New research shows that globalisation and technological progress both lead to greater
wage inequality. But while globalisation increases the unemployment of unskilled workers
and reduces the unemployment of skilled workers, technological progress is likely to reduce
the unemployment of both skilled and unskilled workers.
The research by Professors Mark Moore and Priya Ranjan, published in the Economic
Journal, shows how labour market institutions such as unemployment benefits, hiring and
firing policies, etc. play an important role in determining the effects of more trade and
technology. In particular, in response to globalisation or technological progress, economies
with greater labour market flexibility have smaller changes in unemployment and larger
changes in wages.
This is consistent with the experiences of Europe and the United States in the 1980s. In
response to similar world shocks, Europe suffered more unemployment and the United
States, which has a more flexible labour market, more wage inequality. Therefore, having a
flexible labour market is a mixed blessing. It can keep unemployment low but there is a
greater increase in wage inequality.
Moore and Ranjan study the implications of globalisation and technological progress that
favours skilled workers for unemployment and wage inequality. They find that globalisation
and technological progress both lead to increases in wage inequality but have different
effects on unemployment in rich countries.
In this study, globalisation is limited to trade in goods. Therefore, globalisation refers to
trade liberalisation, which reduces the price of goods produced using unskilled labour in
rich countries. This is because countries with cheap labour, such as India and China, can
produce these goods more cheaply than rich countries.
The flip side of a decrease in the price of these goods is an increase in the price of goods
that require a lot of skill. This is because rich countries are better at making these goods
than poor countries and therefore, these goods are cheaper to produce in rich countries
than in rest of the world before rich countries liberalise trade. Since the outside price of
these goods is higher, rich country producers can get a higher price for these goods after
trade liberalisation.
Since trade liberalisation reduces the price of goods made using unskilled labour, domestic
producers of these goods cut down on their production, which results in lower wages and
higher unemployment for unskilled labour.
As the price of goods made using skilled labour increases in rich countries, producers of
these goods expand their production by hiring more skilled workers. This raises the wage of
skilled workers and reduces their unemployment. Since skilled workers earn more than
unskilled workers to begin with, there is a further increase in the gap due to trade
liberalisation.
The effects of technological progress favouring skilled workers are more nuanced. Since
new technology favours skilled workers, it increases the wage gap between skilled and
unskilled workers. But technological progress also makes an economy richer, which implies
that people consume more goods by spending more. This translates into a greater
production of goods, which increases the need for workers of all types. Therefore, the
unemployment of both types of workers is likely to decrease.
An oil price hike is like a technological change of a negative kind, which increases the
unemployment of both types of workers.
ENDS
Notes for Editors: ‘Globalisation versus Skill-biased Technological Change: Implications
for Unemployment and Wage Inequality’ by Priya Ranjan and Mark Moore is published in
the April 2005 Economic Journal.
Priya Ranjan and Mark Moore are Professors of Economics at the University of California,
Irvine.
For Further Information: contact Priya Ranjan on +1-949-824-1926 (email:
pranjan@uci.edu, website: http://orion.oac.uci.edu/~pranjan); or RES Media Consultant
Romesh Vaitilingam on 0117-983-9770 or 07768-661095 (email:
romesh@compuserve.com).