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:

Cambodia:

-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

Indonesia:

-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

Honduras:

-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

Madagascar:

-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.

What happens when rate of increase of population exceeds food production?

Well, when the rate of increase of population outstrips rate of increase of food production, then there is a production paradox-- despite increase in food production in all regions, the number of hungry stomaches still increase! From NYT:

Scientists and development experts across the globe are racing to increase food production by 50 percent over the next two decades to feed the world’s growing population, yet many doubt their chances despite a broad consensus that enough land, water and expertise exist.

The number of hungry people in the world rose to 1.02 billion this year, or nearly one in seven people, according to the United Nations Food and Agriculture Organization, despite a 12-year concentrated effort to cut the number.

The global financial recession added at least 100 million people by depriving them of the means to buy enough food, but the numbers were inching up even before the crisis, the United Nations noted in a report last week.

Agronomists and development experts who gathered in Rome last week generally agreed that the resources and technical knowledge were available to increase food production by 50 percent in 2030 and by 70 percent in 2050 — the amounts needed to feed a population expected to grow to 9.1 billion in 40 years.

Despite an increase in technology and food production techniques, why is there still increasing hunger? Are we approaching Malthusian nightmare? Here is Greg Clark:

Thomas Malthus warned in 1798 that population pressures would forever keep food and energy scarce and incomes low. In the 200 years since, world population has grown sevenfold, to 6.7 billion. Yet food and energy have become cheaper and more abundant. Malthus's dystopia, it seemed, belonged in history's junkyard. But, suddenly, rapid growth in China and India and the consequent scramble for increasingly scarce resources has revived the Malthusian specter. By 2050, 9 billion people in a world where all have U.S. consumption standards would need eight times as much oil and five times as much food than the planet current uses. Is the future a world of $10-a-gallon gas and $20 Big Macs?

Ostrom and Nepal

2009 Nobel laureate in economics Ostrom's on CPR (via David Warsh)

"total crop yield in Nepal is frequently higher around small primitive dams built from stone, mud and trees and managed locally, than near large concrete and steel dams where irrigation users have little incentive to concern themselves with necessary dam maintenance."

It would be very interesting to read Ostrom's forthcoming book about her research in Nepal.

Two emerging giants battle: Nepal benefits

The battle between China and India for regional influence will potentially benefit Nepal. A positive externality (for Nepal) from competing economic policies for regional influence by two emerging giants.

Indian Railways has chalked out a comprehensive plan to build rail links with Nepal and Bhutan in an apparent bid to counter the recent Chinese move to build rail links in South Asia. China is building a 1,956-kilometer rail route connecting Qinghai province and Tibet with Kathmandu across the Tibetan plateau.

China is also planning to build an internal railway network in Nepal linking it to Pakistan via the Karakoram Highway and Bangladesh via Myanmar. Indian Railways proposes to build six rail links with Nepal and three with Bhutan on a priority basis. Recently, the railways has mooted a proposal to link India directly with Nepal to achieve its all-round development and enhance connectivity between the two neighboring countries.

Free articles from 2009 Nobel Prize in economics winners

Some of the papers (for free!) by Elinor Ostrom and Oliver E. Williamson here.

Here is an interesting one:

The contested role of heterogeneity in collective action: Some evidence from community forestry in Nepal

2009 Nobel prize in economics

This year’s Nobel Prize in economics went to Elinor Ostrom (the first woman to win the prize in economics) and Oliver Williamson for their work in economic governance.

Economic transactions take place not only in markets, but also within firms, associations, households, and agencies. Whereas economic theory has comprehensively illuminated the virtues and limitations of markets, it has traditionally paid less attention to other institutional arrangements. The research of Elinor Ostrom and Oliver Williamson demonstrates that economic analysis can shed light on most forms of social organization.

Elinor Ostrom has challenged the conventional wisdom that common property is poorly managed and should be either regulated by central authorities or privatized. Based on numerous studies of user-managed fish stocks, pastures, woods, lakes, and groundwater basins, Ostrom concludes that the outcomes are, more often than not, better than predicted by standard theories. She observes that resource users frequently develop sophisticated mechanisms for decision-making and rule enforcement to handle conflicts of interest, and she characterizes the rules that promote successful outcomes.

Oliver Williamson has argued that markets and hierarchical organizations, such as firms, represent alternative governance structures which differ in their approaches to resolving conflicts of interest. The drawback of markets is that they often entail haggling and disagreement. The drawback of firms is that authority, which mitigates contention, can be abused. Competitive markets work relatively well because buyers and sellers can turn to other trading partners in case of dissent. But when market competition is limited, firms are better suited for conflict resolution than markets. A key prediction of Williamson's theory, which has also been supported empirically, is therefore that the propensity of economic agents to conduct their transactions inside the boundaries of a firm increases along with the relationship-specific features of their assets.

Economists react:

Paul Romer

Paul Krugman says its “an institutional economics prize”

Tyler Cowen

Steven Levitt

The Economist

Brad DeLong

also, here

IPC One Pagers in one volume!

The IPC has published a collection of its popular One Pagers as a book. Very insightful and interesting short papers. Link here.