Globalization in labor markets

GLobalization is seen as movement of all these four factors – goods, services, capital and labour. There is a large literature on globalization of goods, service and capital but very little on labor. So, it is good to read this research note from Dallas Fed. Dallas Fed also has a Globalization and Monetary Institute, so keep coming out with stuff on globalization.

In this letter the authors draw comparison between physical immigration and virtual immigration.

Today’s computer and telecommunications technologies have provided a way to circumvent barriers to labor market globalization’s traditional mode—the physical immigration that brings the workers to the work. This virtual immigration moves the work rather than the workers, and it typically involves the long-distance delivery of services.

Virtual immigration has unleashed forces that shape globalization in two important ways: First, it has fueled an offshoring boom that shifts some services from high-wage countries to low-wage ones. Second, it has allowed highly paid workers in the U.S. and other wealthy countries to sell sophisticated services around the world.

There were three waves of globalization of labor:

The World Bank describes three waves of globalization.[1] The first came between 1870 and 1914, and the second from 1950 to 1980. The third and current wave began in 1980, triggered by the entry of many developing countries into the global marketplace, declining transportation costs and revolutionary innovations in information technology.

The third wave, like the two globalizations that preceded it, brought a surge in physical immigration. As the world economy grew in recent decades, workers moved across borders in search of better jobs—from Latin America to the U.S., from Eastern to Western Europe and from South Asia to the Middle East and elsewhere.

In the 3rd wave, the globalization is due to both physical and virtual migration. However, it is virtual immigration which provides the edge in the 3rd wave. It allows US to export highly sophisticated services around the world:

The U.S. tracks imports and exports for about two dozen types of services. Based on the Commerce Department’s descriptions, nearly a third of the categories contain low concentrations of virtual immigrants. Three of them involve travel and transport. Others are hands-on business services—for example, equipment installation, maintenance and repair. Low virtual immigration also characterizes personal services such as medical procedures and education

Two-thirds of the Commerce Department’s categories are likely to include high concentrations of virtual immigrants. They consist largely of business-to-business services—computer and information processing, engineering, accounting, insurance, advertising, finance, legal work, leasing, management and consulting.

U.S. exports and imports from high virtual immigration services industries have risen 180 percent since 1998, growing far faster than the low virtual immigration categories (Chart 2). Since overall services trade rose sharply in the decade, virtual immigration represents a growing share of an expanding pie, suggesting a labor market globalization that parallels the one driven by physical immigration.

Further, virtual immigration shows both theories – comparative advantage and increasing returns in trade work well.

Virtual immigration has become increasingly significant in the past decade as computer and telecommunications advances ratchet up our capacity to move vast amounts of data around the world cheaply and quickly. Particularly significant has been the Internet’s reaching critical mass in two key areas. First, it has spread widely enough to become an indispensable tool for modern international business. Second, data-transmission capacity has become big enough to move large amounts of information anywhere in the world. 

For U.S. companies and entrepreneurs, virtual immigration creates opportunities. Offshoring cuts production costs and enhances global competitiveness, and U.S. services firms grow and profit by expanding overseas. For workers, virtual immigration brings competition. U.S. computer programmers vie with lower-wage rivals in India, while U.S. lawyers, architects and consultants take on foreign countries’ homegrown firms.

Here is some US stats:

The U.S. has taken advantage of it. As the Internet facilitated a wave of virtual immigration, we saw the overall surplus in services trade grow from $78.8 billion in 1998 to $161.4 billion in 2008. High virtual immigration categories account for eight of the 11 industries with trade surpluses of better than two to one in 2008….

But Global Recession has taken a toll on labor markets and its globalization.

Now, labor market globalization faces a stern test—a long, severe slump. As recession deepened and spread, signs pointed to collapsing demand for immigrant labor. In the U.K., work applications from eight new European Union member states fell 50 percent in the first three months of 2009. Japan, Spain and the Czech Republic resorted to programs that paid foreign workers to go home. United Arab Emirates’ recruiting of new migrants declined 60 percent.

Take a look at America’s H-1B temporary work visas, awarded principally to educated foreigners. When the U.S. economy is growing, applications typically reach their cap minutes after online filing opens.  In 2009, nearly a third of the slots were still available three months into the process, indicating companies had little immediate need to hire workers that in previous years had been in short supply.

Mexico tracks the outflow of workers on a timely basis. Recent census reports show a precipitous drop in emigration—both legal and illegal—as the U.S. economy faltered.

The U.S. Current Population Survey indicates recession has shrunk employment of foreign-born workers. At the start of 2007, with the U.S. economy in growth mode, 25.6 percent of foreign-born workers had jobs in two highly cyclical industries—construction and manufacturing. Native-born workers’ exposure was 18 percent.

By October 2009, the recession was in its 22nd month, and foreign-born employment had fallen 35.4 percent from its peak in construction and 16 percent in manufacturing. The financial industry, which provided work for 5.6 percent of immigrants in January 2007, cut foreign-born employment 31.4 percent. The heavy toll in building and finance squares with a housing-led recession that roiled financial markets. Immigrants faced smaller job losses in some less-cyclical sectors—for example, the 5.7 percent decline in leisure and hospitality.

So physical migration has slumped. What about virtual?

What about virtual immigration? Offshoring data are rarely reliable or up to date, creating difficulties for measuring the recession’s impact on sending work to low-wage nations overseas. Hard times might pressure companies to cut costs, quickening offshoring’s pace. At the same time, companies might pull back on offshoring because of cuts in IT budgets and plentiful labor close to home.

India shows these contradictory forces at work. Forecasts call for continued expansion in the country’s software and IT services exports, a sign of relatively healthy demand for outsourcing (Chart 6). However, the projected 17 percent growth rate for these sectors in 2009 is less than half the pace of the previous four years.

U.S. services provide another view on how virtual immigration responds to recession. Services trade in industries with high concentrations of virtual immigrants grew an average of 11.3 percent a year from 1998 to 2007

Several sectors actually sped up significantly in the recession year of 2008, led by R&D and testing services, accounting, legal services, management and consulting, and telecommunications.

So, though virtual slows down but still remains positive.

Excellent stuff. Great insights into labor markets and globalization

The authors are positive that once recession goes, labor market globalization will pick up again.

Recession will pass. At some point, the world economy will begin to grow again, raising questions about whether the labor market integration we’ve seen in globalization’s third wave will resume and, if so, at what pace.

The long-term economic forces that have propelled both physical and virtual immigration should reassert themselves once labor demand rebounds. Large wage differentials and developing nations’ labor surpluses will once again spur migration to the richer countries. The same forces will create incentives for more companies to globalize production and cut costs through offshoring.

Great read.

4 Responses to “Globalization in labor markets”

  1. Macroeconomic Vulnerabilities in the 21st century « Mostly Economics Says:

    […] labor markets have improved as we see virtual immigration has not really suffered in this recession. But still we need much […]

  2. Processor Benchmark Says:

    Wooow, This is great…. Nice Share
    Keep Writing .. 😀

  3. Virtual Worker News | Daydreams and Virtual Scapes Says:

    […] Globalization in labor markets For US companies and entrepreneurs, virtual immigration creates opportunities. Offshoring cuts production costs and enhances global competitiveness, and US services firms grow and profit by expanding overseas. For workers, virtual … […]

  4. prince Says:

    please i need more articles on globalization and immigration of nations of the world.

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