OECD Report Acknowledges That Free Trade Hurts Some Workers

An interesting shift is taking place in the economics world. Not so long ago, anyone who had anything to say against free trade was dismissed as being economically illiterate. In a surprisingly short period of time, the consensus seems to be shifting towards a willingness to admit that while free trade produces substantial benefits in aggregate, those gains are not equally shared, and some workers, generally those at the bottom, may wind up worse off.

The Wall Street Journal, in “Free-Trade Alert: A Warning on Globalization Backlash,” cites an OECD report that fesses up to the negative impact of liberalized trade on some groups. However, the OECD report argues that the perception of the downside of free trade is exaggerated, as is its role in growing income disparity (technology is a bigger culprit).

While the OECD report on balance sounds fair-minded, it misses one point. OECD Secretary General José Angel Gurría argues that, “Without job losses, people are fearing job losses,” that is, that the worries are overdone. Yet it is undeniable that employment is less stability, particularly among blue collar workers, and globalization is one of the causes. Lower job security means less bargaining power (and that is confirmed by stagnant average wages in the US). So this widespread fear has played into employers’ hands.

From the Wall Street Journal:

Globalization may be hurting low-skilled workers in the U.S. and Europe enough that politicians in both places may find it increasingly hard to sell voters on the benefits of free trade and open markets, says one of the world’s leading economic institutes.


• More on the OECD’s report at WSJ.com’s new Real Time Economics blog.
The Organization for Economic Cooperation and Development, a Paris-based institute backed by the governments of 30 leading industrialized countries, is a staunch believer in free trade, which most economists believe makes all countries richer overall, including those with high wages.

But in its annual labor study, the OECD acknowledges growing popular unease about globalization — the growing integration of the world economy through trade and cross-border investment — and frets about a popular backlash if governments fail to ensure that lesser-skilled workers share the benefits.

“Millions are benefiting from globalization, but at the same time there’s a feeling something’s wrong with the process,” says OECD Secretary General José Angel Gurría. That is creating political resistance to further moves to free up international trade and investment, he says, particularly in the U.S. and France.

A growing number of economists are expressing concern about the number of losers from globalization. Despite strong economic growth, these economists note, many workers in developed countries are struggling to find well-paid work amid a combination of cheap imports, the relocation of factories and offices to low-wage countries, and changing technology.

“The conventional wisdom was that all boats would be lifted by the rising tide. That was overly optimistic,” says David Audretsch, director of the Max Planck Institute for Economics in Germany.

So far, most economists still think rising global competition is a fact of life established economies should adapt to, rather than try to block. The OECD praises countries such as Denmark that have combined flexible labor markets with effective government help for workers who lose their jobs.

Still, the OECD argues that globalization is more benign than its public image. Widespread popular fears about losing jobs to low-wage competitors in emerging economies such as China are exaggerated, it says. It estimates that the scale of offshoring — or the shift of business functions overseas — is modest so far in service industries, although it is more widespread in manufacturing. The OECD points out that many developed countries have cut unemployment in recent years.

The problem, says Mr. Gurría, is partly about perceptions: “Without job losses, people are fearing job losses.”

The think tank’s report, however, suggests there are good grounds for some popular fears. After much number-crunching, The Employment Outlook concludes that “the expansion of trade is a potentially important source of vulnerability for workers.”

Globalization has probably contributed to slow wage growth in the U.S. and Europe in recent years, the report finds, and is also partly to blame for rising income inequality. Since the mid-1990s, the incomes of the highest-paid have grown at a faster rate than those of the lowest paid in 19 out of 21 countries surveyed, OECD figures show.

But trade isn’t the main culprit, the OECD claims: The spread of computer technology — even harder to reverse than imports from China — is the chief cause of the widening gap between the incomes of low-skilled and high-skilled workers, it argues.

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