Select Committee on Economic Affairs First Report


CHAPTER 4: LABOUR MARKET CONDITIONS

111. Whereas concerns about poverty and inequality focus principally on developing countries, fears about the impact of globalisation on labour market conditions relate to workers in developed countries as much as those in developing countries. We turn first to developed countries.

Developed countries

112. The main worry in developed countries with regard to labour market conditions is that competition from cheap imports from low-wage economies (which may threaten domestic manufacturing industries) and the capacity of transnational corporations to move production to low-wage economies (or to outsource to low-wage economies) may cause

  • higher unemployment amongst the unskilled labour force (particularly in the manufacturing sector);
  • greater wage inequality; and,
  • greater job insecurity.

We note at the outset that discussion about the effect of globalisation on these phenomena must be placed in the context of all the other economic forces at work. Technological advance, the emergence of new products, demographic change, employment laws, an increased emphasis on lower inflation as the target for macroeconomic policy, and a move to greater reliance on the market mechanism within an economy - all have a part to play.

Unemployment

113. A number of witnesses referred to the effect of competition from low-wage economies on developed countries' employment (although not suggesting that high levels of unemployment in some developed countries should be attributable to globalisation). Patricia Hewitt, for example, said about the impact of globalisation within the low-skilled, tradeable sector: "We are not going to have a future making cheap cotton tee-shirts. That and a lot else besides will move to the countries which have low wages or other sources of comparative advantage …" (Ev II, Q 1854).

114. Ignazio Visco of the OECD told us that: "Eventually, globalisation leads to a substitution of low-skilled jobs by high-skilled jobs in high-income countries, and an increase in the employment level in low-income countries. … Even though the net impact on employment is likely to be modest, the skills required of workers could change substantially as the composition of employment shifts." (Ev I, p 172). Similarly, the TUC argued that although "overall, the rapid growth in trade in the 1990s has not been associated with deterioration in labour markets in the OECD", "the entry of new producers will undoubtedly put pressure on some sectors in established markets and cause some industrial restructuring" and, as a result, "concerns remain that growing competition from low-wage competition has lost jobs in the manufacturing sector, especially for less skilled workers in the more labour intensive lower value added industries". The TUC continued:

"There is clearly some truth in that charge, although exports from the industrialised world to low wage economies will at the same time create new jobs. Nonetheless, the argument goes that job losses will tend to be much greater than job gains because the industries under threat from cheap imports tend to be labour intensive, while industries exporting to the developing world tend to be capital intensive." (Ev I, p 35).

The Royal Academy of Engineering anticipated that "the share of the UK GDP generated by traditional 'metal-bashing' and heavy manufacturing will continue to decline" (Ev II, p 371).

115. Michael Kitson also referred to the shift of less skilled jobs to "low cost sectors and less developed countries", causing greater unemployment, job insecurity and wage inequality amongst the less skilled in developed countries (Ev I, Q 274). Similarly the Engineering Employers' Federation (EEF) took the view that "inevitably, we will lose some of our manufacturing activities to lower cost countries" - this would generally be "at the lower end" - that is, the less skilled sectors - of manufacturing and engineering (Ev I, Q 478).

116. Although globalisation has led to some unemployment through industrial restructuring, a number of witnesses drew attention to the fact that the technical innovation that characterises this period of globalisation has influenced the nature and rate of industrial restructuring. According to a study[63] to which reference is made in the TUC written evidence, "80% of the fall in industrial employment in the advanced economies between 1964 and 1994 can be explained by internal factors and only 20% by competition from low wage economies." (Ev I, p 35). John Monks told us, in relation to the cause of unemployment amongst unskilled workers, that "it is extremely difficult to measure [globalisation] against the other factors, of which technological change and development is such a powerful driving factor" (E v I, Q 56). Patricia Hewitt also suggested that "it is very difficult to distinguish the adjustment costs that come from engagement in world trade and globalisation and those that would come anyway from technological change …" (Ev I, Q 1849). Ian Brinkley, a TUC Senior Policy Officer, however, suggested that they were "… more persuaded that the big effects have come through technology and technical advance in terms of the impact on the unskilled worker. Trade and competition from low wage economies clearly has had a role, but it is rather less important than other factors." (Ev I, Q 56).

117. Globalisation has brought about industrial restructuring which has caused some transitional unemployment in developed countries especially amongst the less skilled.[64] The evidence suggests however that technological change has been more significant in reducing industrial employment amongst the less skilled. It is possibly a more significant force than competition from low-wage economies.

Wage inequality

118. Although there has been a decline generally in the demand for unskilled labour in developed countries, the TUC notes that there has not been a corresponding general increase in wage inequality. Whereas there have been significant increases in wage inequality in economies such as the United States, the United Kingdom and New Zealand, other OECD countries have not had a similar experience. The TUC suggests that the implication is that "institutional and other factors - strong trade unions, social benefits and employment protections - also have an important role to play" (Ev I, p 36). Professor Greenaway also notes the "skill premium" - the increase in wage inequality - in the UK and the US in the last quarter of a century but suggests that the difference between the UK and US, on the one hand, and continental Europe, on the other, is that "the decline in labour market outcomes for the less skilled in those economies seems to manifest itself on the employment front" rather than through wage inequality. As regards the cause of increased wage inequality in the UK, he argues that trade with low-wage economies is only a "minor player": other factors such as wage compression in the public sector and the proliferation of skill-biased new technologies are "at least as, if not more, important than the globalisation process" (Ev I, Q 232).[65]

119. The evidence suggests that in those developed countries where there is increasing wage inequality, this cannot be attributable solely to globalisation but is also a consequence of a number of other factors including technological change.

Job insecurity

120. Job security, in terms of the perception of members of a workforce about their individual security, is, as the TUC rightly points out, "difficult to measure" (Ev I, p 37). However a survey was carried out by the OECD in 1996 and 2000 across a large number of OECD countries which at the very least offers some information about changes in concerns about job insecurity. The survey showed a general fall in concern about job insecurity during that period although the 2000 survey indicated a comparatively high level of insecurity in the United Kingdom.[66] Patricia Hewitt, however, had a different impression:

"There is undoubtedly … a greater feeling of insecurity, if you look at the survey evidence over time. I think that part of that does some from the sense that this is an intensely competitive world; increasingly competition comes from international companies and from other countries, but coupled with that and intertwined with it is the incredible speed of technological change. So that the prospect of staying in pretty much the same job using pretty much the same skills in a sector that does not look very different has really disappeared." (Ev II, Q 1858).

121. Whatever the perceptions of members of the workforce about their security, Professor Greenaway suggested that globalisation will tend to create actual job insecurity: "Increased globalisation creates more opportunities and therefore the potential for greater job turnover. Although the latter is a desirable characteristic of a dynamic well functioning economy, it also brings with it less job security." (Ev I, p 98). It is important not to assume, however, that job insecurity must result from labour mobility. It is argued that countries such as ours or, even more so, countries in the EU would benefit economically from increased labour mobility (see paragraphs 128 and 136 below). This is sometimes confused with a fear of increased insecurity. If, however, there is full employment, more mobility does not necessarily imply more actual insecurity because workers may be able easily to get suitable new jobs.

Skilled workers

122. Although the focus of the concern of developed countries about the impact of globalisation on labour markets has been on the unskilled workforce, according to the TUC, the skilled workforce of the United Kingdom does not remain unscathed by worries about unemployment and job insecurity. They reminded us that our major competitors are other European countries (Ev I, Q 49) and that the impact of this European trade is to encourage companies to go "up market all the time" - the implication of this is "very different from competition from low-wage economies, which is more likely to result directly in unemployment" (Ev I, Q 51).

Developing countries

Unemployment and wage effects

123. In general, witnesses argued that fears about the impact of globalisation on labour market conditions were principally about unskilled labour in developed countries. We received some evidence, however, which indicated that structural changes in production in developing countries have also had harmful transitional effects in relation to employment and wage levels. Donald McKinnon suggested that:

"Trade liberalisation has resulted in the loss of employment in sectors that had previously been protected and had difficulties in driving down unit costs. The loss of trade preferences is having a particularly pernicious impact on vulnerable small states … The loss of these preferences is undermining the competitiveness of these economies and threatening their viability." (Ev I, p 304).

He urged that measures should be taken to assist these vulnerable countries.[67] Duncan Green, Public Policy Analyst, CAFOD, argued that globalisation could create unemployment because of a high proportion of foreign direct investment being in the form of mergers and acquisitions rather than 'greenfield' investment (Ev I, Q 901).

124. Ignazio Visco, whilst arguing that globalisation would generally lead to the creation of employment opportunities in developing countries (as unskilled work shifted from developed to developing countries), also acknowledged the likelihood of "distributional consequences" which would require some form of "social insurance" (Ev I, Q 438).

125. As regards wage levels, again the evidence we received was largely to the effect that globalisation would benefit wage levels in developing countries. (In Chapter 5 we refer to the effect of TNCs on wage levels in developing countries.) Duncan Green, however, argued that his experience of the textile industry in particular indicated that where an industry was highly mobile, "the threat of relocation is almost as bad as the actuality of relocation in terms of holding down and reducing wages and conditions …" (Ev I, Q 901).

Developed country "poaching"

126. The new technologies, coupled with globalisation, have placed a premium on skilled labour in developed countries. There is also a premium on skilled labour in developed countries arising from indigenous shortages in certain areas such as the medical and teaching professions.[68] This has led to recruitment by developed countries of professional staff who have been trained in developing countries. In the Report of the Commission on Macroeconomics and Health to the World Health Organisation, the problem of the "brain drain" from developing countries is identified as one of the four key policy challenges of globalisation.[69]

127. In a general sense it is contradictory to argue that international capital mobility is economically beneficial and international labour mobility is not. The case for it is based on the elementary proposition that the world gains if factors of production are used where they are most productive. As we indicate below, that does not mean that serious problems do not emerge in connection with such mobility. Policy intervention is needed to mitigate the ill effects of the international movement of capital and labour. International labour mobility - which at present is relatively restricted - has major benefits however. Andrew Crockett, for example, took the view that, although the movement of labour imposed certain costs, "any broadened opportunity for willing buyers and sellers to come together, whether for products or for factors of production, is desirable" (Ev I, Q 396). He also referred to the importance of remittances by migrant workers to their home countries (especially in relation to high population countries in the Middle East (Ev I, Q 399)).[70] Willem Buiter thought that: "On the whole ... the movement from countries where labour is plentiful and productive jobs are few and far between relative to the endowment of labour to countries which are greying, where labour is scarce, makes sense both for those who move and in principle for those left behind ..." (Ev I, Q 201). Diane Coyle gave the example of the recruitment by firms in the United States Silicon Valley of computer experts from Taiwan and India and suggested that "… the US opening its doors to those immigrants could turn out ... to be one of the best things that developed countries have ever done for developing countries because they have built leading edge industries in their own countries, it is not all one way." (Ev I, Q 665). Donald McKinnon similarly cited the Indian diaspora as a benefit to Indian economic growth (it has "become a major source of foreign capital inflows into Indian, with an estimated US $30 billion in net foreign currency deposits in India, contributing substantially to the balance of payments and foreign debt financing needs") and suggested that the Chinese diaspora was similarly contributing to China's recent "remarkable economic performance" (Ev I, p 306).

128. On the other hand, there are also harmful effects on developing countries: not only, as Professor Bulmer-Thomas suggests, have these countries "invested scarce resources" in the training of such staff (Ev I, Q 109), but the knock-on effect will be that the developing countries themselves will suffer a shortage in professional staff. Andrew Crockett gave an example:

"… the so-called green card scheme in Germany … is intended to attract large numbers of IT professionals from India to Germany. That is obviously beneficial from the German point of view, it is obviously beneficial from the point of view of the individual who earns more. Whether it is so beneficial from India's standpoint, losing skilled labour, is another question." (Ev I, Q 397).

129. Donald McKinnon also emphasised this (somewhat unwelcome) connection between globalisation and labour mobility:

"The 1970s debate about the brain drain of skilled labour of developing countries into the OECD is still a concern to certain countries which are suffering particularly high losses of skilled professionals, for example South Africa. (The Canadian Medical Association Journal has noted in an article that nearly one in five doctors in Saskatchewan province earned their first medical degree in South Africa.) …

In what can sometimes be seen as constituting a form of harmful competition millions of highly skilled workers, trained in developing countries, in key professions such as doctors, nurses, IT professionals and accountants are recruited by the OECD area." (Ev I, p 305).

130. The Department for International Development, in its White Paper on globalisation, indicated its awareness of the problem of poaching of skilled labour by developed countries:

"The UK believes that developed countries need to be more sensitive to the impact on developing countries of a skills drain. They need to ensure that policies in this area do not unfairly restrict the ability of developing country service suppliers to sell into their markets, yet also do not worsen skill shortages in developing countries. In line with this principle the National Health Service has developed a set of ethical guidelines which rule out recruitment from a particular country of this has a negative effect on that country's healthcare services".[71]

The Department indicated that it is carrying out research in this area.[72]

131. Given this, we were interested to receive the evidence of Patricia Hewitt. She told us that the Government had taken steps to make it easier for those who had skills falling within a list of skills shortages to migrate to the United Kingdom, a list which had been expanded to include information and communication technology and other engineering skills (Ev II, Q 1869).

132. In sum, there are two important considerations to bear in mind here. One is the economic proposition that all factors of production should be used where they are most productive. In that way output is maximised. The second is that much labour contains a capital element which is the education and training invested in it. It is that embodiment of human capital which raises its productivity and causes a wage premium for the skilled. The problem is that the cost of that education and training is largely paid for by the general taxpayer. The labour may then move in response to higher wages and better employment prospects. The individual concerned will gain, but what of the general taxpayer who has borne some of the cost? Where governments restrict the movement of labour and, in particular, admit mainly those with special skills of which they are short, the problem of the cost to the sending country is exacerbated. The difficulty, which we raise in paragraphs 136-38 below, is whether it is possible to encourage the free movement of labour while co-operating with those who paid for the investment in skills. In doing so we note that the problem is not just one of movement from poor countries to the rich. In principle, it will apply, for example, to movement of the highly skilled and highly educated from the UK to US.

Responding to changing labour market conditions

Promoting skills

133. In Chapter 3 we considered, as part of a broader strategy for dealing with poverty in developing countries, the importance of promoting the skills of the workforce in those countries. It is not surprising that in a changing labour market in developed countries where there is an employment shift in favour of skilled labour, a number of those who gave evidence suggested a similar prescription for developed countries. Professor Greenaway, for example, suggested that the policy response in developed countries could either be to increase job security (through legislative measures to reduce job turnover and transitional unemployment) or to increase adaptability through education and on the job training. Since, he argued, policies to increase job security are likely to reduce adaptability, they tend to be associated with greater structural unemployment. He advised, therefore, measures which would foster adaptability (Ev I, p 98) and went on: "The benefits from such policies extend well beyond adjusting to globalisation and include adjusting more smoothly to changes in technology which, given computerisation and the communications revolution, are also accelerating." (Ev I, p 98).

134. The Royal Academy of Engineering advised that "it will be essential to maintain a high level of skills in the workforce" (Ev II, p 371) and the Royal Society of Edinburgh stressed the importance of investment to "progressively 'up-skill'" (Ev II, p 377). Michael Kitson similarly suggested that investing in competencies, skills, infrastructure and R&D (research and development) was important if the United Kingdom were to "compete effectively … in a globalising economy" (Ev I, Q 310). Patricia Hewitt told us that "the big challenge" was to ensure that those "who lack basic skills" should be assisted in acquiring them (Ev II, Q 1854). There was, she suggested, a basic skills deficit which had been "neglected for a very long time" and which would require "a very substantial investment to overcome" (Ev II, Q 1858).

135. Given the fall in demand for unskilled and less skilled labour in the tradeable sector of the economies of developed countries, including the United Kingdom, successive UK governments have been right to take steps over many years to promote the skills training of the unskilled and less skilled workforce. We support the present Government's reinforcement of the policy to promote education and skills training. Similarly, as regards developing countries, increasing skills levels is an important element of a strategy to enable those countries to exploit more effectively the potential of globalisation.

Compensation and the "brain drain"

136. John Monks suggested to us that part of the response to a shortage of skills in the British labour market should be "to improve our own skills, educational skills and training to ensure that we seek to meet our own needs as far as we can" rather than "to look abroad and poach other countries' skills" (Ev I, Q 58). Whilst adapting the skills set of the home workforce to meet the needs of the economy is clearly important, migration can be beneficial both to the individual worker and more generally: it can enhance cultural exchange, promote the dissemination of skills and enables migrants to send remittances back to their home countries. On the other hand, policies need to be put in place to offset the harmful effect of publicly-financed skilled workers leaving developing countries.

137. A number of witnesses argued in favour of a scheme where if skilled labour is lost to a country, that country should be compensated for the costs of training. Diane Coyle, for example, said that she could "envisage many mechanisms for making sure that the taxpayers of already very poor countries are not penalised for losing their best and brightest" (Ev I, Q. 672). Willem Buiter suggested more specifically that where education is publicly financed there should be a form of exit tax "related explicitly to the costs incurred by society" in training and educating, collected by the host (or recipient) country and paid to the home (or sending) country (Ev I, Q. 201). Donald McKinnon also endorsed the idea of a compensation scheme although he suggested that it should be the host country which should be charged rather than the migrant worker. Whilst supporting the basic right of individuals to choice where to live and work, Mr McKinnon thought that "… may be … some form of compensation needs to be paid by OECD countries to correct [the] market externality caused by OECD organisations 'free-riding' on developing country investment in human capital". He also made a "concrete suggestion" which was "for rich industrial countries to support technical skills training institutes such as nursing schools, medical schools and IT training institutes in developing countries …" (Ev I, p 305). These are all interesting suggestions. We would be worried, however, about the implication for freedom of movement if an exit tax were introduced. In addition, where a person moves from country A to country B and then to country C, it becomes exceedingly difficult to determine where the benefits and costs lie.

138. Significant benefits arise from labour mobility (for both the countries involved and the individuals). Nevertheless, there is a concern about the effect of the "brain drain" on those developing countries which are losing skilled labour. To the extent that this impairs the development of these countries (in relation to both their public and private sectors), we share that concern. We welcome the UK Government's commitment to undertake further research on the "brain drain". Overseas aid policy should help to finance education and training in poorer countries, shifting the burden from taxpayers there to taxpayers in the countries of immigration. The level of aid might be geared to some extent to the number of skilled workers coming from a country.


63  
Rowthorn and Ramaswamy, Growth Trade and Deindustrialisation, IMF Staff Papers, March 1999. Back

64   As the TUC suggested, however, "there is little new in this process of industrial change" - competition from low wage economies has been going on for decades or longer and "[industries] have had to respond as a result." (Ev I, p 35). Back

65   Professor Greenaway added two caveats to this conclusion: first, there is a link between trade and skill-biased technical change; and, secondly, a significant increase in trade with some of the very large low-wage economies such as China and India is likely to have an impact on UK wage inequality (Ev I, Q 232). Back

66   International Survey Research, OECD 2001, quoted in the written evidence of the TUC (Ev I, p 37). When asked whether they were unsure of a job even if they performed well, 41% of respondents in the UK said they were. Back

67   It is, of course, the case that a change in trade preferences can have a neutral, rather than negative, effect: the removal of trade preferences from one country can be offset from a gain in another country. Back

68   See, for example, John Monks (Ev I, Q 58) and Professor Bulmer-Thomas (Ev I, Q 109). Sabine McNeill of the Forum for Stable Currencies also refers to the flow of "essential skills" from developing to developed countries (Ev II, p 297). Back

69   "It is estimated that in the case of 20 African countries - Algeria, Benin, Burkina Faso, Cape Verde, Côte d'Ivoire, Gambia, Ghana, Guinea, Guinea Bissau, Liberia, Mali, Mauritania, Morocco, Nigeria, Senegal, Sierra Leone, Somalia, Sudan, Togo, and Tunisia - more than 35 percent of nationals with a university education are now living abroad (International Organization for Migration 2001)": report to the World Health Organisation by the Commission on Macroeconomics and Health, Macroeconomics and Health: Investing in Health for Economic Development (December 2001), pp 75-76. Back

70   In a Special Report on Emigration by the Economist, 28 September 2002, p 28, it is stated that migrants send home $60 billion though official channels with an estimated additional $15 billion in other, unreported, ways. As to the benefit of remittances, the report states: "One of the few attempts to estimate whether remittances by the skilled offset the loss of intellectual capital to the sending country concluded that they did not." Back

71   Eliminating Poverty: Making Globalisation Work for the Poor, Cm 5006, December 2000, p 43, para 134. Back

72   Ibid, p 43, para 133. Back


 
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