The Impacts of Globalisation on Workers

Left to Right: Guy Michaels, Giordano Mion, Frédéric Robert-Nicoud, Stephen Redding, and John Van Reenen.

Over the last few decades, trade liberalisation and reduction in transportation costs have dramatically increased trade. Understanding the effects of globalisation on the income distribution is an important policy issue for reasons of equity. Although trade theory predicts overall welfare gains from trade for the economy as a whole, if liberalisation exacerbates income inequality, calls for trade protection may become irresistible.

In fact, the impact of free trade on workers can be very different across groups of workers. CEP researchers have provided a theoretical framework for analysing the distributional consequences of globalisation that explicitly recognises that not only firms but also workers display significant heterogeneity (Discussion Paper No 940, final version published on July 2010 in Econometrica). We show for example how labour market frictions impact both wages and the allocation of workers across firms after trade liberalisation. This affects income distribution and explains why many groups strongly oppose free trade.

To study the effect of reducing global trade barriers on inequality from an empirical perspective, our researchers use the construction of the United States Interstate Highway System as a source of exogenous variation in trade barriers (Discussion Paper No 772, final version published on November 2008 in the Review of Economic and Statistics). They show that the highway construction increased the wage-bill of high-skilled workers relative to low-skilled workers in counties where skill was abundant, but reduced it where skill was scarce. This suggests that the expansion of trade between economies that differ in their skill endowment, such as trade between the developed world and the less-developed world, may continue to contribute to changes in labour market inequality.

Recent CEP research in this area includes:

CEP Discussion Paper
Trade and Labor Market Outcomes
Elhanan Helpman, Oleg Itskhoki, Stephen Redding, December 2010
Paper No' CEPDP1028: Read Abstract | Full paper

CEP Discussion Paper
Has ICT Polarized Skill Demand? Evidence from Eleven Countries over 25 Years
Guy Michaels, Ashwini Natraj, John Van Reenen, June 2010
Paper No' CEPDP0987: Read Abstract | Full paper

CEP Discussion Paper
Wage Bargaining and the Boundaries of the Multinational Firm
Maria Bas, Juan Carluccio, December 2009
Paper No' CEPDP0963: Read Abstract | Full paper

CEP Discussion Paper
Trade, Wages and Productivity
Kristian Behrens, Giordano Mion, Yasusada Murata, Jens Südekum, July 2009
Paper No' CEPDP0942: Read Abstract | Full paper

CEP Discussion Paper
Inequality and Unemployment in a Global Economy
Elhanan Helpman, Oleg Itskhoki, Stephen Redding, July 2009
Paper No' CEPDP0940: Read Abstract | Full paper

CEP Discussion Paper
Trade, Technology Adoption and Wage Inequalities: Theory and Evidence
Maria Bas, December 2008
Paper No' CEPDP0902: Read Abstract | Full paper

CEP Discussion Paper
Volatility, Labor Market Flexibility, and the Pattern of Comparative Advantage
Alejandro Cuñat, Marc J. Melitz, June 2007
Paper No' CEPDP0799: Read Abstract | Full paper

CEP Discussion Paper
Offshoring: General Equilibrium Effects on Wages, Production and Trade
Richard E. Baldwin, Frédéric Robert-Nicoud, May 2007
Paper No' CEPDP0794: Read Abstract | Full paper

CEP Discussion Paper
The Effect of Trade on the Demand for Skill - Evidence from the Interstate Highway System
Guy Michaels, December 2006
Paper No' CEPDP0772: Read Abstract | Full paper