Globalisation and jobs: What policies?

Director, Directorate for Employment, Labour and Social Affairs

Globalisation produces winners and losers, including in employment. But while the job threat is real, it is manageable as long as the right policies are in place.

One recurring theme in the longstanding debate about globalisation concerns how best to compensate the losers. The issue has come to the fore again recently, particularly in connection with the perceived threat to jobs in OECD countries from “offshoring” of business services and the growing integration of China, and more recently India, into the world trading system.

It is argued that many jobs and high wages are at risk from these developments and there is a need for effective policies to compensate the losers. But the evidence suggests that compensation often does not occur in the real world–or only partially. This fact raises two questions: Why is compensation rarely forthcoming? What might be desirable elements in a compensation strategy?

©David Rooney

Realising the gains from trade implies labour reallocation from declining to expanding sectors. But this is also true for technological and demographic shocks. New labour reallocation inevitably involves some workers being displaced from their jobs and becoming unemployed. Prolonged unemployment, in turn, involves not only costs to the individuals concerned but also to society, in the form of lost output and welfare.

A recent OECD study shows that adjustment costs are higher for trade-displaced workers than for other job losers. In both the US and Europe, workers displaced from jobs in the industries facing the most intense international competition are slower to become re-employed and experience larger wage losses once re-employed than do job losers in other industries.

But there is a noticeable difference in the nature of the adjustment costs experienced by the average trade-displaced worker in the US compared with his European counterpart. Large drops in wages on the post-displacement job are a particularly important source of workers’ losses in the US. By contrast, long-term unemployment and labour force withdrawal following displacement are the biggest sources of earnings losses in Europe.

In both the US and Europe, the adjustment costs borne by trade-displaced workers are highly variable, implying that adjustment assistance needs for this group are very diverse. Compared with other job losers, displaced manufacturing workers in both Europe and the US tend to be somewhat older, less educated and to have had longer tenure on the lost job–all characteristics that are associated with above-average re-employment difficulties and larger earnings losses following re-employment. Trade-displaced workers are also more likely to have vocational skills specialised to declining occupations and industries.

Three rationales have been put forward in the literature for compensation/adjustment assistance for trade-displaced workers. First, there is an efficiency argument: output is lower due to involuntary unemployment of trade-displaced workers. Second, there is an equity argument: it is unfair that even a minority of workers should lose from a policy that increases overall welfare. The final rationale is a political economy one: continued political support for trade liberalisation is contingent on society providing adequate compensation for workers who lose their jobs or face large wage cuts as a result.

The question then arises: do these three rationales create a strong case for compensating trade-displaced workers? The evidence suggests that, on both efficiency and equity grounds, the answer is negative for a specific trade-related programme as opposed to having a programme for all permanently displaced workers, irrespective of the source of job loss. However, there could be an exception to this preference for general programmes on political-economy grounds.

One prominent example of the latter is Trade Adjustment Assistance (TAA) in the US. TAA has been in existence for over four decades. During that period it has undergone many changes, most recently in 2002 when a healthcare benefit and a limited wage insurance component for older workers was added. All the evidence suggests that TAA has not been effective in fostering worker adjustment since procedures for certification are very time-consuming and arbitrary; and relatively few certified workers get re-employment services. Instead, TAA’s main purpose is to extend unemployment benefits and serve as a political sop to freer trade. Since the US spent less than $1 billion on TAA in 2003, it seems a good bargain on the political-economy front, even if it is manifestly unsuccessful in promoting worker adjustment.

The European Commission recently proposed a new Globalisation Adjustment Fund (GAF). The stated aim is “to soften the negative impact of globalisation on laid-off workers and to improve their chances of finding new and better jobs by providing money for training and relocation”. Details about the GAF are very sketchy but it appears that the motivation for it is also a political economy one. At the time of writing, it is unclear whether the GAF will get off the ground or not. In any event, it is not obvious that the EU needs to spend more on labour market policies: in 2004 it spent almost 2.5% of GDP compared with only 0.5% in the US. Rather it needs to spend these large resources in a much more effective manner.

What should be the main elements in a good compensation/adjustment assistance programme for permanently displaced workers? First, a country has to have the right framework conditions, as spelt out in the four pillars of the restated OECD Jobs Strategy. These include: macroeconomic policies conducive to sustained growth and price stability; flexible labour and product markets; and an effective education and training system.

Second, a country needs an effective nexus of labour market policies encompassing unemployment benefits and re-employment services. OECD evidence suggests that the following elements should figure in such a package.

First, set income replacement rates at reasonable levels and avoid open-ended duration of benefits. Second, make basic job-search services available to all job losers. This can involve counselling and the preparation of individual action plans, especially for those at risk of long-term unemployment, and advance notification of plant closures. Third, monitor effectively the job-search activity of displaced workers. The emphasis should be on “activation”, and this may involve moderate benefit sanctions if the unemployed do not actively look for work. Fourth, take steps to ensure that there is a financial gain from taking a job compared with remaining on benefits. This can be achieved in a variety of ways, e.g. via an in-work benefit like the Earned Income Tax Credit in the US or the Working Families Tax Credit in the UK or a targeted wage subsidy paid to employers. And fifth, ensure that much greater use is made of active labour market programmes that work and phase out those that do not, drawing on insights from the growing scientific literature on programme evaluations.

In sum, the labour market policy challenge from globalisation is real, but it is manageable. There is little justification for policies that target explicitly trade-displaced workers except on political-economy grounds. Instead, what is required is a balanced package of largely familiar policies: good macroeconomic policy; flexible labour and product markets; activation of the unemployed; and effective lifelong learning policies. And, most importantly, the political will to implement them.


This article is adapted from: Martin, John (2006), “Compensating trade-displaced workers: a mountain or a molehill?” in GEP Newsletter, No. 17 Spring 2006, Leverhulme Centre for Research on Globalisation and Economic Policy, Nottingham University.

OECD (2005), OECD Employment Outlook, Chapter 1: “Trade-Adjustment Costs in OECD Labour Markets: a Mountain or a Molehill?”, Paris.

OECD (2006), OECD Employment Outlook, with a reassessment of the OECD Jobs Strategy.

©OECD Observer No 256, July 2006

Economic data

GDP growth: +0.6% Q1 2019 year-on-year
Consumer price inflation: 2.3% May 2019 annual
Trade: +0.4% exp, -1.2% imp, Q1 2019
Unemployment: 5.2% July 2019
Last update: 8 July 2019

OECD Observer Newsletter

Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Subscribe now

<b>Subscribe now!</b>

To order your own paper editions,email

Online edition
Previous editions

Don't miss

  • MCM logo
  • The following communiqué and Chair’s statement were issued at the close of the OECD Council Meeting at Ministerial level, this year presided by the Slovak Republic.
  • Food production will suffer some of the most immediate and brutal effects of climate change, with some regions of the world suffering far more than others. Only through unhindered global trade can we ensure that high-quality, nutritious food reaches those who need it most, Angel Gurría, Secretary-General of the OECD, and José Graziano da Silva, Director-General of the United Nations Food and Agriculture Organization, write in their latest Project Syndicate article. Read the article here.
  • Globalisation will continue and get stronger, and how to harness it is the great challenge, says OECD Secretary-General Gurría on Bloomberg TV. Watch the interview here.
  • OECD Secretary-General Angel Gurría with UN Secretary-General António Guterres at the 73rd Session of the UN General Assembly, in New York City.
  • The new OECD Observer Crossword, with Myles Mellor. Try it online!
  • Listen to the "Robots are coming for our jobs" episode of The Guardian's "Chips with Everything podcast", in which The Guardian’s economics editor, Larry Elliott, and Jeremy Wyatt, a professor of robotics and artificial intelligence at the University of Birmingham, and Jordan Erica Webber, freelance journalist, discuss the findings of the new OECD report "Automation, skills use and training". Listen here.
  • Do we really know the difference between right and wrong? Alison Taylor of BSR and Susan Hawley of Corruption Watch tell us why it matters to play by the rules. Watch the recording of our Facebook live interview here.
  • Has public decision-making been hijacked by a privileged few? Watch the recording of our Facebook live interview with Stav Shaffir, MK (Zionist Union) Chair of the Knesset Committee on Transparency here.
  • Can a nudge help us make more ethical decisions? Watch the recording of our Facebook live interview with Saugatto Datta, managing director at ideas42 here.
  • The fight against tax evasion is gaining further momentum as Barbados, Côte d’Ivoire, Jamaica, Malaysia, Panama and Tunisia signed the BEPS Multilateral Convention on 24 January, bringing the total number of signatories to 78. The Convention strengthens existing tax treaties and reduces opportunities for tax avoidance by multinational enterprises.
  • Globalisation’s many benefits have been unequally shared, and public policy has struggled to keep up with a rapidly-shifting world. The OECD is working alongside governments and international organisations to help improve and harness the gains while tackling the root causes of inequality, and ensuring a level playing field globally. Please watch.
  • Checking out the job situation with the OECD scoreboard of labour market performances: do you want to know how your country compares with neighbours and competitors on income levels or employment?
  • Trade is an important point of focus in today’s international economy. This video presents facts and statistics from OECD’s most recent publications on this topic.
  • The OECD Gender Initiative examines existing barriers to gender equality in education, employment, and entrepreneurship. The gender portal monitors the progress made by governments to promote gender equality in both OECD and non-OECD countries and provides good practices based on analytical tools and reliable data.
  • Interested in a career in Paris at the OECD? The OECD is a major international organisation, with a mission to build better policies for better lives. With our hub based in one of the world's global cities and offices across continents, find out more at .
  • Visit the OECD Gender Data Portal. Selected indicators shedding light on gender inequalities in education, employment and entrepreneurship.

Most Popular Articles

OECD Insights Blog

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2019