Blog Post

Compensating the “losers” of globalisation

What’s at stake: According to some, 2016’s political turmoil shows that the so-called “losers” of globalisation are striking back. There is, however, little agreement on how government should respond to this challenge.

By: Date: January 9, 2017 Topic: European Macroeconomics & Governance

An important contribution to the debate came this week from Maurice Obstfeld. He argues that countries must protect and expand gains from trade through policies that redistribute them more equitably. Globalisation offers potential economic gains for all. But there is no guarantee that this potential will be realised if governments do not take decisive action to support those who suffer from the side effects.

The political consensus that drove trade policy over much of the postwar period will dissipate without a policy framework to spread the risks of economic openness. Such a framework must ensure flexible labour markets and educated, agile workforces, while supporting job matching. It should improve the functioning of financial markets. And it must directly address inequality of incomes. We face many economic challenges, and trade is unique under the illusion that governments can shut out the rest of the world when it becomes inconvenient. In the 21st century, however, interdependence is not optional.

The question that follows is how this compensation for those who do not gain, or even lose out, through globalisation can be engineered. As Gavyn Davies effectively summarises, the shape of a solution that makes economic sense while also being politically feasible remains embryonic at best.

Antràs et al. (2016) study the welfare implications of trade openness in a world where trade raises aggregate income but also increases income inequality, and in which redistribution needs to occur via a distortionary income tax-transfer system. They propose two adjustments to the standard measures of welfare gains from trade: a ‘welfarist’ correction inspired by the Atkinson (1970) index of inequality, and a ‘costly-redistribution’ correction capturing the efficiency costs associated with the behavioral responses of agents to trade-induced shifts across marginal tax rates. The quantitative results suggest that both corrections are non-negligible: trade-induced increases in inequality of disposable income erode about 20% of the gains from trade, while the gains from trade would be about 15% larger if redistribution was carried out via non-distortionary means.

Some have proposed that we might consider a form of Universal Basic Income (UBI) as a way to replace earnings from vanishing jobs. Robert Skidelski argues that the explosion of robotics has given the demand for UBI renewed currency. A standard objection to UBI is that it is unaffordable, but Skidelski argues that this is not the main point. The overwhelming evidence is that the lion’s share of productivity gains in the last 30 years has gone to the very rich. Even a partial reversal of this long regressive trend for wealth and income would fund a modest initial basic income, which can be designed to grow in line with the wealth of the economy. Automation is bound to increase profits, because machines that make human labor redundant require no wages and only minimal investment in maintenance. Thus, unless we change our system of income generation, there will be no way to check the concentration of wealth in the hands of the rich and exceptionally entrepreneurial. A UBI that grows in line with capital productivity would ensure that the benefits of automation go to the many, not just to the few.

Danny Leipziger argues that adequate income redistribution ex post depends on public policy, including effective taxation and collection from firms and individuals and efficient use of the funds. This is where globalisation has largely failed, because many highly successful corporations have avoided paying their fair share. Beyond redistribution, however, Leipziger argues that governments, at various levels, need to be in a position to create new jobs.  Effective labour market programs need to be found going forward to deal with future dislocations due to disruptive technology. This can be seen as part of preparedness for the Fourth Industrial Revolution.

Harold James writes that the compensation strategy has many hazards. People who are paid to do meaningless activities will become even more disengaged and alienated. Regions that are subsidised simply because they are losing out may demand more autonomy, and then grow resentful when conditions do not improve. Thus, simple transfers are not enough and we should rethink labour mobility. Europe and the US have long attempted to support “losers” in manufacturing and services through small-scale programs. Many of the dilemmas that confronted nineteenth-century policymakers are confronting their counterparts today.

Earlier generations used emigration as a release valve, and many people today, especially in Eastern and Southern Europe, are responding to poor local economic conditions in a similar fashion. Internal migration into dynamic metropolitan hubs is still a possibility, especially for young people, but this kind of mobility requires skills and initiative. In today’s world, workers must learn to embrace adaptability and flexibility, rather than succumb to resentment and misery. The most important form of mobility is thus not physical; it is social or psychological. Unfortunately, the US and most other industrialised countries, with their rigid education systems, have failed to prepare people for this reality.

Asatryan et al. (2014) look specifically at the EU and argue that compensation policies should target workers in branches exposed to import competition. Rather than subsidising unemployment, compensation policies should strengthen the incentives of displaced workers to seek re-employment and improve their chances of success. In the long run, sound skill and education policies are key instruments both for increasing the benefits of globalisation and for making it more inclusive. Although “one size fits all”-strategies should be avoided given the specific strengths and weaknesses of EU countries’ education systems, a particular focus ought to be set on the early phase of the life cycle. Early childhood education programmes targeted at children from disadvantaged backgrounds are a particularly promising tool for reducing inequality of educational and labour market outcomes.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Blog Post

Global Imbalances

The recent IMF’s External Sector Report highlighted the persistence of imbalances and a switch of imbalances towards advanced economies. We review recent contributions on this topic.

By: Silvia Merler Topic: Global Economics & Governance Date: September 21, 2017
Read article More on this topic More by this author

Blog Post

Hurricane Harvey’s economic impact

What’s at stake: tropical storm Harvey has caused unprecedented and catastrophic flooding in southeastern Texas. We review recent estimates of the economic impact of this natural disaster.

By: Silvia Merler Topic: Global Economics & Governance Date: September 4, 2017
Read article More on this topic More by this author

Blog Post

EU posted workers: separating fact and fiction

After President Macron’s recent tour of Central and Eastern European countries, EU posted workers are getting a lot of attention. However, a major reform of the system is already underway and we should not confuse posted workers with long-term labour migrants. Posted workers are a small part of the labour force, and their labour market impact is likely to be minor.

By: Uuriintuya Batsaikhan Topic: European Macroeconomics & Governance Date: August 31, 2017
Read article Download PDF More by this author

Parliamentary Testimony

European Parliament

Could revising the posted workers directive improve social conditions?

This presentation was delivered in Brussels on 31 January 2017 at a hearing of think-tanks, to advise the European Parliament on the revision of the Posting of Workers Directive.

By: Zsolt Darvas Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: August 29, 2017
Read article More on this topic More by this author

Blog Post

The US Antitrust Counter-Revolution

Plenty of recent research has highlighted a rise in concentration in the US economy, across different sectors. Economists are now wondering to what extent this is attributable to a shift in the antitrust enforcement philosophy. We review contributions to this debate.

By: Silvia Merler Topic: Global Economics & Governance Date: July 31, 2017
Read article More on this topic More by this author

Opinion

The EU and the US: a relationship in motion

Europe’s post-crisis recovery has been disappointing in comparison with the USA. But lower rates of inequality are staving off populism and bolstering support for globalisation. With the USA an increasingly unpredictable partner, the EU must address internal imbalances and build alliances to defend the multilateral order.

By: Maria Demertzis Topic: Global Economics & Governance Date: July 28, 2017
Read article More on this topic More by this author

Blog Post

The US retail crisis

What’s at stake: America is undergoing a retail sector crisis, partly related to the increase of competition from online commerce. We review recent contributions to this debate.

By: Silvia Merler Topic: Innovation & Competition Policy Date: July 17, 2017
Read about event More on this topic

Past Event

Past Event

Perspectives on Universal Basic Income

At this event, we discussed the possible benefits but also the possible disadvantages of Universal Basic Income.

Speakers: Grégory Claeys, Olli Kangas, Professor Philippe Van Parijs and Prof. Dr. Hilmar Schneider Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 12, 2017
Read article More on this topic More by this author

Opinion

Engagement in a time of turbulence

The arrival of China as an increasingly significant setter of global standards may be uncomfortable for India but is near-inevitable and needs to be planned for.

By: Suman Bery Topic: Global Economics & Governance Date: July 5, 2017
Read article More by this author

Blog Post

The Universal Basic Income discussion

What’s at stake: the concept of a Universal Basic Income (UBI), an unconditional transfer paid to each individual, was prominent earlier this year when Finland announced a pilot project. It’s now back in the discussion as the OECD published a report illustrating costs and distributional implications for selected countries. We review the most recent contributions on this topic.

By: Silvia Merler Topic: European Macroeconomics & Governance, Global Economics & Governance Date: June 12, 2017
Read article More on this topic More by this author

External Publication

The future of globalization

This brief reviews the main features of the recent globalization, attempts to explain its persistence over the centuries and why it is likely to persist in the indefinite the future, examines the causes and prospects of the new protectionism, and concludes by drawing policy implications.

By: Uri Dadush Topic: Global Economics & Governance Date: May 29, 2017
Read article More on this topic More by this author

Blog Post

President Trump’s budget: the 3% growth quandary

What’s at stake: the Trump administration released its full budget proposal. Economists have been arguing about the feasibility of the underlying growth assumptions, and on whether there is a double-counting implied. We review the most recent contributions to this debate.

By: Silvia Merler Topic: Global Economics & Governance Date: May 29, 2017
Load more posts