Global Economic Issues and Policies

Joseph P. Daniels, David D. VanHoose

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351998291
• Edition: 4
• Topic: Business
• Subtopic: Business General
• Index: Business

This introduction to all aspects of international economics, business and finance is the clearest guide available to the economics of the world we live in. Written in a highly engaging style, packed full of up-to-the minute, real-world case studies and pitched at introductory level, the book does an expert job of drawing students in and will leave them equipped with a comprehensive toolkit of methods and essential facts.

Now in its fourth edition, Global Economic Issues and Policies reflects continuing changes in the world economy and in the analysis of international economics. Chapter introductions, pedagogy and data have all been thoroughly updated throughout, including the addition of a new 'Issues & Policies Notebook' feature. Key topics for expansion and revision include:

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• Evolution of Comparative Advantage

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• Import Quotas and Subsidies

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• Services in Regional and Multilateral Trade Agreements

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• Balance of Payments Accounting

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• Unconventional Central Bank Policies

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• Territorial versus Worldwide Taxation and "Tax Inversions"

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• The role of Foreign Exchange Markets and Exchange-Rate Arrangements

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• Public Policy Issues in International Money and Finance

The text is suitable for any introductory module in international economics and business, whether taught as part of an economics, business or international studies program. It is also the ideal MBA level introduction to the global economy.

UNIT IV

Contemporary global economic issues and policies

10. Can globalization lift all boats?

11. Economic development

12. Industrial structure and trade in the global economy—businesses without borders

13. The public sector in the global economy

14. Dealing with financial crises—does the world need a new international financial architecture?

10

Can globalization lift all boats?

Fundamental issues

1. What factors influence the demand for a nation’s labor resources?

2. How are market wage rates determined, and how can increased international trade affect the wages earned by a nation’s workers?

3. What are the implications of the factor proportions approach to international trade for how trade affects workers’ earnings?

4. Why do labor and capital resources often flow across national borders?

5. What is international labor outsourcing, and what are its impacts on market wages and equilibrium levels of employment in affected nations?

6. Why do large numbers of people migrate to other nations each year?

Some estimates indicate that as many as 85 percent of Ethiopian jobs ultimately may be threatened by automation. The percentages in China and India are 77 percent and 69 percent, respectively. In contrast, these projections suggest various forms of automation eventually will endanger fewer than half of all U.S. jobs.

Two key factors explain projections that a larger share of jobs in Ethiopia, China, India, and many other emerging and less developed nations are under greater threat than in the United States and other more advanced countries. The first factor is that more tasks performed by human beings in emerging and less developed nations involve unskilled labor that involves repetitive actions. Such tasks can more readily be mimicked by and programmed into nonhuman technologies that range from apps to robots. The second factor is that an initial wave of automation has already swept through the economies of more advanced nations but has only begun to affect emerging and less developed nations. Consequently, a slice of positions for human workers already has ceased to exist in advanced nations, leaving a smaller percentage of jobs susceptible to future elimination in those countries.

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People around the globe fret about whether their sources of wage income might disappear as firms increasingly opt for having tasks performed by machines instead of human beings. In addition, however, many people worry about the possibility that their jobs might “move abroad.” Indeed, public opinion polls persistently show that concerns about the effects of globalization on job prospects lie behind much of the expressed opposition to maintaining borders that are open to international trade. In this chapter, you will learn about implications of globalization for the utilization of human resources.

International trade and wages

A controversial aspect of international trade is its effect on the overall level of workers’ wages. A related issue is the distribution of wages across different categories of workers.

The alleged “trade threat” from developing nations

For many U.S. workers, the period between the 1990s and 2008 was a time of higher inflation-adjusted earnings, increased fringe benefits, and (for a time) soaring values of stocks. U.S. residents did not share equally in these gains, however, and since 2008 overall U.S. labor compensation has been stagnant. Some observers have argued that rising international trade with developing nations is the reason.

Rising U.S. earnings inequality

Since the 1970s, the inflation-adjusted pay of male workers among the highest 10 percent of the U.S. income distribution has risen by more than 10 percent. At the same time, the inflation-adjusted pay going to those among the lowest 10 percent has fallen by more than 20 percent. Female workers in the bottom 10 percent of the U.S. income distribution have done a little better than their male counterparts; their earnings have risen by about 5 percent. Women in the top 10 percent have done considerably better, however. These high-income women have seen their earnings increase by more than 30 percent.

Some politicians and union leaders have blamed greater U.S. earnings inequality on international trade. In the early 1970s, they note, only a sixth of U.S. imports of manufactured goods came from emerging economies. Today the proportion is close to one-half. There must be a simple line of causation, they claim. Extrapolating from these data, they conclude that to keep from losing his job to foreign workers, the pay of an “average Joe” is falling. The “average Jane,” they contend, has barely been holding her own in the face of this same competition from abroad. (In recent years, many unions have claimed that they can help to protect “average Joes and Janes” from competitive threats from workers abroad. To contemplate how globalization has affected unions, see on page 350 Issues & policies notebook: How has globalization affected prospects for unions?)

Is international trade the culprit?

Take a look at Figure 10.1 on page 351. Panel (a) shows shares of U.S. trade with the world’s nations. Canada and Mexico are the top U.S. trading partners, followed by China, Japan, the United Kingdom, Germany, the Netherlands, and other developed nations. As you can see, emerging and developing countries other than Mexico currently account for about one-fourth of U.S. trade. Together with China and Mexico, emerging and developing nations as a whole account for about 50 percent of U.S. exports and imports.

Panel (b) indicates that in recent decades there has been an increase in the share of products that U.S. residents buy from emerging and developing nations. Panel (b) also shows that the wages of manufacturing workers residing abroad, including in emerging and developing and, have increased relative to the earnings of U.S. manufacturing workers.

One interpretation of Figure 10.1 is that some politicians and union leaders are correct: By buying more goods from emerging and developing nations, U.S. consumers reduce the wages of U.S. workers relative to low-wage workers in those countries. Thus, goes the argument, U.S. workers are losing out from freer trade, and the United States should erect barriers against imports from emerging and developing nations.

As you learned in earlier chapters, however, the story is not nearly this simple. Trade induces nations to specialize in goods for which the nations have a comparative advantage. When trade barriers fall, resources naturally shift into those industries. Resources shift away from industries that do not possess comparative advantages.

How does international trade affect the market wages earned by a nation’s workers? Does trade really have anything to do with the changing U.S. distribution of earnings? How does trade affect wages and distributions of earnings in other countries, including emerging and developing nations? Let’s consider each question in turn.

Wages and international trade

Before contemplating how international trade affects wages, it is helpful to consider the extent to which wages differ across countries. In addition, a prerequisite to evaluating the effects of international trade on wage patterns is developing a framework for understanding the fundamental determinants of wage rates.

ISSUES & POLICIES NOTEBOOK

How has globalization affected prospects for unions?

A union engages in collective bargaining with an industry’s firms over wages and other terms of employment for their members. If a union is the only provider of labor to the industry, it has a monopoly in the labor market. The union’s ability to act as a monopoly provider of labor thereby enables it to limit the quantity of labor available to firms to employ and to set members’ wages at levels that firms are willing and able to pay.

Naturally, any union’s capability to act as a monopoly provider of labor is undermined by competition from other providers of labor services. Such labor-market competition could occur directly if non-unionized workers were to find a way to bargain individually for slightly lower wages. Unions typically seek to prevent such competition by inducing governments to guarantee exclusive dealings with unionized firms. Nevertheless, unions can face indirect labor-market competition from foreign imports produced by non-unionized, lower-wage labor. In this way, increased globalization potentially can undermine the monopoly power of unions, push down union wages and reduce the incentive for workers to join, and thereby bring about lower unionization rates.

Zohal Hessami of the University of Konstanz and Thushyanthan Baskaran of the University of Goettingen, Germany, have examined the relationship between a measure of globalization and the rate of labor-force unionization for 44 nations between 1980 and 2009. These researchers find no evidence that globalization has affected the extent to which governments intervene in labor markets to protect union monopolies. They do find, however, that on average across these nations, every 10 percent increase in this measure of globalization is associated with a decrease in the rate of unionization of almost 1 percent. Thus, indirect labor-market competition to unions via imported products made possible by increased globalization can help to explain why unionization rates have declined in a number of countries in recent years.

For critical analysis

Based on Hessami and Baskaran’s conclusions, why is it unlikely that increased globalization alone could explain why the U.S. unionization rate has declined from about 22 percent in 1980 to less than 12 percent today? Explain your reasoning.

International wage differences

Figure 10.2 on page 352 displays index measures of the hourly rates of compensation that manufacturing firms in selected nations have paid their employees since 1975, where a value of 100 is equivalent to the U.S. hourly manufacturing compensation rate. The U.S. Bureau of Labor Statistics tabulates these indexes, which take into account pay for time worked, other indirect pay such as bonuses and holiday and vacation compensation, benefits, and labor taxes imposed on companies.

Panel (a) displays shares of U.S. trade for major trading partners of the United States. Panel (b) shows that in recent years wages earned by workers in manufacturing industries in nations that trade with the United States have increased relative to wages of U.S. manufacturing workers, and at the same time U.S. trade with developing nations has increased.

Sources: International Monetary Fund, Direction of Trade Statistics, U.S. Department of Commerce, and authors’ estimates.

Figure 10.1 Shares of U.S. trade and wages of manufacturing workers as a percentage of wages of U.S. manufacturing workers

To develop the indexes in F...