The entry of China, India and Russia into the global economy poses an unprecedented challenge to living standards in the developed countries of the OECD. The global labour force has effectively doubled in just 15 years and millions of the new entrants work for wages and in conditions far below those of workers in more developed countries. Unless appropriate policies to regulate globalisation and provide decent work and sustainable development are adopted by the OECD and developing country governments alike, globalisation, rather than bidding up living standards for everyone, will produce even greater inequality between rich and poor, and between capital and labour.
The effects are already visible in many developing countries as companies threaten to shift production to China, where workers’ rights to organise are not respected. Yet assuring the human rights of workers must become as important an objective of international trade and investment agreements as protecting intellectual property rights.
In some OECD countries, the historical relationship between higher productivity and real wage growth has been broken over the past two decades. It was this close relation that powered rapid growth and broadly shared prosperity in the boom years after the Second World War. In the US, workers are suffering a generation-long stagnation of wages and living standards, even as the economy grows and overall productivity and profits surge. In fact, all kinds of people find they have to hold down two jobs just to get by. Meanwhile, European governments anxious to get unemployment down are pushing reforms that seem to be heading in the same direction. But rather than making labour markets more flexible, in practice they will simply end up reducing quality by making jobs cheaper and more precarious. If productivity and competitiveness are the goals, then this is hardly smart economics. Globalisation is not supposed to reduce living standards. But when policies between the interests of corporations and workers are as unbalanced as they presently are, a drop is inevitable. Developing countries must be given equitable access to the global economy but we need the right policies and the right rules for globalisation to ensure a “race to the top” and not a “race to the bottom”.
The OECD was founded by governments to promote growth and development through global co-operation. It has an important role in helping build a consensus around a balanced set of policies to guide the globalisation process. We must all adopt a more pragmatic approach to trade and investment agreements and not impose free market orthodoxies on labour as though it were just another input.
Given the enormous differences in compensation in the global economy, how can companies in high-wage countries meet the competition from companies in the lower-wage countries without undermining living standards in the developed countries? It is a tough question. The US has lost 3.5 million manufacturing jobs since 1998, more than half of them to companies losing market share or offshoring production to cheaper places. Alan Blinder, a distinguished American economist, estimates that as the challenge of offshoring spreads to services, as many as 28-52 million American jobs could be at risk. The OECD has also advanced estimates which paint a similar picture.
The solution is no secret. Companies must adopt new business and competitive strategies that focus on high-quality products, customer service and continuous innovation. Ordinary workers hold the key. Every day, they learn about products and processes. Companies that do not reward workers fully or provide incentives will not win the workers’ commitment to share that knowledge. They will be unable to harness the unique firm-specific knowledge needed to improve quality, productivity and build sustained competitive advantage.
The circle of continuous innovation, productivity and growth is not easy to accomplish, of course, but it is the only feasible strategy for OECD countries. Unfortunately, too many companies –operating in a poorly regulated global environment– are adopting business and competitive strategies that, even when they succeed, benefit only their shareholders and CEOs. Rather than fostering continuous innovation, these companies are content to profit from international wage arbitrage. They can hardly be trusted to transfer technology, invest in proper jobs in poorer countries and raise standards everywhere.
Meanwhile, companies trying to compete insist on “flexibility” at home to hire and fire workers at will in a bid to maintain margins. Yet what they really need is “flexibility of work,” not “flexibility of labour.”
Workers will respond positively to these challenges of change in return for reasonable security and benefits such as proper training, health insurance, pensions, and so on. Robust social welfare and active labour market programmes can help provide a solid framework for both companies and workers, as Nordic countries have demonstrated. The OECD recognises the value of Nordic labour markets, so why does it not map out a strategy to help other countries emulate them for a change? After all, where insecurity and fewer rights are on offer, as is the case in the US and to a lesser extent the UK, the supply of skills and knowledge becomes badly compromised.
When it comes to labour reform, European governments should not throw the baby out with the bathwater. There are many value-adding qualities in their labour practices that workers in the US need, in training and workplace rights, for instance. Shoe-horning people into jobs without such quid pro quo is a recipe for decline. Corporations and some commentators have spun a great story that under globalisation, labour should be thankful for work and basic wages, that unemployment is labour’s fault, and businesses are blameless. Yet while benefits and contractual obligations to workers have been chopped back, the truth is that huge profits have been earned on the back of labour forces both at home and offshore. Strong growth in the US has benefited only the very highest of high-income earners.
Supporting development and making a place in the global economy for hundreds of millions of new workers without undermining the living standards in OECD countries requires concerted action by governments to forge more balanced global economic policies. It also requires corporations to see beyond CEO and shareholder interests. The OECD is the forum where serious discussion on these matters can take place. To be useful, however, our discussions must honestly and pragmatically address the challenges we face. And we must leave our ideologies and textbook theories at the door. Business as usual will not restore balance to the global economy. A major new policy consensus is needed.
*American Federation of Labor - Congress of Industrial Organizations
©OECD Observer No 255, May 2006