capital are readily available, but have minimal labour will have a comparative advantage in those products that need a lot of capital or land and minimal labour. If land and capital are abundant, they will cost less (low input cost). As land and capital are the main factors used to produce the given product, the cost of the product will therefore be low and thus suitable for both local and international markets. Looking at the case of labour intensive countries such as China and India, we find that these countries have abundance in labour and land but little capital. This means that their comparative advantage is on those goods that require an abundance of land and labour but little capital. As such the introduction of China and India to the world market saw the introduction of low wage labour intensive countries that offered an ample opportunity for offshoring (Wood, 1995, p.31). By considering this theory, we find that UK and other industrialised countries have a comparative advantage in skilled labour intensive sectors compared to the emerging low wage countries such as India and China. This comparative advantage resulted from the industrialised countries having many highly educated workers, whereas the emerging low-wage countries having less skilled workers. Therefore, according to the Heckscher Ohlin theory, international trade would result in the employment and output of skilled labour-intensive sectors in industrialised countries and it would increase the output and employment in the unskilled labour intensive sectors in the low-wage labour intensive countries such as China and India. Stolper–Samuelson theorem This is one of the theories contained in the Heckscher Ohlin theorem. The theory is used to describe the relationship between output prices and factor rewards mainly the real wages and real returns. The theorem holds that in a perfect competition and with constant returns as well as equity between number of factors and the product numbers, an increase in the relative price of a product will result to an increase in returns to the most intensively used production factor, and equally, a fall in the other factor (Feenstra & Hanson, 1996, p.242). In a model having two factors only, skilled and unskilled labour, as countries decrease the trade barriers, the relative prices of products that are skill intensive will increase in skill rich country and fall in those that are not. The Theory holds that as this happens, an increase in skilled wages and a decrease in unskilled wages are expected in the skill abundant countries (Crino, 2007, p.210). Production in sector i, Yi is a function of technology τ, and the employment of skilled and unskilled workers, Si and Ui. Yi = Yi(τ, Si ,Ui) Given the competition, marginal costs, C, are equal to the prices, P, (zero profit), which is a factor of factor wages and completion. P = C(Τ,WS, WU) The relative wages are a function of relative employment of the two factors WS/WU = W(τ, Si ,Ui) In simple cases, an increase in the availability of one factor i.e. technology, skilled labour or unskilled labour, can only affect wages through technical substitution of product. Through the formulas given above, the relationship between endowments and wages in a two good two factor model where industry 2 is skilled labour intensive is represented below (Abrego & Edwards, 2002, p.9.): Tang and Wood focus on the falling cost of moving skills around the world. Cheaper telecommunication and travel, better policies and institutions, enable high skilled workers who live in industrialised nations to cooperate more broadly in production with workers from low wage countries such as India and China. These skilled workers, K-Workers, are managers, top executives, engineers, designers and other top professionals; their knowledge is a product of education and training. Tang and Wood assume that all the K-Workers live in industrialised countries. These skilled workers also work in the low wage countries, but at a higher cost and lower efficiency that in the advanced countries (Wood, 2002. P.3). Their main cost is wasted time, airfare and hotel bills. Hence: K = KN + (1+ t )KS Where K is the world supply of K-workers, KN is time worked in industrialised countries, KS is effective working time in LWC and tKS is wasted time. To compensate for the loss in time, the price of K-Worker services in low wage countries becomes (1 + t) times greater tat that in industrialised countries. All the unskilled workers are categorized as L. Cooperation costs result in the wages of L workers to be lower in low wage countries than in industrialised nations. That is, since the service of K workers (skilled) cost more in low wage countries, it can only be profitable to utilize them in these low wage countries provided cooperating L workers cost less there. This is consummate with Bivens (2007, p.7) who argues that on average, offshoring leads to an absolute decline of 9.4% in returns to raw labour (low-skilled) and a 6.6% increase in the returns to skills. Improvements in global travel and communication, plus better policies and institutions lower the wasted penalty time in the emerging low wage countries and thus results in a shift of skilled workers (K) from the industrialized nations to the emerging markets i.e. China and India (Bhagwati, Panagariya, & Srinivasan, 2004, p.106). This raises the wages of skilled workers by increasing the number of unskilled labourers they cooperate with. This also raises the wages of unskilled labourers (L) in the emerging markets by reducing the scarcity of skilled work. However, the wages of unskilled labourers in the industrialised nations will decrease due to the increasing scarcity of skill-dependent work in these countries (offshoring). In the emerging markets, the increased inflow of skill-intensive work from industrialised nations expands production in tradable sector (A), whose increased need for unskilled labourers (L) is fulfilled by flow from the non-tradable sector (B sector). The movement between the two sectors can be summarized as: LB = LS - LAS(t) dLAS /dt < 0 (Wood, 1994, p.5) In the industrialised nations, however, a decline in cooperation costs shifts unskilled labourers from the tradable sector to the non-tradable sector. This is because the increased supply in skilled-intensive work to the low wage countries is paid for by increased imports of the tradable goods from the low wage countries (India and China), which replace some production of tradable goods in the industrialized nations. The share of the non-tradable goods produced in the industrialised nations, thus increases and with it the local non-tradable employment for both skilled and non-skilled workers in these industrialised nations. Rybczynski theorem The Rybczynski theorem shows the manner in which variation in an endowment affects the production of goods when we sustain full employment (Krugman & Obstfeld, 2007, p.74). When we consider Rybczynski theorem we understand that in a closed economy, the relative price p is dependent on the demand side of the economy. In our situation, there is an increase in the amount of labour in the global market due to the entrance of low-wage countries in the world economy. The increase in low skill labour causes an outward shift in the labour constraint. The product-possibility frontier, which describes the combination of capital intensive goods and labour intensive goods that could be produced using fixed amount of labour and capital, will shift from point A to point B. Looking at out graph, we see that the production of the labour intensive good will increase from C1 to C2. The production of the capital intensive good is however set to drop from S1 to S2. In the global economy, increase in the amount of labour endowment has made it such that labour intensive goods area major driver of the economy and as such countrys that produce labour have a big control over issues concerning the production of these goods such as labour. Low skilled workers in advanced countries are thus dependent on policy developed by producers of labour intensive goods in the low-wage countries. Conclusion Skilled workers in the advanced countries would be expected to benefit from the great doubling and only a minority of non-skilled labourers are expected to lose. From the early 1990s, a lot of changes have been witnessed as huge numbers of workers from India and China have entered the global market. According to the standard Heckscher Ohlin model, this entry will bring about a lot of changes. In this paper, we have shown how a decrease in trade barriers will affect the movement of skilled and unskilled labourers. We have also applied the Stolper–Samuelson theorem to show how improvements in global travel and communication will affect wage inequality in both the north and the south. Using Tang and Wood model we have proved that the influx of worker from India and China will benefit skilled labourers as they will be able to move from one country to another without a risk to their jobs. The model, however shows that unskilled workers in an advanced nation face some challenges, but on overall stand to gain from increased output of non-tradable goods in their country. References Abrego, L. & Edwards, H. 2002. The relevance of the Stolper-Samuelson theorem to the trade and wages debate. CSGR Working Paper No 96/02, Washington: IMF Amiti, M., & Wei, S. 2005. Fear of service outsourcing: Is it justified? Economic Policy, 42, pp.305–347.  Auer, P., Besse, G. & Méda, D. 2006. Offshoring and the Internalization of Employment: A challenge for a fair globalization? 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