Globalisation and Labour

The income of any country (measured as GDP) is divided into income from the three (classic) factors of production: capital, labour and land. Globalisation (free movement of capital and knowledge) makes it easier for any kind of labour (manual or knowledge based) to be performed somewhere else (if it is cheaper there). This of course decreases the income from labour in the country and increases income from capital. Opposing this are the increasing total income of the country because of cheaper imports and higher productivity. The question is, how strong is the effect really?

The IMF took a closer look in it’s recent World Economic Outlook. First, it is clear that the income share of labour is getting smaller. Here is the average annual decrease between 1982 and 2002 (in percentage points):

• Large Europe (France, Germany, Spain, Italy): -0.33
• Rest of Europe (excluding Eastern Europe): -0.33
• Japan: -0.25
• Anglo-Saxonian (Britan, Australia, Canada, US): -0.05

It hit Europe pretty hard (about 10% less than 20 years ago). But what of this is related to globalisation? Here it is split up for Large Europe:

• Technology Change: -0.2
• Labour Globalisation: -0.08
• Labour-market policies: -0.05

So the technology change almost 2/3 of the total decrease, making it the real source of income share reduction.

What is the conclusion? Given that the annual grow rate of the GDP was significantly higher than the annual decrease in the income share, the total labour income has actually increased. Or as the Economist put it recently: Labour’s share of the pie is smaller, but the whole pie got bigger.

More interesting would be, how the decrease effects skilled and unskilled workers. I will have a look into that a bit later.