Over the past two decades, labor has become increasingly globalized; that is, countries have access to an increasingly large global supply of labor through immigration, offshoring of the production of intermediaries, and imports of final products. Chapter 5 of the IMF's April 2007 World Economic Outlook (WEO) estimates that the integration of China, India, and the former Eastern bloc into the world economy, together with population growth, has quadrupled the size of the effective global labor force since 1980. By 2050, it could more than double again.
Labor globalization has benefited advanced economies: it has expanded export opportunities considerably and, by lowering input costs and improving production efficiencies, has boosted productivity and output.
As a result, labor compensation has risen in all advanced countries since 1980. For instance, calculations suggest that the decline in traded goods prices over the past 25 years has generated a 6 percent increase, on average, in both output and real labor compensation.
Research published in the WEO suggests that labor globalization, technological change, and labor market policies have all affected the share of income accruing to labor (the labor share) over the past two decades (see chart). The first two have reduced the proportion of income going to labor, with technological advances having the larger effect. This share has declined by about 7 percentage points, on average, since the early 1980s in advanced countries, with the European countries, Japan, and unskilled sectors of the economy experiencing the largest declines. In contrast, countries that have reduced the tax wedge, thereby lowering the cost of labor to business, and ensured that unemployment benefits do not deter workers from seeking employment have generally experienced a smaller decline in labor share.
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The issue: Is globalization forcing down labor income in advanced economies?
The bottom line: Although the global labor force has swelled over the past two decades, it has contributed to rising labor compensation in advanced economies.
Is there a downside? Yes. Globalization is one of several factors that have reduced the share of income accruing to labor in advanced economies.
Technological change has hit the labor share in unskilled sectors particularly hard; growth in real labor compensation...