Globalization and the Labor Market
Posted: 29 Feb 2008
Does globalization affect labor market outcomes? Can labor market policies mitigate or offset the effects? Would these policies have important side effects on efficiency? This article addresses these questions through an analytical survey of the literature, including several studies under preparation. Some of the studies use new cross-country databases of wages and other labor market indicators. Although all the answers should be considered tentative, some patterns emerge. Different aspects of globalization have different consequences. In the short run wages fall with openness to trade and rise with foreign direct investment. But after a few years the effect of trade on wages becomes positive. Foreign direct investment also increases (substantially) the returns to education. Social protection programs are effective in reducing inequality. Minimum wages, public sector employment, and core labor standards are not. Between these two extremes, collective bargaining works mainly for the middle class. Social protection programs do not adversely affect efficiency, but high public sector employment and trade union membership are associated with weaker performance in the context of adjustment.
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