Regional Perspectives on World Development Report 1995 THE EMPLOYMENT CRISIs IN INDUSTRIAL COUNTRIES Is International Integration to Blame? Regional Perspectives on World Development Report 1995 THE EMPLOYMENT CRISIS IN INDUSTRIAL COUNTRIES Is International Integration to Blame? THE WORLD BANK WASHINGTON, D.C. (D 1995 The International Bankfor Reconstruction and Development / The World Bank 1818 H Street, N. W, Washington, D. C. 20433, U.S.A. All rights reserved Manufactured in the United States ofAmerica First printingAugust 1995 This report has been prepared by the staff of the World Bank. The judgments expressed do not necessarily reflect the views of the Board of Executive Directors or the governments they represent. Editing, layout, and production by American Writing Corporation ISBN 0-8213-3349-6 ISSN 1020-3648 Contents 1 International Integration and the OECD's Employment 1 An integrating world 1 Declining demand for unskilled workers in industrial countries 2 Are linkages with developing and transition economies to blame? 3 Most industrial workers gain from integration 5 2 Industrial Country Policies for Workers in Rich and Poor Countries 7 Deepening integration through regional agreements 7 What to do about labor standards 8 Reforms to allow industrial country workers to benefit from integration 8 3 Conclusion 10 References 11 iii This report was prepared in conjunction with World Development Report 1995: Workers in an Integrating World. It was written by Ana Revenga under the direction of Michael Walton. She was assisted by Claudio Montenegro and Michael Geller. Helpful, detailed comments were provided by Ishac Diwan, Swati Ghosh, and Alan Winters. Meta de Coquereaumont and Vince McCullough edited the report. Julie Harris and Christian Perez laid out the text. iv CH A TF E R I International Integration and the OECD 's Employment T he industrial countries are in the midst of a long-term which deeper international integration fuels growth in industrial, employment crisis typified by persistent unemploy- developing, and transition economies. ment in Europe and rising wage inequality in Australia, In the past few decades the pace and scale of global integra- Canada, the United Kingdom, and the United States. At the tion have accelerated. In the late 1970s about two-thirds of the same time, the industrial countries have experienced a surge in world's labor force lived in countries largely insulated from inter- international interactions with countries that have large numbers national markets by prohibitive trade barriers and capital con- of much poorer workers-that is, with developing economies trols or by planned trade. Today, three giant population and, increasingly, those in transition from central planning. blocs-China, the countries of the former Soviet Union, and Many commentators portray these two developments as con- South Asia-with nearly half the world's labor force are entering nected. There is a concern that workers in industrial countries- the global market, and many other countries, from Mexico to especially unskilled workers-are losing out as low-wage Turkey, have already established strong linkages. By 2000 less economies like China take over production of labor-intensive than 10 percent of workers may be living in countries that are goods and middle-income countries like Mexico upgrade into disconnected from world markets. the production of more skill-intensive products. Apprehension over job losses and declining wages is exacerbated by fears of An integrating world multinational capital heading to lower-cost producers in Eastern Trade is the main channel of economic integration. The move- Europe, Latin America, and Asia. ment of goods and services across borders has grown dramati- This report analyzes these linkages. It concludes that the for- cally in recent years, from 23 percent of world GDP in 1970 tunes of industrial country workers and their counterparts in to about 40 percent in 1990. Developing and transition poorer countries are indeed interconnected but that interna- economies contributed significantly to that increase. In tional linkages account for only a small part of the plight of those 1987-92, U.S. exports to developing and transition economies suffering long-run unemployment or declining wages. It also grew by more than 13 percent, while those to other industrial concludes that future gains from rising interactions with the countries grew by 8 percent. Between 1991 and 1993 develop- developing and transition economies are likely to outweigh the ing and transition economies accounted for almost 75 percent losses. Industrial countries are already benefiting from the grow- of the increase in world exports and contributed decisively to ing integration of developing and transition economies into the pulling industrial economies out of recession. By 2010 devel- global economy as such countries absorb a large, and growing, oping and transition economies will account for 30 percent of share of industrial country exports. The potential for additional world imports and 22 percent of world exports of manufactures gains is large. (World Bank 1995a). But increasing integration is also likely to entail significant Private capital flows to developing and transition economies adjustment costs. Workers in labor-intensive industries and low- totaled $175 billion in 1994, more than four times the 1989 fig- skill occupations may bear the brunt. Reaping the full benefits of ure of $42 billion (all on a net basis), although still a much less integration will be easier if these workers are helped through important form of economic interaction between countries than domestic policies. Policies to ease the cost of adjustment for those trade. Overall, the transfer of capital resources from rich to poor adversely affected can be crucial in curbing protectionist pres- countries has played only a moderate role in complementing sures in industrial countries, and to the realization of a world in domestic savings: under the extreme assumption that savings I T H Er - M r X 3oY M Er N T C R I S I S I N I N4D U S T R I A L C ED U N T R I E S phenomenon, linked to global integration. According to this view, increased trade with developing and transition economies _a_ _*|I_ is putting particular pressure on low-skill manufacturing in industrial countries, with low-skilled workers bearing the brunt Figure 1. Unemployment levels in OECD regions, of adjustment through lower wages or higher unemployment. 1973-93 Unemployment in industrial countries started to trend (millions of unemployed workers) upward in the early 1970s (Figure 1). Between 1972 and 1982 35 - the number of unemployed almost tripled. Strong economic LJ Japan growth in the second half of the 1980s brought some reduction 30 - North America in unemployment, but these gains were quickly erased by the 25 - Europe recession of the early 1990s. Unemployment is currendy esti- OECD mated at 35 million people for the OECD as a whole, about 8.5 20 - percent of the labor force. Unemployment is not, however, evenly distributed. The average for the European Union is 12 15 - l | l | percent, twice the level in the United States and four times that 10 1 | s | in Japan. These official unemployment rates may even under- 1 l 201 ] .l 5' | estimate the true extent of joblessness, since many job-seekers 5 have given up looking for work. Indeed, Europe's jobless dilemma appears even more acute when judged by employment 0 to population ratios, which have fallen steadily among men since 1973 1975 1979 1983 1991 1992 1993 the 1 960s. Despite similar growth performances, some European Source: OECD 1994a. countries have employment to working-age population ratios that are 10 to 20 percentage points lower than those of Japan or rates remain unaffected by these flows, about 11 percent of cap- the United States (Table 1). ital formation in developing and transition economies in These differences in unemployment performance across 1970-90 could be attributed to the cumulative effect of capital industrial countries are commonly attributed to differences in mobility. For industrial countries, capital outflows represented employment growth paths. North America has been creating only 2 percent of their capital stocks in 1990. Migration follows trade and capital flows as the third most important channel of international interactions. Since the 1960s I . 6 I the flow of migrants to industrial countries has risen and its com- position has shifted, with most migrants coming from develop- ing and transition economies. Between 1965 and 1990 the share of immigrants in the total work force increased from 3.5 to 5.0 Table 1. Employment rates and output growth, percent in Europe and from 6 to 8 percent in the United States. 1972-90 As with other forms of international exchange, there are large pos- (percent) sibilities for mutual benefit. Average annual Change In output Declining demand for unskilled workers in industrial Employment employment growth, countries Country 1972 1990 rate 1972-90 If unemployment in the industrial countries were low and wages Japan 70.7 73.2 2.5 3.8 were rising rapidly, few people would worry about any ill effects United States 62.2 70.9 8.7 2.6 of international linkages. The surge in trade with developing and United Kingdom 69.9 69.0 -0.9 1.9 Inges. ~~~~~~~~ ~~~~Austria 64.9 68.8 3.7 2.6 transition economies, however, has occurred against a backdrop Australia 67.6 67.5 -0.1 3.0 of rising labor troubles in the industrial world. Over the past fif- Canada 59.9 67.3 7.4 3.3 teen years, industrial countries have struggled with two deeply Norway 59.2 64.4 5.2 3.5 Germany 57.9 61.7 3.8 2.4 worrisome labor market trends reflected in rising and persistent Italy 55.9 54.6 -1.3 2.7 unemployment throughout much of Europe, and stagnant real France 50.6 51.6 1.0 2.5 wages and growing wage inequality in the United States. Many Spain 58.5 47.5 -11.1 3.0 analysts argue that both trends are manifestations of the same Source: Revenga and Bentolila 1995. 2 I N' TE rs P4 A T I O N A L It 1JT4 rs E QR A T I O N AN N D E M P LOYP E M rs N T jobs at 1.8 percent a year since 1960, and Japan at 1.2 percent. In contrast, annual employment growth in the European Union Real wages have stagnated in the United States has been a dismal 0.3 percent. The other side to North America's better employment performance, however, has been slower labor productivity growth and stagnant real wages. Annual real wage Figure 2erage hre i n e. growth in the United States averaged only 0.3 percent in the (1982 dollars) 1980s, down from 2 percent in the previous two decades (Figure 2). Moreover, in the same period wage inequality in the United 9.0 States increased dramatically (and also rose in Australia, Canada, F and the United Kingdom). In the United States the increased disparity in wages has been 8.5 associated with falling real wages for low-skilled male workers. Real earnings of those in the lowest decile of earners have fallen by 10 percent since their peak in 1979. The declines in real earn- 8.0 ings have been even more dramatic for young unskilled workers- for young men with a secondary education earnings fell by as much as 20 percent in the 1980s. (By contrast, those of young 7 - men with a college education increased by 11 percent in real terms.) The fall in the real earnings of unskilled U.S. men has prompted concerns that better unemployment performance has been at the expense of a growing number of "working poor." Real 7.0 M b r 45 05 sq t s cfp 9< s § earnings for men in the lowest decile have also declined in Australia and Canada, raising similar concerns there (Figure 3) Source: U.S. Council of Economic Advisers 1995. One way or another, all industrial countries are experiencing declining demand for unskilled labor. Where relative wages have of the value of manufacturing output in 1970 to 12 percent in been flexible (Australia, Canada, and the United States), the shift 1992. But these imports are still just a small proportion of GDP in demand against the unskilled has translated into rising wage (Table 2). And on a net basis, the changes have been modest. inequality, but relative unemployment rates have remained Even in the United States, where imports from the developing largely unchanged. Countries with more rigid wage structures countries have grown the most, deterioration in the trade balance (such as those of continental Europe) have been spared the with developing and transition economies is estimated at less increase in wage dispersion, but at the cost of rising unemploy- than 1 percent of GDP-a change too small to explain the stag- ment (Figure 4). nation of real wages throughout the economy or to account for a 6.6 percent drop in the share of manufacturing in GDP. Are linkages with developing and transition economies Developing country trade is even less plausible as an explanation to blame? for Europe's malaise, since changes in Europe's trade balance with These labor market developments have coincided with a surge these countries have been negligible. in exports from developing and transition economies to indus- Import penetration is only one of many measures of increased trial countries, leading many observers to blame this trade for competition from developing countries. And it is not necessarily the labor problems of industrial countries. Such claims seem the most comprehensive. Trade with developing countries could largely unfounded. On net, the effects of trade with developing exert competitive pressures on industrial country employment and transition economies do not seem large enough to account and wages that are not reflected in changes in import penetra- for the massive shifts in labor demand that have occurred within tion. For example, firms in industrial countries could respond to the OECD. Past developments, however, do provide some cause increased competition from developing country exports by low- for concern: to the extent that they reflect the inability of indus- ering their prices and maintaining market share. Employment trial countries to adequately adapt to changing global conditions and wages would still feel the effects of increased competition, and new technologies, they may portend difficulties as integra- but measures of import penetration would not show them. tion proceeds. Studies of the impact of changes in relative prices or trade barriers There is no doubt that competition from developing and on industrial country employment and wages, however, have transition economies has increased: industrial country imports found small or moderate effects at best (Grossman 1987; of manufactured goods from these countries rose from 3 percent Lawrence and Slaughter 1993; Revenga 1992). 3 T H (c E S M P LS O Y M E 1 T C F I . I A I 11 1 U A r 1 A L C O U T r2 1 E A Figure 3. Cumulative change in real wages Figure 4. Change in unemployment rate of lowest paid workers of low-skilled workers (percent) (percent) -15 -10 -5 0 5 10 15 20 25 -4 -2 0 2 4 6 8 10 United Stat United States 1980--891900 Canada 1981-90 ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~1909 Au stralia _1980-91 Australia 19anc91981-90 77France __9Austria71982-91 Austria 1_980-91 United Kingdom Unitedt Kingdom1849 1980-92 Italy 1980-89 1980-87. Norway 1980-9 Sweden Sweden 1981-91 1980-92 Germany Germany 1983-88 1978-87 Source: OECD 1993. Note: Change in unemployment rate of blue-collar workers. For Germany and Italy, change in unemployment rate for workers with less than a secondary education. Source: OECD 1994a and 1994c. ____ . . .* .5Even if trade with developing and transition economies cannot explain the stagnation of real average wage growth in the United States or the dismal employment performance of Europe, could it account for the deteriorating relative position Table 2. Trade with non-OECD countries of unskilled labor? Indeed, economic theory predicts that (percentage of GDP) competition from lower-wage countries will reduce the 1962 1972 1982 1992 demand for unskilled workers. But empirically the question OECD remains controversial: most analyses conclude that trade with Imports 2.54 2.60 5.21 3.77 developing and transition economies can explain only 10 to Exports 2.42 2.54 4.70 3.72 30 percent of the observed demand shifts against unskilled United States labor. And although some studies find more extreme results, Imports 1.13 1.26 3.37 3.76 most calculations of factor content suggest that during the past Exports 1.42 1.34 2.92 3.11 Exportp 1.42 1.34 2.92 3.11 two decades trade with developing economies reduced the Imports 4.40 3.94 6.66 4.03 demand for workers by only I to 3 percent of total employ- Exports 3.64 3.44 5.95 3.93 ment (2 to 5 percent of the unskilled labor force; see also Japan World Bank 1995a). Imports 4.08 3.77 7.49 3.28 The effects of trade seem particularly modest when compared Exports 4.17 4.21 6.58 4.25 with other economywide changes that affect labor markets. The Source: OECD 1994b. fast growth of the service sector is one structural shift that may 4 I N T E R N A T-I O N A L I T1 r- E3 R ^A T I O N AN N D E_ M P L O Y M E N T have had important effects: in the United States alone employ- relatively little of it on the gains. This has tilted the discussion ment in services increased by 6 million workers in 1970-92. toward protectionist sentiments and away from the core issue Labor-saving technological change also may have played a role. of how to maximize and distribute the mutual benefits of inte- Evidence from the United States, for example, suggests that the gration. Although the adjustment process can involve signifi- ratio of skilled to unskilled employment has increased consider- cant costs to certain groups, there are large gains associated ably in all industries since the 1970s-a finding that is inconsis- with further integration for workers in industrial countries. tent with the predictions of trade theory but quite compatible These gains are linked to the three main channels of global with the effects of across-the-board skill-biased technical change. interactions: expansion of trade, increased financial integra- And in the high-unemployment economies-Australia, Canada, tion, and international migration. Europe-rigidities in labor and product markets may have inhib- Expansion of trade brings all workers immediate consump- ited adjustment to globalization and technological progress and tion gains (through lower prices for consumer goods) and enables contributed to the employment problem. many to become more productive as the goods they produce In addition to concerns over trade, many naysayers have increase in value. Industrial country consumers have already voiced fears that the industrial countries will become "decapital- reaped large gains from cheaper labor-intensive imports. In the ized" as capital relocates to developing and transition economies United States, for example, prices of footwear and apparel have in search of cheap labor. These fears are motivated largely by the fallen by more than 20 percent in real terms over the past decade. growing presence of multinationals in developing countries. In Many workers in the OECD will also benefit as industrial coun- recent years more than half the expansion of multinational tries shift production toward higher-value, higher-wage sectors, employment has taken place in developing economies: 5 million increasing average job quality and average wages. By raising of the 8 million jobs created by multinationals between 1985 and incomes in developing and transition economies, expansion of 1992 were in low- and middle-income countries. Even so, indus- trade can raise the demand for industrial country exports of con- trial coantry fears of decapitalization do not seem well grounded. sumer and capital goods and, where there is unused capacity in In 1990 cumulative net flows to developing and transition the industrial countries, can provide a strong boost to output. economies amounted to just 2 percent of industrial countries' Current World Bank estimates (1995a) suggest that a 1 percent capital stock. Although net flows to developing and transition increase in developing and transition country growth could economies are expected to rise further, the cumulative net flow increase growth in the industrial countries by 0.2 percent. over the next decade will still represent only about 2.5 percent of Growing integration with the developing and transition industrial country savings (World Bank 1995a). economies could also dampen cyclical swings in the industrial Concerns that higher foreign direct investment flows to countries and in the global economy as the distribution of eco- developing and transition economies will entail large-scale nomic activity broadens and diversifies around the world. exports of jobs from industrial countries also appear largely All in all, first-round static gains to the industrial countries unwarranted. A recent report by the United Nations Conference from increased trade due to the Uruguay Round are estimated at on Trade and Development suggests that the proportion of for- $50 billion in 1992 prices-or a permanent increase of 0.3 per- eign direct investment that relocates jobs from industrial to cent of GDP (World Bank 1995a). Optimistic assumptions in developing and transition economies is small overall, although which industrial countries continue to invest heavily in skill substantial in a few industries such as textiles and electronics upgrading suggest a second-round, permanent increase in out- (World Bank 1995a). put of about 0.8 percent of industrial country GDP These sec- There are some concerns that strong demand for capital from ond-round gains result from greater investment (in both physical both developing and industrial countries will combine with and human capital) and greater savings following the first-round falling private savings rates to create a "capital shortage," putting efficiency gains. strong upward pressure on world interest rates. Most analyses There are additional sources of potential gains for the indus- suggest that such an outcome is unlikely, provided that industrial trial countries: larger international markets may allow firms in countries keep their fiscal deficits under control. Sustained high industrial countries to exploit economies of scale, and increased deficits in industrial countries could undermine this positive out- competitive pressures could stimulate innovation and higher pro- look by sucking in world savings, raising interest rates, and ductiviry growth. These gains are much more uncertain, however. sharply curtailing flows to developing and transition economies. Were they to materialize, they could translate into permanent increases in the growth of output in the industrial countries. Most industrial workers gain from integration Like the expansion of trade, increases in flows of private cap- Because of the OECD's employment problems, much of the ital between industrial countries and the developing and post- debate on rising integration has focused on the costs, and centrally planned economies can benefit both investors and 5 T H E E M R L. Y M E N T C R I S I S I N ID U 9 T R I A L C O U N T R I E S recipients. Equipping an increasingly skilled work force in benefit; and they can reduce labor costs in the receiving country, developing and transition economies with better capital will generating direct gains to employers and to native workers with help boost productivity and wages. For savers in industrial skills that complement those of the migrants. But migrants can countries, investment in the developing and transition potentially hurt native workers with skills similar to their own. economies offers higher returns and scope for gains from port- For example, if the demand for labor that they generate indi- folio diversification-especially important for industrial coun- rectly-through their demand for goods and services-is less tries facing an aging population and a growing number of than their own labor supply, that would put downward pressure pensioners. The rising importance of private capital flows, espe- on the wages of similar workers. Recent studies suggest that the cially financial flows, however, increases the risks of instability pressures introduced by migrants on the unskilled segment of the in world financial markets-witness the turmoil created by the labor market in the United States and Europe are comparable to recent Mexican crisis. those created by trade with developing countries. The effects of As do other forms of exchange, migration offers possibilities migration are also potentially more far-reaching than those of for mutual benefit. Most workers in both home and host coun- trade because migrants often enter the nontradable sectors. As tries gain from migration flows: migrants are more productive in with trade, however, the relevant questions are how to distribute the host country, boosting world output and increasing their own the many gains that result from this form of international inter- wages; they send remittances to those at home, who thus also action and how to help the few who get hurt. 6 CHAPlT ER 2 Industrial Country Policies for Workers in Rich and Poor Countries S olving the employment problem in industrial countries scope for further integration between richer and poorer coun- requires both achieving sustained economic growth and tries through regional agreements. Contrary to some views, implementingasetofstructural reformsandtargetedmea- NAFTA almost certainly diminished the magnitude of the sures to address the distributional aspects of the current malaise. recent Mexican crisis by reducing the probability of a reversal of International interactions are a source of rising pressure on reform and by facilitating the mobilization of resources by the unskilled employment and wages in industrial countries. But United States. Locking in to external markets through a trade they are also an important source of global growth and hence agreement is a powerful commitment mechanism, which can part of the solution to the employment crisis. Relieving the pres- strengthen the credibility of domestic reforms. The potential for sures on the unskilled by restricting international interactions NAFTA-like agreements in other regions of the world is large, risks choking off this source of growth for both the industrial especially as it concerns Europe and the regions to its east and countries and the developing and transition economies. A more south. There are already significant openings: discussions of new coherent strategy is to deepen, not reduce, international inte- trade agreements with Israel, Morocco, and Tunisia; of Turkey's gration, while taking domestic action to allow workers, espe- Customs Union with the European Union; and of special treat- cially the unskilled, to participate in the gains. ment within the European Union for Eastern and Central Europe. And there are strong arguments on both sides to push Deepening integration through regional agreements for an opening of European markets. For Europe, market open- Capital will continue to flow from rich to poor countries, and ing would support the development of strategically important migrants from poor to rich narions. But the gains from integra- regions (Eastern and Central Europe and the Mediterranean) tion that can be realized through these two channels are limited. and recipients of significant transfers (Sub-Saharan Africa). For Capital flows are bound by considerations of creditworthiness developing and transition economies it provides an opportunity and by the rising importance ofgeographical proximity and non- to integrate into international markets and commit to a program labor cost factors in determining productivity. Flows of workers of domestic reform, with less risk of contingent protection. are constrained by borders and other forms of control that will Regional agreements do pose some dangers: too close a focus not disappear. Hence the key to achieving deeper integration is on regional trade could risk generating significant trade diver- trade expansion. The Uruguay Round was an important step in sion. This risk is lower for free trade areas that do not impose that direction, making progress toward facilitating the exchange restrictions on members' external trade policies than it is for cus- of goods between rich and poor countries. But the Round was toms unions, and it is reduced when the possibility of increasing probably more important for what it was able to prevent (in ris- external barriers is constrained by multilateral disciplines under ing protectionist sentiments) than in the actual gains it brought. the World Trade Organization. If structured around principles High-income countries continue to maintain high protection in of openness, regional agreements can be a useful step toward a certain goods, most evident in agriculture and in the lengthy multilateral opening of markets. They mayallow for deeper inte- phaseour of the Mulrifiber Arrangement, while contingent pro- gration than multilateral accords because negotiations are sim- tection remains an important worry. pler and countries are more likely to share common interests. Multilateral and unconditional liberalization of trade should And they may facilitate a gradual adjustment into export pro- remain a first-best policy objective. But, as underscored by the duccion in the transitional period leading up to full multilateral North American Free Trade Agreement (NAFTA), there is also liberalization under the General Agreement on Tariffs and 7 T- HE E M P L o Y M E N Tr C R I ' I 9 1 N 1 N D U S T- r I A L C O U NT . R I E E Trade. This can be crucial to the political economy of trade sense for each country's development level and of devising mech- reform: as more workers shift into production of exports, the anisms for their implementation. Progress in this regard would number of people who gain from trade liberalization increases, help separate those in rich countries motivated by moral con- reinforcing support for further reform. For regional agreements cerns from the protectionists. Industrial country efforts to to work, however, they have to be conditional on effective domes- improve working conditions in developing and transition tic reform, since integration heightens the need for sound domes- economies could then focus on generating more capital flows and tic policy. They should also be conditional on rapid movement development assistance. toward nondiscriminatory trade. Reforms to allow industrial country workers to benefit What to do about labor standards from integration Even before the Uruguay Round agreements were signed, the The key to solving the employment crisis in industrial countries issue of labor standards had attracted considerable attention. lies in domestic policy. Deepening integration will help secure Some industrial countries argued-unsuccessfully-for linking growth and thus contribute decisively to a solution. But the dis- certain labor standards to the Uruguay Round agreements, but tributional consequences of integration should not be ignored, this proposal will be examined in the next round of multilateral especially since persistent labor problems may slow the process negotiations. Agreement on standards (on the environment as or even force countries to backtrack to a more protectionist envi- well as labor) proved necessary to get the U.S. Congress to ratify ronment. The OECD, the EU Secretariat, and many other orga- NAFTA. The case for links between standards and trade is pre- nizations and individuals have addressed domestic reform issues sented in terms of moral principle, prevention of unfair compe- extensively. The main conclusions of these diagnoses are pre- tition, and avoidance of a downward spiral in which countries sented here and relate to Wor/dDevelopment Report 1995s analy- are forced to adopt the lowest standards among competitors. sis of labor market issues in the developing, transition, and The real danger of using trade sanctions as an instrument for post-centrally planned economies. promoting basic rights is that the trade-standards link will be Global integration, by affecting international prices, can have hijacked by protectionist interests attempting to preserve activi- important distributional consequences within and between ties rendered uncompetitive by cheaper imports. As the history countries. Globalization affects the relative demand for various of antidumping shows, discretionary trade protection is highly types of goods and consequently shifts relative demand for dif- susceptible to misuse. Moreover, the efficacy of trade sanctions ferent factors and skills. In the long run, when resources have in enforcing labor standards is far from proven, especially if sanc- been adequately reallocated across sectors, trade with developing tions are imposed selectively. There is a risk that they would be and transition economies can be expected to have an overall pos- applied only to small countries and that big-country violators itive effect on aggregate employment and wages in industrial would not be affected. To the extent that higher standards lead countries. But the adjustment process can be painful-especially to higher labor costs, they threaten to hit developing and transi- for groups displaced by changing trade patterns. In industrial tion economies precisely in products where their comparative countries, the most vulnerable groups are young, low-skilled advantage is greatest. Low-cost unskilled labor is the main com- workers in manufacturing. parative advantage of poor countries. Such differences in endow- The challenge for industrial economies is to facilitate the ments are the very basis of international trade and are not a source movement of labor from declining to expanding activities and to of general declines in employment in richer countries-even manage the transition with minimal social costs. A first step is though they may contribute to changes in employment structure ensuring that both labor and product markets are open and com- and contraction of employment in specific areas. Where jobs are petitive. Increasing competition in protected sectors such as ser- lost there is a case for public action, but trade protection is likely vices and transport can spur growth in labor demand. Reforming to be a blunt instrument, taxing others in the society and delay- institutions that favor insiders at the expense of outsiders-as ing the structural change that will be the foundation of future with job security provisions that differ for different groups-will growth and jobs. contribute to more equitable employment outcomes and a more Does this mean that groups in industrial countries should even distribution of the benefits of growth, while measures aimed remain silent on labor conditions in poorer countries? By no at increasing the flexibility of working arrangements can have means. Labor conditions, like poverty reduction and overall similar beneficial effects. Well-designed programs to help work- development, are legitimate areas for international concern. But ers switch jobs-such as placement services or job-search assis- such concerns should be weighed against the economic costs tance-also can play a positive role. Relatively inexpensive involved. For developing and transition economies, it is impor- job-search assistance, for example, has proved effective in help- tant to develop a strategy of actively setting standards that make ing displaced U.S. workers find new employment. 8 IN DUSTR IA L C O U NTRMY PO LI C I ES FEO R W O R K ER S More flexible markets, however, will reduce significantly shift in demand toward higher skills is already under way, as unemployment only under conditions of sustained growth. This reflected in the recent rise in enrollments of adults in com- calls for an appropriate macroeconomic policy mix and for sup- munity colleges. But it is unclear whether this will be suffi- porting efforts toward further integration. cient to reverse the trends toward rising inequality, even Sustaining the real wages of those with few skills in the face though it may slow or freeze them. Further efforts to extend of increased competition from low-wage countries will require and upgrade workers' skills may be needed, especially in continued investments in education and the acquisition of increasing the quality of education and improving school-to- skills. In the United States, a private supply response to the work transitions. 9 Conclusion T he growing integration of goods and capital markets has outweigh the costs for the industrial countries. Deepening inte- linked the labor markets of industrial, developing, and gration with developing and transition economies can provide an transition economies as never before. This has fueled important source of growth for the industrial world. But such a fears that manufacturing jobs will be siphoned off to developing deepening must be coupled with structural reforms and measures and transition economies at the expense of unskilled employ- aimed at ensuring that all industrial country workers share in the ment and wages in industrial countries. International interac- gains. Policies aimed at easing the cost of adjustment for those tions, however, explain only a small part of the plight of unskilled who are most vulnerable-young workers and the unskilled- industrial workers facing the threat of unemployment or declin- are crucial in dealing with the distributional impact of globaliza- ing wages. Moreover, gains from further integration are likely to tion and in curbing protectionist pressures. 10 References Grossman, GeneM. 1987. "The Employment and Wage Effects Revenga, Ana. 1992. "Exporting Jobs? The Impact of Import of Import Competition in the United States." 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Jobs Study, assorted background reports. Paris. Integrating World. New York: Oxford University Press. 11 World Development Report 1995 Workers in an Integrating World Full text edition available in the following languages: English (Hardback) ISBN 0-19-521103-0 StockNo. 61103 $37.95 English (Paperback) ISBN 0-19-521102-2 Stock No. 61102 $19.95 Forthcoming: Arabic ISBN 0-8213-2897-2 StockNo. 12897 $19.95 Chinese ISBN 0-8213-2896-4 Stock No. 12896 $19.95 French ISBN0-8213-2892-1 StockNo. 12892 $19.95 German ISBN 0-8213-2894-8 Stock No. 12894 $19.95 Japanese ISBN0-8213-2895-6 StockNo. 12895 $19.95 Portuguese ISBN 0-8213-2899-9 Stock No. 12899 $19.95 Russian ISBN 0-8213-2898-0 Stock No. 12898 $19.95 Spanish ISBN 0-8213-2893-X Stock No. 12893 $19.95 Regional Perspectives on World Development Report 1995 Seven companions to World Development Report 1995, each with additional material on the labor market issues in the particular region. 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