The globalization of labor markets and its policy implications

Since the 1990s, the effective global labor supply has increased strongly, in particular due to the integration of China and India into the global markets. This rise has also deteriorated the situation of low-skilled workers in advanced economies. This development raises important challenges for policy makers in advanced economies. Concerning monetary policy, it is important to know, how the increasing global labor supply affects wages, inflation and macroeconomic activity. The analysis is based on a dynamic general equilibrium model. To make the analysis as transparent as possible, it is based on global variables, i.e. there is no disaggregation. Concerning labor market policy, it is important to know, how to react to the adverse impact of the increasing global labor supply on the low-skilled labor force. In this context, two aspects are analyzed. First, the impact of a particular policy (low-wage subsidies) on skill formation, aggregate employment and welfare is analyzed in detail. Second, the interactions between two policies (hiring subsidies and training subsidies) are analyzed. Both analyses are based on a Markov model. In particular – given the specific challenges for labor market policy –, a disaggregated approach is used, i.e. it is distinguished among different types of labor. The analyses are concerned with the decisions of labor market participants in response to policy-induced incentives.