Speech by Mr. Angel Gurría, OECD Secretary-General
Meeting of G8 Employment and Labour Ministers: "Shaping the Social Dimension of Globalisation"
Dresden, 7 May 2007
Minister Müntefering, Ladies and Gentlemen,
It is a great honour for me to be the keynote speaker at your first session. The social dimension of globalisation will loom large at the annual OECD Ministerial meeting in Paris on the 15-16 May. We have done much work on this topic and I will summarise some of our main findings and policy recommendations.
First, the current stage of globalisation is unprecedented. World exports of manufactures now amount to an unprecedented 30% of the world's GDP, with a large share of these exports originating from emerging economies. Brazil, China, India and Russia currently account for 45% of the world's labour supply, compared with less than one fifth for all OECD countries. They are also increasingly open to trade and investment –for instance, over the past 15 years, total trade grew by over 50% as a proportion of GDP in Russia, it more than doubled in Brazil and India and nearly doubled in China.
Second, globalisation continues to be a powerful engine for raising living standards in developed and in developing countries. The proportion of people living in extreme poverty has been halved since 1980 and is expected to diminish further. Per capita incomes in developing countries are likely to continue to converge with those in developed economies. Within the OECD area, The OECD Growth Study concluded that a 10% increase in trade openness is associated with a 4% increase in per capita income. Freer trade and investment intensifies competition, thus encouraging firms to innovate and adopt new technologies –which, in turn, spurs economic growth and supports job creation. In sum, deepening international specialisation continues to be a win-win process for both OECD and major non-OECD trading partners alike.
This globalisation is sometimes perceived as a source of inequality and insecurity for workers. One reason is that the gains from globalisation are not automatic. The labour market plays a crucial role in the "capture" of the potential gains from globalisation by facilitating a process of “creative destruction”, whereby jobs shift from declining sectors or occupations to expanding ones in line with changes in comparative advantage. Transferring resources to more productive uses as quickly as possible is an important driver behind increased living standards and sustained growth. However, this is not painless: displaced workers are at risk of long-term unemployment and/or significant earnings losses once they find a new job. Our background note provides some evidence on the relative magnitudes of these adjustment costs for workers in Europe and the United States.
A second reason is that this adjustment now involves a broader range of jobs than in previous episodes of globalisation – when mainly unskilled labour and industrial sectors were affected. Indeed, an important characteristic of the ongoing globalisation process is that it goes hand-in-hand with the rapid adoption of information and communications technology. ICT and declining transportation costs facilitate the fragmentation of the production of goods and services, and the outsourcing of certain tasks to other countries.
A third reason is perceptions that the gains from globalisation are not shared equally. These perceptions draw on evidence – summarised in our background note – that the share of wages in national income has tended to fall in most G8 countries (and the profit share has correspondingly increased). And the distribution of earnings has widened over the past two decades. In 16 of the 19 OECD countries for which data are available, since the early 1990s, the earnings of workers at the top of the wage distribution have risen relative to those at the bottom. The coincidence of these trends with the intensification of globalisation has led many to conclude that globalisation must be the main culprit.
But this is not the case. The bulk of empirical evidence assembled by OECD and other researchers suggests that the contribution of globalisation to these trends in wage shares and earnings is quite modest compared with other drivers such as technological change.
But it is crucial to address the concerns. Indeed, public support for furthering international economic integration (and the structural reform agenda more broadly) could weaken if the perception that many workers do not benefit from it takes firm root.
The good news is that domestic policies can play a major role in promoting employment opportunities arising from globalisation and reducing adjustment costs. Countries with similar trade and FDI patterns – even members of a regional trading area – have widely different employment and unemployment rates and wage disparities. The stylised facts on these trends for the G8 countries are summarised in our background note, and clearly show that the actual impact of globalisation depends crucially on national policy settings and institutions.
The Restated OECD Jobs Strategy of 2006 provides an important benchmark on how countries can create more and better-paid jobs in a globalising world. Let me cite five concrete examples.
Reducing barriers to competition and entrepreneurship are instrumental in strengthening the economy’s capacity to adjust and to absorb displaced resources. In particular, such policies help unleash the considerable potential of the services sector as a source of job creation. OECD work provides robust evidence that measures in this area stimulate job creation, while also boosting productivity and real incomes.
Second, globalisation requires mobility to ensure that workers are not trapped in jobs which have no future. In this regard, overly-strict employment protection legislation may reduce mobility by constraining firms’ ability to cope with a rapidly changing environment. In addition, when severance pay is tied to the existing job, workers with a permanent contract and long tenure will have limited incentives to change jobs voluntarily. This is especially problematic when these jobs are located in declining sectors, while new job opportunities are available elsewhere in the economy. However, a certain degree of employment protection, like advance notification of plant closures or other large-scale layoffs, may reduce adjustment costs by providing all interested parties time to plan and implement the necessary adjustments.
The OECD Jobs Strategy provides several examples of policy innovations on how to provide adequate workers’ compensation against dismissal, while at the same time reducing some of the drawbacks of traditional severance pay systems. These innovations are drawn from the recent experiences of countries such as Austria, Denmark and the Netherlands, and are documented in more detail in our background note.
Third, it is important to compensate the losers through employment-friendly, social protection systems. Time-limited, targeted policies to help reintegrate displaced workers into jobs might be envisaged in some cases, particularly in the face of adverse trade shocks that affect disproportionately certain low-skilled groups or are concentrated in particular localities. However, the overriding advice from the Restated OECD Jobs Strategy is to aim for good general policies to cope with structural adjustment problems, whatever their origins. Labour market, education and social policies all have important roles to play in a good policy package.
One way of encouraging high re-employment incentives for job losers is to moderate unemployment benefits and their duration. A better approach, however, is to implement mutual obligations/activation policies which increase re-employment opportunities for displaced workers while mitigating the dis-incentive effects embodied in overly generous welfare systems. This includes, in particular, effective job-search assistance and compulsory participation in a labour market programme after a period of unemployment as is done in Australia, the United Kingdom and some Nordic countries; this should be backed up by moderate benefit sanctions if the jobseeker does not take steps to search for work actively or improve employability.
Fourth, the low-skilled are a particularly disadvantaged group in the face of globalisation and they need well-designed support to ensure that work pays for them. In OECD countries, freer trade and investment, combined with skill-biased technology, tend to reduce the demand for unskilled labour relative to that for skilled labour. At the same time, the interactions of tax and welfare benefit systems often create traps for low-paid workers, whereby taking a job gives them little or no extra income compared with remaining on benefits. This is why it is necessary to develop so-called “make-work-pay” policies to help minimise the size of such unemployment/inactivity traps.
Evidence summarised in our background note shows that “making work pay”, through in-work benefits (like the Working Tax Credit of the United Kingdom or the Earned Income Tax Credit of the United States), combined with a moderate minimum wage, can yield significant employment gains and be very cost effective to tackle in-work poverty.
Fifth, a successful welfare-to-work strategy needs to be complemented by “welfare-in-work” policies in order to ensure better career prospects. Better skilled workers are more mobile across occupations, industries and regions than their lower skilled counterparts. They also face a lower risk of layoff. And, when they lose their job, better skilled workers have a relatively good chance of obtaining new employment. This reinforces the urgent need for implementing the skill development pillar of the Restated OECD Jobs Strategy.
The bottom line is that domestic policies are instrumental for enhancing the benefits from globalisation while addressing some of the adjustment and distributional concerns. Such an approach i) supports the transfer of resources from declining sectors and occupations to expanding ones, but also ii) provides security to workers in the form of employment-oriented social protection. The relative importance of each of the two depends on a country's starting point, preferences and institutions and there is no unique combination to guarantee success, as I argued at our previous meeting in Moscow. But what is important is to move ahead with a coherent, successful package.
One final thought. While governments have a primary responsibility in this area, enterprises also have a role to play in shaping the social dimension of globalisation. The OECD Guidelines for Multinational Enterprises – described in a second OECD background note – are an important instrument in this area, and I hope to say a few words about them tomorrow at the final session.