Does globalization hurt wage earners?

As the world economy has become increasingly tightly knit over the past decade, the wage gap has widened between high-skilled and low-skilled workers. It would seem safe to conclude that the two trends are linked.

Not so, according to a new paper presented at the IDB's Washington, D.C., headquarters. According to the study "The Effect of Globalization on Wages in the Advanced Economies," by International Monetary Fund economists Matthew J. Slaughter and Philip Swagel, globalization has had only a modest effect on wages. The major culprit is technology, which has led to a pervasive shift in demand for skilled labor.

In the study, which was carried out in the advanced economies, the authors conclude that the "consensus of empirical research suggests that increased trade accounts for only about 10 to 20 percent of the changes in wages and income distribution."

According to the study, the 1980s and 1990s has seen a technology-driven shift in labor demand away from less skilled workers and toward more skilled workers. "This shift has resulted in increased wage inequality in some countries, and in lower relative employment among unskilled workers in others," says the study.

The authors also find that increased capital mobility, including the outsourcing of production to low-wage countries, together with immigration from developing countries to the advanced economies, appears to have had only a modest effect on labor markets. Nonetheless, further globalization could contribute to greater job insecurity, they say. "Policymakers must keep in mind potential social dislocations from these changes and ensure that those who are displaced do not become marginalized."

Policy actions must not impede adjustment, they continue, but rather provide incentives for workers and companies to adjust to and gain from changes in the global economic environment.