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.
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.
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
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,
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,
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
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.
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.
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
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.
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.
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
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).
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
"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
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.
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
" (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.
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.
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)).
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".
The Department indicated that it is carrying out
research in this area.
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
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 "
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
63 Rowthorn and Ramaswamy, Growth Trade and Deindustrialisation,
IMF Staff Papers, March 1999. Back
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
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
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
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
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
"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
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
Eliminating Poverty: Making Globalisation Work for the Poor,
Cm 5006, December 2000, p 43, para 134. Back
Ibid, p 43, para 133. Back