February 25, 2008 10:06 pm

Globalisation ‘a blessing’ for west Europe

Increased trade, outsourcing and offshoring do not create unemployment but boost the number of jobs in advanced economies, a study of European labour markets says on Tuesday.

The European Economic Advisory Group, a consortium of European academics organised by the Munich-based Ifo Institute, argues that although globalisation can lead to a fall in demand for certain types of skill, it also tends to sweep away job-destroying rigidities in labour markets.

The evidence from the group’s work suggests the positive effects of globalisation outweigh the negative effects. Although the group concedes that its statistical work remains “crude”, the report concludes that globalisation is likely, if anything, to lead to long-term rises in employment.

“If so, globalisation will not be a curse for employment in western Europe, it could instead turn out to be a blessing,” the report says.

But the EEAG report suggests these gains are not likely to be evenly distributed. Richer and higher-skilled people would gain, while there could be losers among lower-skilled employees facing greater competition from overseas workers and immigrants.

Although the gains from trade have the side-effect of increasing inequality, the group recommends that governments avoid policies that try to preserve employment and wage equality in the face of overseas competition. Rather, they should “try to allocate the gains from globalisation in a ‘fair way’ and ensure that groups that might otherwise lose out also share the benefits”.

The group strongly condemns German policies of higher minimum wages, because it can price people out of jobs, and higher unemployment benefits, as they makes joblessness more attractive.

Instead, it advocates cushioning the blow for those finding themselves in jobs that are no longer viable in rich countries. Following practice that has been at the heart of policy in the UK and Nordic countries, the focus should be on government retraining schemes, public sector support severance pay for displaced workers, payments for employees taking a new job with lower pay and other in-work state ­benefits.

Recent economic research has often found a greater link between globalisation and job losses. But the EEAG argued that this research was incomplete because it tended to assume that apart from increased competition from abroad, labour markets would remain unchanged.

The authors said, instead, that there were at least six ways in which globalisation would also tend to increase the flexibility of European labour markets, boosting employment.

These include increasing competition in markets and demand for output; reducing the power of unions to price labour too high; and lowering the price of imports, which increases living standards without making employees more expensive for companies.

The report found that including trade-related data in statistical models of employment suggested that the more open to trade a country is, the more jobs are created and the lower is unemployment.

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