Saturday, October 24, 2009

Globalization, wages and the quality of jobs

It is pretty much accepted that globalization has led to an increase in jobs in the export-based industries. But, what has been the impact of globalization on wages and quality of jobs? A new book (Globalization, Wages, and the Quality of Jobs) sheds light on these issues and digs answers for if globalization has increased wages and quality of jobs. In short: there is some evidence that globalization has increased wages and working conditions in the sectors that are exports based. However, there is no consensus on the effects (positive or negative) of globalization on wages and quality of jobs.

The authors look at five countries: Cambodia, Indonesia, Honduras, El Salvador, and Madagascar. They focus on apparel sector to gauge if globalization is improving working conditions and increasing wages.

The authors show three connections between globalization and inter-industry wage differentials (IIWDs):

  • FDI-intensive and export sectors paid wages significantly above the mean (Cambodia and Honduras)
  • Wage premium in FDI-intensive and export industries increased over time 
  • Wage premium was positively correlated with exports and FDI

Few details about the five countries:


-apparel made up 82 percent of total merchandise exports in 2003; nearly 2/3 destined for the US

-wage in garment sector is 35 percent higher than average wage

-wages and working conditions are positively correlated with trade

-first country to have quota access for exporting firms specifically tied to working conditions


-exports oil, gas, electrical appliances, textiles, plywood

-went two periods of liberalization: mid-1980 to mid-1990 focused on textiles and apparel sectors and after mid-1990s it diversified to heavy industries (metal products and machinery and chemical industries)

-ILO contributed a lot to improving working condition and labor protection

-wage in apparel sector is 8.3 percent higher than average wage


-exports coffee, banana, textiles/apparel

-apparel exports made up 60 percent of total exports; 2/3 exported to the US

-more than 82 percent of all Honduran workers worked in foreign-owned factories

-wage in apparel sector is 21 percent higher than average wage

-the end of MFA has deteriorated wages and exports sector

El Salvador:

-exports coffee, sugar, offshore assembling, shrimp, textiles

-wages in apparel sector is 7.2 percent higher than normal wages

-wages positively related with working conditions

-end of MFA coincided with decline in FDI and wages


-exports coffee, vanilla, shellfish, sugar, cotton, clothes

-wage of workers working in the exports industry is generally higher than normal wages but the end of MFA and the entry of China in the WTO has dampened wages and FDI

-end of MFA triggered an outflow of capital out of apparel sectors to lower-wage countries

Globalization has increased FDI in countries and improved export opportunities with the potential for rising wages and more employment. It has also changed the structure of economies, particularly in the developing countries. The authors argue that the influx of exports-focused FDI was positively correlated with wage premiums and working conditions, as employment in agriculture fell and apparel employment increased. Also, FDI that produces for the domestic market has different effects than FDI that produces for export. See the figure below:

The barometer for success of globalization should not just be increase in trade volume but also the number and quality of jobs created. This will have an impact on poverty reduction as well.While in developed countries, working conditions are generally better, it cannot be safely assumed the same in the developing countries. The authors argue that working conditions are positively related to wages.

It appears that labor markets in export-oriented sectors that attract FDI are characterized by "good" jobs with high wages and better working conditions. In contrast, the agricultural sector (or more generally, the informal sector in Madagascar) offers "bad" jobs with low wages and poor working conditions. Thus, the positive correlation between and working conditions is more consistent with theories of efficiency wages and rent-sharing than with compensating differentials.

The relationship between globalization and its implications for wages and working conditions in developing countries is not straight forward-- it depends on many factors. These factors include:

  • technology
  • worker preferences and bargaining power
  • the cross-sectoral integration of labor markets
  • the quality of governmental institutions
  • international trade policy
  • the transmission of knowledge through supply chains
  • the establishment and enforcement of international labor standards
  • the leverage exercised by consumers, stockholders, and reputation-sensitive international buyers
  • the stability of labor markets

Some observations:

-Governments may impose specific regulations on firms that benefit from trade liberalization. For instance, the commitment of Cambodia to ensure good working conditions in firms that operated under the MFA.

-The action of national interest groups can influence the impact of globalization. For instance, anti-sweatshop activists waging a campaign for better working conditions and fair wages. It is interesting to note that, in Indonesia, the factories that were forced to raise wages as a consequence of government action and anti-sweatshop agitation were able to do so without cutting employment or production.

-A set of labor market inefficiencies may be in place and be aggravated by increased globalization. For instance, the factors that undermine bargaining power of workers in relation to factory managers--young, female, poorly educated or illiterate workers; workers migrating to urban areas may not have experience beyond the barter economy; over supply of labors makers it harder to negotiate better wage and working conditions; frequent economic downturns might wipe out gains made during good economic times.