The annual Employment Outlook from the Organization for Economic Cooperation and Development (OECD) released on June 18 has generated media attention because it explains that increased international trade leaves some groups of workers in developed countries more exposed to job transitions and unemployment. The 280 page report outlines the economic impacts of increased trade and a cover editorial highlights the OECD’s political response for assisting the economic adjustment process.
The OECD is supported by governments of 30 democracies that are mostly economically developed. Its staff gathers statistics from members and does research on economic, social and environmental issues. OECD economic analyses generally support increased international trade; their work shows that a 10 percentage point increase in trade openness results in a 4 percent increase in per capita income for the OECD area.
The editorial by John P. Martin, Director, OECD Directorate for Employment, Labor and Social Affairs, begins with “The debate about the social impact of globalization is characterized by a paradox.” Open markets are generally associated with greater prosperity, but public opinion in many OECD countries focuses on changes in jobs and wages. The economic benefits of comparative advantage through specialization and intensified competitive pressures that encourage firms to innovate and adopt new technology are pushed to the background of the public policy debate.
Martin says the paradox can be partially explained by the “unprecedented scale of globalization.” The 30 OECD countries account for 19 percent of the world’s labor supply, while Brazil, Russia, India and China (the BRIC countries) account for 45 percent. Trade by those four countries has doubled in the last 15 years. Labor-intensive services are now part of trade because of “the rapid adoption of information and communications technology.” New technology and declining transportation costs result in most firms and workers “directly or indirectly competing in today’s world economy.”
The other factors Martin stresses are wider earnings inequality and the perceptions of job insecurity. A majority of the OECD countries have had a decline in the share of wages in national income over the past 20 years. The job insecurity issue is hard to quantify, but workers are increasingly worried about keeping their jobs. The research reported in Chapter 3 estimates that the wage elasticity of labor demand (greater employment volatility and/or wage volatility if everything else is held constant) has increased from 0.2 to 0.5 from 1980 to 2002, with manufacturing likely the most impacted. This change has not been caused just by trade; changes in technology have actually had the greatest impact. Companies can more easily adjust to economic shocks by changing the domestic and foreign mix of production.
With or without a new Doha Round trade policy agreement, increasing world trade driven by comparative advantage, technology changes, international production networks and decreasing transportation costs has become an economic fact of life for businesses, employees and pubic policy makers. Last year’s OECD Employment Outlook highlighted the OECD Jobs Strategy for 2006. Martin’s editorial drew four points from that strategy to address the issues raised in this year’s report.
The first strategy is to remove barriers to creating new businesses where OECD economies have a comparative advantage in world markets, particularly in services. This would create jobs, boost productivity and increase real incomes by decreasing consumer prices. The second point is related to the first; support the mobility of workers rather than protecting jobs that have no future in declining industries. These two points address economic resource allocation issues of putting capital and labor to the best possible use to compete in international trade.
The third and fourth points directly address concerns about job insecurity. Employment-friendly social protection programs are needed to increase the employability of displaced workers to take advantage of new job opportunities. Some of these programs may be short term to address specific situations, but permanent, general programs are needed to handle ongoing changes in trade and technology.
Specific programs are needed for the lowest skilled workers. More open trade and technological changes tend to favor skilled workers over unskilled workers. Improving workers’ skills is the only solution to this condition. Chapter 4 of the report addresses those programs.
Compared to the other OECD countries, the U.S. is probably better than most in creating new businesses and the mobility of workers. The U.S. would likely be graded lower on programs that respond to repositioning displaced workers to take advantage of new job opportunities. An opinion poll cited in the report showed U.S. workers and French workers the most concerned about job losses even though the general impression of policy makers is that French workers have more job protections than U.S. workers. The greatest challenge may be in moving the lowest skilled workers up the skill ladder to gain increased income that comes with greater productivity.
Public policy responses to economic changes associated with more open trade are no different that those needed to respond to changes in the domestic economy caused by technological innovations of the past 50 years. Businesses need the flexibility to create new job opportunities and workers need opportunities to develop skills to fill the new jobs.