The Effect of Globalization on Wages in the Advanced Economies

Increased globalization--the international integration of markets for goods, factors, and technology--has coincided in the past two decades with a shift in labor demand away from less-skilled workers toward those with more skills. This shift in labor demand has produced a widening of the gap in wages between the two groups of workers, along with rises in income inequality and unemployment, primarily among low-skilled workers. This paper summarizes research on the connection between globalization and labor markets in the advanced economies. Much of the concern about the effects of globalization has focused on the impact of imports from developing countries on wages, employment, and income inequality. However, the consensus of empirical research is that increased trade accounts for only about 10 to 20 percent of the changes in wages and income distribution in the advanced economies. The more important influence on labor markets in the 1980's and 1990's has been a technology-driven shift in labor demand away from less-skilled workers and towards more-skilled workers. This has resulted in increased wage inequality in some countries and in lower relative employment among unskilled workers in others. Increased capital mobility, including the "outsourcing" of production to low-wage countries, as well as immigration from developing countries to the advanced economies appear to have had only modest effects on labor markets in the advanced economies. Nonetheless, increased globalization can increase the sensitivity of wages and employment to external shocks and thereby contribute to increased job insecurity. Moreover, the burden of adjusting to changes in the global economy falls most heavily on low-skilled workers. Policymakers must keep in mind potential social dislocations from these changes and ensure that those who are displaced do not become marginalized. It is important, however, that any policy actions do not impede adjustment, but rather provide incentives for workers and firms to adjust to and therefore gain from changes in the global economic environment