Order Code RL34091
Globalization, Worker Insecurity,
and Policy Approaches
Updated July 31, 2008
Raymond J. Ahearn
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Globalization, Worker Insecurity, and Policy
Approaches
Summary
Today’s global economy, or what many call globalization, has a growing impact
on the economic futures of American companies, workers, and families. Increasing
integration with the world economy makes the U.S. and other economies more
productive. For most Americans, this has translated into absolute increases in living
standards and real disposable incomes. However, while the U.S. economy as a whole
benefits from globalization, it is not always a win-win situation for all Americans.
Rising trade with low-wage developing countries not only increases concerns of job
loss, but it also leads U.S. workers to fear that employers will lower their wages and
benefits in order to compete. Globalization facilitated by the information technology
revolution expands international trade in a wider range of services, but also subjects
an increasing number of U.S. white collar jobs to international competition. Also,
globalization may benefit some groups more than others, leading some to wonder
whether the global economy is structured to help the few or the many.
The current wave of globalization is supported by three broad trends. The first
is technology, which has sharply reduced the cost of communication and
transportation that previously divided markets. The second is a dramatic increase in
the world supply of labor engaged in international trade. The third is government
policies that have reduced barriers to trade and investment. Some recent research
examines whether these trends are creating new vulnerabilities for workers.
Some of the vulnerabilities for workers are underlined by changing employment
patterns caused by increased foreign competition, a declining wage share of national
income, and rising earnings inequality. These trends, in turn, have become a source
of economic insecurity for many Americans and may be weakening public support
for U.S. engagement with the world economy.
To bolster public support for an open world economy, the conventional wisdom
is that the legitimate concerns of those who are losing in the contemporary economic
environment need to be addressed. To what extent the losers should be compensated
and how is a matter of considerable congressional and public debate. Because the
relationship between globalization and worker insecurity is complicated and
uncertain, a number of different approaches may be considered if the goal is to
bolster public support for U.S. trade policies, globalization, and an open world
economy. Policies involving adjustment assistance, education, tax, and trade are
most commonly proposed.
There appears to be a range of views on the merits of each of these policy
approaches and the extent to which they can be designed and implemented in a way
that would reduce worker insecurity without undermining the benefits of
globalization. In the view of many economists, policies that inhibit the dynamism
of labor and capital markets or erect barriers to international trade and investment
would not be helpful because technology and trade are critical sources of overall
economic growth and increases in the U.S. living standard. This report will be
updated should events warrant.
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Trends Driving Global Economic Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Global Labor Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Government Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Sources of Worker Insecurity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Job Losses and Fears . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Rising Income Inequality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Policy Approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Adjustment Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Tax Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Trade Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Domestic Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Free Markets and Limited Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Globalization, Worker Insecurity, and Policy
Approaches
Introduction
The U.S. economy is becoming increasingly open to the world economy. With
international trade and investment at record levels, much of what Americans
consume or buy is produced in other countries. Similarly, much of what Americans
produce is exported abroad.1 Huge quantities of capital or money flow into and out
of the United States every day, swamping the value of goods and services that are
exchanged.2 New technologies and business practices accompany the flows of
investment capital. A growing number of the largest U.S. companies rely on
international markets for over 50% of their sales and employ more foreign workers
than domestic.3 In the process, today’s global economy, or what many call
globalization, is having a growing impact on the economic futures of American
companies, workers, and families.4
Economic theory holds that a more open and integrated world economy provides
large scale economic benefits. By providing for specialization in production across
countries, trade enhances the economic output here and abroad, and in so doing,
boost living standards. Competition from economic integration is seen as making the
U.S. economy more efficient and more productive. Global markets give consumers
more choices and help reduce the costs of goods and services, thereby keeping
inflation in check. The Institute for International Economics has estimated that the
integration of the global economy generates an economic gain of between $500
1 Exports and imports of goods and services accounted for 29.2% of U.S. GDP in 2007, up
from 9.2% in 1960. CRS calculations based on U.S. Department of Commerce, Bureau of
Economic Analysis data.
2 By some estimates (a 2004 survey by central banks) daily trading of foreign currencies
totals more than $1.9 trillion. This compares to global trade in goods and services of about
$12 trillion per year (2005 data). See CRS Report RL33944, Trade Primer: Qs and As on
Trade Concepts, Performance, and Policy, by Raymond J. Ahearn et al.
3 Holstein, William J., “Have and Have-Nots of Globalization,” New York Times, July 8,
2007, BU, p. 4.
4 Globalization can be defined in various ways, but economic globalization refers to the
increasing integration of national economies into a world trading system. Globalization
involves trade in goods and services, sales of assets (i.e. currency, stocks, bonds, and real
property), as well as the transfer of technology, and the international flows (migration) of
labor. See CRS Report RL33944, Trade Primer: Qs and As on Trade Concepts,
Performance, and Policy, by Raymond J. Ahearn et al, and Freiden, Jeffrey, A., Global
Capitalism: Its Rise and Fall In the Twentieth Century, WW Norton &Co., 2006.
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billion and $1 trillion dollars to the U.S. economy each year.5 Similarly, gains from
globalization have been large for many developing countries, lifting hundreds of
millions of people out of poverty in countries such as China and India.6
At the same time, greater global economic integration does not always benefit
everyone within a country. It can be accompanied by stress and anxiety, as new
competitors arise and compete for market share. Shifts in the structure of production
impose costs on workers and business owners in declining sectors, and thus, create
a constituency that opposes the process of economic integration. Opposition may be
intensified by perceptions that foreign competitors benefit from unfair trade practices.
Furthermore, rising trade with low-wage developing countries may drive down the
wages of domestic low-skilled workers — even as they benefit from cheap imports
— and prompt them to wonder whether the United States can continue to compete
in a vastly changed world economy.7 Increased economic openness and
interdependence may also engender opposition as some groups benefit more than
others from globalization, leading some to question whether the global economy is
structured to help the few or the many.8
On balance, today’s integrated global economy provides substantial net benefits,
but it also creates substantial economic losses that are borne by specific groups.
While the U.S. economy as a whole benefits, some workers, firms, and communities
are made worse off. Even as new technologies create new jobs and lead to greater
productivity and output overall, many Americans worry that their losses will
outweigh their gains, and, as a consequence, they and their children will face a
stagnant or declining standard of living. Widespread insecurity, in turn, may affect
how Members of Congress view globalization generally and specifically, its most
visible manifestation — new trade agreements.9 Moreover, popular insecurity may
5 Bradford, Scott C., Paul L. E. Grieco, and Gary Clyde Hufbauer, “The Payoff to America
from Global Integration,” In The United States and the World Economy: Foreign Economic
Policy for the Next Decade, C. Fred Bergsten, ed., Institute for International Economics,
Washington, D.C. 2005.
6 See Remarks by Treasury Secretary Henry M. Paulson on the International Economy,
September 13, 2006. [http://www.ustreas.gov/press/releases/hp95.htm]
7 Since the United States tends to export goods that use skilled labor intensively and to
import goods that use less-skilled labor intensively, increased trade, on balance, raises the
demand for skilled labor and reduces the demand for less-skilled labor. Thus, it is
reasonable to expect that as the United States increases its trade with low-wage and low-
skilled developing countries, wages of low-skilled U.S. workers will face downward
pressure. An influx of immigrants with less than a high-school education, by increasing the
relative supply of low-skilled labor, may further intensify pressures on wages at the bottom
end, as does technological change.
8 Bernanke, Ben S. Remarks at the Federal Reserve Bank of Kansas City’s Thirtieth Annual
Economic Symposium, Jackson Hole Wyoming, “Global Integration: What’s New and
W ha t ’ s Not ? At [ ht t p: / / ww w . f e d e r a l r e s e r ve . go v/ b o a r d d o c s / s pe e c he s /
2006/20060825/default.htm].
9 For discussion of trade agreements and legislation in the 110th Congress, see CRS Report
RL33463, Trade Negotiations During the 110th Congress, by Ian F. Fergusson; CRS Report
(continued...)
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be raising concerns that the process of economic integration will be interrupted or
reversed.10
Some congressional opposition to selective efforts to expand world commerce
has been linked, in part, to public unease over globalization’s impact on U.S.
economic security and prosperity. For example, the House Democratic leadership
stated in 2007 that the benefits of globalization must be expanded to all Americans
first before Congress would consider President Bush’s request to extend his authority
to negotiate new trade agreements that would receive expedited consideration, that
is trade promotion or fast-track authority.11
To bolster public support for an open world economy, conventional wisdom
suggests that the legitimate concerns of those who are losing in the contemporary
economic environment need to be addressed. Yet, compared to the benefits of
globalization, U.S. programs geared towards compensating the losers have been quite
modest.12 To what extent the losers should be compensated and how, however, is a
matter of considerable congressional and public debate. Currently, approaches
affecting adjustment assistance, education, tax, and trade policies are most commonly
being put forth to address these concerns. The costs and whether the programs will
directly address economic insecurities are some of the questions being raised.
Trends Driving Global Economic Integration
Economic integration of widely separated regions is hardly a new phenomenon.
It has been going on for hundreds of years. The current wave of globalization, which
may be unprecedented in terms of its scale and pace, is supported by three broad
trends. The first is technology, which has sharply reduced the cost of communication
and transportation that previously divided markets. The second is a dramatic increase
in the world supply of labor engaged in international trade. The third is government
policies which have reduced barriers to trade and investment. A growing body of
9 (...continued)
RL33743, Trade Promotion Authority (TPA) Issues, Options, and Prospects for Renewal,
by J.F. Hornbeck, and William H. Cooper; CRS Report RL32540, The Proposed U.S.-
Panama Free Trade Agreement, by J. F. Hornbeck; CRS Report RS22391, U.S.-Peru Trade
Promotion Agreement, by M. Angeles Villarreal; CRS Report RS22419, U.S.-Colombia
Trade Promotion Agreement, by M. Angeles Villarreal; and CRS Report RL33435, The
Proposed South Korea-U.S. Free Trade Agreement (KORUS FTA), by William H. Cooper
and Mark E. Manyin.
10 See remarks of Timothy F. Geithner, President and Chief Executive Officer, New York
Fed, “Developments in the Global Economy and Implications for the United States, January
11, 2007. Found at [http://www.newyorkfed.org/newsevents/speeches/2007/gei070111.htm]
11 Goodman, Peter S. “President Set to Lose Trade-Negotiating Power,” Washington Post,
June 30, 2007, D1.
12 The Peterson Institute for International Economics, for example, estimates that the
lifetime costs of worker displacement to be roughly $50 billion per year, but calculates that
the United States spends about $2 billion per year to address the costs connected to
displacement.
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research examines whether these trends are combining to create new vulnerabilities
for workers.13
Technology
In the current phase of globalization, economic distances have shrunk because
of the increasing ability to communicate nearly instantaneously at costs that continue
to decline. These advances in communication have allowed firms to break up the
production process into discrete steps and to produce goods in whatever location
allows them to minimize costs. The information technology revolution also facilitates
international trade in a wider range of services, from call center operations to
sophisticated financial, legal, medical, and engineering services. In the process, more
jobs in the U.S. labor force become increasingly vulnerable to international
competition.14
Global Labor Supply
The integration of Brazil, Russia, India, and China into the world economy over
the past two decades means that the greater part of the earth’s population is now
engaged in the global economy. The addition of several billion new workers to the
global supply of labor (an estimated 50% increase), combined with the lessening of
time and distance by the information technology revolution, creates a more
competitive environment for workers in the United States and other developed
countries. Integrating the economies of poor and rich countries means that workers
in rich countries are often now in direct competition with workers in emerging
market economies who may on average be paid 90% less, yet are still highly
educated.15 Not only does this integration increase fears of job loss among workers
in rich countries, but it leads to concerns that employers will have to lower their
wages and benefits in order to compete.16
Government Policy
Government policy has played a critical role in supporting or at least permitting
global economic integration to proceed. Over the past 60 years, government
restrictions on trade and capital flows have gradually declined, making it easier for
13 See chapter 3 of OECD Employment Outlook, 2007, “OECD Workers in the Global
Economy: Increasingly Vulnerable? ISBN 978-92-64-033303-0, pp. 105-154.
14 Bernanke, Ben S. op. cit. (2006 Jackson Hole Speech) p. 5.
15 If unit labor costs or productivity are also 90% lower in low-wage countries, then U.S.
workers are not at a disadvantage.
16 The actual impact of trade from low-wage countries on U.S. wages is controversial.
Some analysts point to the fact that high wage and high standards developed countries still
account for over 50% of U.S. imports. Others point to the fact that the share of U.S. imports
accounted for by the two most populous low-wage countries — China and India — have
risen from 1.8% 1985 to 16.7% in 2006. For more on trends on U.S. trade with developing
countries, see CRS Report RL33945, U.S. Trade With Developing Countries: Trends,
Prospects, and Policy Implications, by William H. Cooper.
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companies to act as global players. By providing an institution in which all members
are on a roughly equal footing, the World Trade Organization (WTO) greatly
facilitated the inclusion of several billion new workers in the global system. The
WTO also has developed rules and disciplines that make it easier for companies to
move production to low-wage countries with more business-friendly regulations. In
addition, agreements such as NAFTA have provided an additional spur to economic
integration between a low-wage (e.g. Mexican) economy and the high-wage U.S.
economy.17
Sources of Worker Insecurity
There is little question that by many measures — economic growth, productivity
growth, inflation, and unemployment - the U.S. economy has been strong over the
past decade. For most Americans, this has translated into absolute increases in living
standards as measured by gains in real consumption and real disposable incomes.18
A growing engagement with the world economy has been an important factor
facilitating a robust overall economic performance. However, these positive
developments have coincided with changing employment patterns caused by
increased foreign competition, a declining wage share of national income, and rising
earnings inequality. These trends, in turn, have become a source of economic
insecurity for many Americans and may be contributing to declining public support
for U.S. engagement with the world economy and for additional trade agreements.19
Job Losses and Fears
Much of the public anxiety about the economy and globalization may be related
to job losses in the manufacturing sector and fears that many service sector jobs,
previously thought immune to the pressures of the global economy, are being
17 Prestowitz, Clyde, Three Billion New Capitalists: The Great Shift of Wealth and Power
to the East, Basic Books, 2005.
18 Bernanke, Ben S. “The Level and Distribution of Economic Well-Being,” Remarks before
the Greater Omaha Chamber of Commerce, February 6, 2007.
19 For example, an NBC News Wall Street Journal poll found that from December 1999 to
March 2007, the share of American public opinion that believes trade agreements have hurt
the United States increased by 16 percentage points (to 46%) while the share of those who
thought trade agreements have helped the United States fell by 11 points (to just 28%). A
2000 Gallup poll found that 56% of respondents saw trade as an opportunity and 36% saw
it as a threat. By 2005, the percentages had shifted to 44% and 49% respectively.
Especially noteworthy is the decline in support from Americans with college educations.
[Cited in Kenneth F. Scheme an Matthew J. Slaughter, “A New Deal for Globalization?”,
Foreign Affairs, July/August 2007] In addition, polls by Pew Charitable Trust , New York
Times, and CBS indicate that growing shares of respondents feel that their children will
experience a diminished quality of life in coming years [cited in Speech by Janet L. Yellen,
President, Federal Reserve Bank Board of San Francisco, Center for the Study of
Democracy, November 6, 2006].
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outsourced to other countries.20 Some critics of globalization maintain that
America’s manufacturing base is being eroded and the longstanding belief that
America’s economic future rests increasingly in the creation of high-paid service
sector jobs is being jeopardized.21 While some of these job fears rest on
misconceptions, others reflect problems that may require new or different policy
responses.
A main anxiety about the U.S. manufacturing base stems from a sharp drop in
U.S. manufacturing employment. The total number of manufacturing jobs fell by 2.3
million, from 15.8 million in November 2001 (the trough of the latest recession) to
13.5 million in mid-2008.22 Despite a growing economy and near full-employment,
many of those who lost jobs have found it more difficult to secure new employment
or had to accept lower paying jobs in order to become reemployed. And, most
workers who permanently lose jobs in mass layoffs that involve outsourcing
(offshore or domestic) had been employed by manufacturers.23
This has been combined with Internet-facilitated outsourcing of service jobs that
were previously only tangentially involved in the global economy. The fact that the
work of a wide range of U.S. knowledge workers in business services, medicine,
accounting and computer programming can now be done much more cheaply by
workers residing in lower-wage countries has led to rising anxiety among white-
collar workers about international competition. At the same time, many businesses
that are not shedding workers are pulling back or reneging on decades-old
commitments to provide health insurance and traditional pensions as they search for
ways to stay competitive in today’s global economy. All of this may be a factor in
the erosion of traditional sources of security for workers — not only job security, but
the confidence of families in their own health and pension benefits and their
children’s college prospects.24
Other economists maintain that worker fears of de-industrialization and massive
offshoring of high-paid jobs are vastly overblown. While rising foreign competition,
together with technical change, will reduce employment in sectors of the economy
most sensitive to foreign competition, they point out that increased competition has
20 Outsourcing, also known as offshore outsourcing, involves the contracting out of service
sector activities (e.g., call center operations) to businesses outside the United States. For
background and analysis, see CRS Report RL32292, Offshoring (a.k.a. Offshore
Outsourcing) and Job Insecurity Among U.S. Workers, by Linda Levine.
21 Ibid. p. 6. For example, while U.S. workers have been encouraged to focus on obtaining
information technology or IT skills to position themselves for high-paying jobs, some of
these jobs now appear at risk of being exported.
22 Bureau of Labor Statistics’ data from the Employment Situation: June 2008.
23 CRS Report RL32292, Offshoring (a.k.a. Offshore Outsourcing and Job Insecurity of U.S.
Workers, by Linda Levine; and CRS Report RL30799, Unemployment Through Layoffs:
What Are the Underlying Reasons, by Linda Levine.
24 See Edward Gresser, “Healthy Factories, Anxious Workers,” Progressive Policy Institute
Policy Report, February 2007. Found at [http://www.frbsf.org/news/speeches
/2006/1106.html]
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not been a barrier to creating near full-employment. They also maintain that U.S.
manufacturing is healthy and strong as reflected by data showing that (1)
manufacturing accounted for 11.7% of the U.S. economy in 2007 in real dollars —
down from 14.5% in 2000 ; and (2) that the U.S. share of world manufacturing output
dropped 0.4% from 21.4% in 1993 to 21.0% in 2006.25 They also emphasize that
much of this is being accomplished by heavy investment in robots and computers,
which allow companies to produce more goods with fewer workers. Domestic factors
such as technological innovation, not trade, they argue have been the dominant
factors in the loss of manufacturing jobs.
While services offshoring may be growing rapidly, most studies find the extent
of job losses from services offshoring to be relatively small in the aggregate, but
concentrated in a few industries and occupations.26 Also most estimates do not take
into this account the new jobs that offshoring may create as a result of making
domestic firms more competitive or jobs that are offshored back to the United States.
Thus, offshoring appears not to be on scale so far that is a major source of job
destruction, especially compared to the normal churning of jobs in the U.S.
economy.27 Yet, anecdotes of higher skilled and higher-educated computer
programmers or medical technicians being outsourced, combined with estimates by
some reputable economists that one-quarter of all U.S. jobs could be potentially off
shore, generates fears over the kind of jobs that will be available for American
workers in the future. As a result, many more workers that have not been affected by
foreign competition in the past may now feel concern that global competition is a
potential threat to their job security and future earnings.28
Rising Income Inequality
A second source of anxiety or insecurity may stem from the impact that
globalization, immigration, and automation are having on the bargaining power of
workers. Under this view, while most workers have continued to stay employed, the
pressures of the global marketplace and technological change have forced them to
accept modest or no wage increases.29 As a result, workers are seen as increasingly
isolated in a competitive squeeze and not receiving their fair share of the benefits of
25 U.S. Department of Labor, “Manufacturing output as a percent of world manufacturing
output, 2006”.
26 See CRS Report RL32292, op. cit., pp. 7-9, by Linda Levine; and CRS Report RL32484,
Foreign Outsourcing: Economic Implications and Policy Responses, by Craig K. Elwell.
27 The U.S. labor market reflects an economy that creates and destroys millions of jobs each
year. In 2005, for example, 31.4 million jobs were created and 29.3 million were lost, for
a net expansion of 2.1 million. More than half of the jobs losses were voluntary. See
Financial Services Forum report, p. 29.
28 Testimony of Alan S. Blinder, Princeton University, to the Joint Economic Committee,
“Will the Middle Class Hold? Two Problems of American Labor,” January 31, 2007.
29 Interestingly, Europe’s much higher minimum wage and greater labor protections against
lay-offs may make the competitive pressures from developing country trade felt more
through lower job creation (higher unemployment) rather than wages. See Jeffrey Freiden,
op. cit., p. 465.
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globalization.30 Alternatively, US companies as seen through the lens of corporate
profitability are thriving as never before.
Support for this view may be found in data that indicates little or no wage and
salary growth for all but the highest earners over the past six years.31 One data set
of real earnings growth by educational level shows that only 3.4% of workers (those
with doctorates and professional graduate degrees in business, law and medicine)
enjoyed any increases in average real money earnings from 2000-2006. Stated
differently, more than 96% of U.S. workers are in educational groups (high school
dropout, high school graduate, some college, college graduate, and nonprofessional
masters) for which mean average money earnings fell during this period. For college
graduates, constituting 29% of the workforce, this was a new experience since real
pay increase rose steadily between 1980 and 2000.32
Another indicator that the average worker may not be getting ahead is captured
by data linking productivity growth to growth in average real hourly wages. While
productivity growth or output per worker rose by 71% from 1980 to 2005, the real
compensation of non-supervisory workers comprising 80% of the work force grew
by 4%. The gap in the manufacturing sector was even greater: productivity rose
131%, while compensation of non-supervisors grew only 7%.33 According to this
view, the strong U.S. productivity growth of the past several years has not been
reflected in wage and salary earnings for most American workers.
Whether the rest of the income generated by increased productivity is being
captured by the top 1% of income earners, by corporate profits, or in non-wage
compensation (such as health benefits) of non-production workers is a major
unresolved question. One recent study found that 60% of the gap is mostly accounted
for by rising non-age benefits such as health insurance. Using an alternative
measurement, this study also found that the real incomes of hourly paid workers have
not in fact been flat since the early 1980s, but have risen by 1.5 % per year.34
At the same time while the vast majority of American workers may not have
received any boost in their real take-home pay, the richest Americans were doing
quite well. The share of national income accounted for by the top 1% of earners (as
30 Many economists maintain that total compensation, which has risen over the period under
review, is a more appropriate measure.
31 A growing unequal trend of earnings from work started many years ago. For example,
according to IRS data, the average taxpayer in 1979 in the top 1/10th of one percent of all
wage and salary earners earned about as much as 44 average taxpayers in the bottom half.
This number had risen to almost 160 by 2001. Cited in Blinder, JEC testimony.
32 Kenneth F. Scheve and Matthew J. Slaughter, “A New Deal for Globalization,” Foreign
Affairs, July/August 2007.
33 Testimony of Dr. Lawrence Mishel, President, Economic Policy Institute, “Globalization
That Works for Working Americans,” Presented to the House Committee on Ways and
Means, January 30, 2007.
34 Research of Robert Z. Lawrence, Harvard University, as cited in Clive Crook, “Why
Middle America Needs Free Trade,”Financial Times, June 28, 2007.
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reported on tax returns) reached 21.8 % in 2005 — a level not seen since 1928. In
addition to high labor earnings, income growth at the top is being driven by corporate
profits which accrue mainly to those with high labor earnings. In 2006, corporate
profits totaled 12.4% of national income, a level not reached in 50 years. The
corporate profit share of national income is also at or near record levels in Japan and
Europe.35
A variety of explanations — trade with developing countries, foreign
investment, an increase in low-skilled immigration, the business cycle, and skill-
based technological change — have been put forth to explain these income trends.
But there is no consensus on what weight each factor may have, thereby making it
difficult to prescribe an approximate policy remedy. Nor is it known whether these
wage trends will persist. But it is clear that the market, starting over two decades
ago, turned strongly against less skilled and less educated workers.36
Policy Approaches
The relationship between globalization and worker insecurity is complicated and
uncertain. There are many different components of globalization and it is not easy to
discern which components are most linked to rising worker insecurity. Most research
indicates that trade plays only a limited role in generating the economic losses or
concerns, but that it gets most of the blame because of its visibility, particularly in
the guise of new trade agreements. While this report has identified three components
of worker insecurity — job losses, outsourcing fears, and downward pressures on
wages — there easily could be other material and psychological factors that are
involved as well. As a result, a number of different approaches might be required if
ones goal is to maximize American economic well being with the derivative need to
bolster public support for globalization and an open global economy.
Approaches involving adjustment assistance, education, taxes, and trade are
most commonly put forth in this context. Adjustment assistance is designed
primarily to address job dislocation concerns; education is generally considered a
means to foster skill-sets demanded by a globalizing economy, as well as a vehicle
for promoting greater equality; tax policy is the primary means of affecting changes
in income distribution; and trade policy tends to affect the kinds of jobs available in
an economy, but not the overall level of employment.
Additional perspectives are offered at both ends of the political economy
spectrum. At one end, there are those who call for setting higher standards at home
— a higher minimum wage, a union friendly workplace, universal health care, stricter
corporate governance laws, more research and development support for new
35 Steven Greenhouse and David Leonhardt, “Real Wages Fail to Match a Rise in
Productivity,” New York Times, August 28, 2006, and Morgan Stanley, Special Economic
Study -“The Politicization of the U.S.-China Trade Relationship.” February 13, 2007, p. 6
36 Alan Blinder, JEC Testimony, p. 2.
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industries — as a way to create high wage jobs.37 At another end, there are those who
call for primary reliance on market forces and de-regulation as the best way to
promote robust economic growth and vibrant job creation.
A key question may be the extent to which any of these approaches can be
designed and implemented in a way that would reduce worker insecurity without
undermining the benefits of globalization.38 In the view of many economists, policies
that inhibit the dynamism and flexibility of labor and capital markets or raise barriers
to international trade and investment would not be helpful because technology and
trade are critical sources of overall economic growth and increases in the U.S.
standard of living.39
What follows is a short description of the main policy approaches. Each section
discusses how each policy is intended to affect worker insecurity, as well as concerns
and criticisms of the approach. None of the approaches alone may be an answer to
the adjustment problems globalization is posing for workers.
Adjustment Assistance
The primary government program to compensate U.S. workers who are
disadvantaged by trade competition is the Trade Adjustment Assistance (TAA)
program.40 Established in 1962, the program aids workers in certain industries if they
can show that increased imports have contributed importantly to a loss of jobs.
Workers certified for TAA can access a variety of benefits including income support,
job training, job search, and relocation allowances.41 In 2002, the program was
reformed and expanded. Secondary workers became eligible for TAA benefits; a
wage insurance or supplement was created for older workers; and a tax credit was
instituted to help trade-affected workers pay for health insurance.42 In FY2007,
Congress appropriated $572 million for TAA income support payments, $6.6
37 Galbraith, James K., “Why Populists Need to Re-think Trade,” The American Prospect,
May 10, 2007, web only.
38 OECD study, p. 109.
39 Bernanke, Ben S, “The Level and Distribution of Benefits,” 2007, p. 6.
40 TAA also has a firm and community component. For information of the firm program, see
CRS Report RS20210, Trade Adjustment Assistance for Firms: Economic, Program, and
Policy Issues, by J.F. Hornbeck. Other forms of federal assistance available for workers
displaced by offshoring include the Worker Adjustment and Retraining Notification Act
(WARN, P.L. 100-379), and the Workforce Investment Act (WIA, P.L. 105-220). For more
information on these programs, see CRS Report RL31250, The Worker Adjustment and
Retraining Notification Act (WARN), by Linda Levine, and CRS Report 97-536, Job
Training Under the Workforce Investment Act (WIA): An Overview, by Ann Lordeman.
41 CRS Report 94-478, Trade Adjustment Assistance for Workers: A Fact Sheet, by Christine
Scott.
42 Statement of Dr. Sigurd R. Nilsen, Director for Education, Workforce and Income
Security Issues, Government Accountability Office, Before the House Committee on Ways
and Means, June 14, 2007.
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million for job search and relocation expenses, and $23.5 million for Alternative
Trade Adjustment Assistance (ATAA) for older workers.
TAA has had some notable successes over the past 30 years, particularly in the
area of training. While a number of studies suggest workers trained through TAA
have had much better success in finding jobs than workers who have not received
training, many observers maintain that the current program is too narrow, too
bureaucratic, and underfunded to alleviate worker anxiety by itself.43
Current options for reform being proposed range from small to large. While the
Bush Administration has called for streamlining the processes of eligibility
determination and assistance implementation, many in Congress have proposed a
broadening and expansion of the program. In addition to funding increases, the most
prominent proposals include extension of eligibility to service workers and to
workers displaced by trade with non-trade agreement countries. A number of other
proposals call for streamlining the program and integrating it with other programs for
displaced workers.44
Education
While TAA focuses directly on those workers who appear to be visible losers
from globalization, some analysts believe that priority needs to be placed on ensuring
that all Americans are in a position to take advantage of globalization. Support for
increasing the skill level of the labor force through more education is based on the
notion that higher skilled workers generally earn more, have lower unemployment
rates, and are more likely to be better able to adapt to changing demands of the
workplace.45 Some research also suggests that the higher rate of return to education
and skill training is likely the single greatest source of the long-term increase in
inequality. Thus, policies that boost national investment in education and training
may also help reduce inequality while expanding economic opportunity.46
Beyond the view that the provision of more education is a way for more workers
to benefit from globalization, there appears to be less consensus on what kind of
education to emphasize. Does the best return on government expenditures come
from spending on early childhood development and pre-school, primary school, high
school or college? How much spending should be devoted to improving math and
43 Ibid. According to the GAO, TAA data make it difficult to provide a complete and
credible picture of the program’s performance.
44 For background and analysis of current congressional proposals, see CRS Report
RL34383, Trade Adjustment Assistance (TAA) for Workers: Current Issues and Legislation,
by John J. Topeleski; CRS Report RS22718, Trade Adjustment Assistance for Workers
(TAA) and Alternative Trade Adjustment Assistance for Older Workers (ATAA), by John J.
Topeleski; and CRS Report RS22761, Extending Trade Adjustment Assistance (TAA) to
Service Workers: How Many Workers Could Potentially Be Covered?, By John J. Topeleski,
45 Janet L. Yellen, President and CEO, Federal Reserve Bank of San Francisco, Speech to
the Center for the Study of Democracy, November 6, 2006, p. 7.
46 Ben Bernanke, 2007, p7.
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science skills? What is the role for career-education and on-the-job training?
Should more money be put into federally subsidized retraining programs, particularly
for economically disadvantaged populations?47
Given the increasing globalization of labor markets, the question also arises as
to what kind of skills to promote. Those at the top end of today’s income distribution
have skills that enable them to perform non-routine kinds of problem solving, often
within the context of large, complex, global operations. In contrast, an increasing
share of domestic workers in the middle of the wage spectrum have experienced
lower demand because companies can now look all over the world for workers able
to perform computer programming tasks, communications tasks, and similar jobs
whose tasks can be routinized but do not require face-to-face contact with others. In
this context, it is not self-evident what kind of education or training will foster labor
skills that will be immune to outsourcing and global competitive pressures in the
future, other than that they require face-to-face contact for work that does not involve
codifiable information.48
Another consideration in evaluating education as a policy approach for dealing
with worker insecurity about globalization may be the amount of time for
educational changes to achieve the objective. One analyst maintains that education
as a policy approach to worker insecurity could take more than a generation to make
a difference. For example, it took 60 years to boost the share of college graduates in
the work force from 6% at the end of WWII to 33% today, and that required major
government programs, such as the GI bill.49
Tax Policy
Calls for a more progressive form of taxation is one of the more recent policy
approaches for lessening resistance to globalization. Based on a view that the current
pattern in U.S. income distribution is the most pressing issue to address, a report
funded by the country’s top financial firms argues that some direct form of income
redistribution is necessary for ensuring that globalization’s benefits are shared more
widely. Accordingly, the report calls for making the Federal Insurance Contribution
(FICA) social security tax more progressive, either by integrating it into the income
tax or by adding progressivity into FICA itself.50
A number of tax policies such as the earned income tax credit, which
supplements the earnings of low-income workers, are already in place to diminish
economic inequality. Most prominently, the individual income tax’s graduated rate
structure is progressive with higher income earners assessed higher tax rates.
Unemployment insurance cushions family income in the face of job loss and illness.
Of course, numerous other alternative tax changes are possible if the goal is income
47 Yellen, Janet, p. 8.
48 Yellen, Janet p.5.
49 Shreve , Kenneth F., and Matthew J.Slaughter, p.5
50 Financial Services Forum Report, p. 45.
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redistribution. But the question whether government should move in this direction
is controversial.51
On the one hand, most economists maintain that some market determined
income differences are needed to create incentives to work, invest, and take risks.
Without the incentives, economic growth would be less robust to the detriment of
everyone. On the other hand, there are signs that rising inequality is intensifying
resistance to globalization and some observers maintain that it is important to act
quickly if public support for global integration is to be maintained.
Trade Policy
Trade policy can also play a role in reducing worker insecurity. Traditional U.S.
policies toward free trade agreements (FTAs) and unfair foreign trade practices, in
particular, have been pointed to by labor activists as contributing to job loss and job
insecurity. If the United States adopted and successfully implemented more muscular
policies in these areas, proponents of this view posit that some alleviation of job loss
and worker anxiety could materialize.
Bilateral and regional FTAs and U.S. FTAs with countries such as Canada,
Mexico, Chile, and Australia have played a role in accelerating the integration of
global markets. Through a mutual reduction in trade barriers, countries entering into
an FTA accelerate specialization in production and trade. By opening new
opportunities for the export of U.S. goods and services, FTAs support jobs associated
with increased exports. At the same time, some U.S. jobs and production shift to
FTA partners who can offer lower costs of production, including labor cost. While
most labor activists accept that lower labor costs are a legitimate source of
comparative advantage that many developing countries can offer, they challenge any
incremental cost advantage that these countries may gain from the suppression of
workers’ rights.
To deal with concerns raised by unfair worker rights practices, a bipartisan
policy position was agreed to by congressional leadership and the Bush
Administration. As outlined in the “New Trade Policy for America,” U.S. FTAs will
begin incorporating enforceable labor standards.52 Thus, countries that sign an FTA
with the United States will have to allow collective bargaining and abolish forced
labor, among other requirements. But it is uncertain how much relief this provision
will provide for American workers. According to one analyst, no matter how free
developing and newly industrializing country workers are to organize, they are still
going to be paid very little, (Mexican wages are only 11% of the U.S. level and
Chinese wages 3% of the U.S. level) and trade is likely to continue to pressure U.S.
wages.53
51 Yellen, Janet, p.8.
52 Released March 27, 2007 and available on the websites of the House Ways and Means
Committee and the United States Trade Representative (USTR).
53 Krugman, Paul, “Divided Over Trade, New York Times, May 14, 2007, p. 16.
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U.S. efforts to eliminate foreign country unfair trade practices could also serve
to reduce pressures on workers. Foreign practices such as subsidies and predatory
pricing strategies can encourage a shift in investment and employment to their
markets, thereby displacing U.S. workers. From the perspective of U.S. workers
whose jobs are displaced by these kinds of foreign government interventions, the
financial and psychic costs of dislocation are not insignificant. Accordingly, some
maintain that a forceful U.S. policy towards these practices may be justified in order
to prevent unnecessary job displacement and churning in the domestic economy,
although measures that restrict trade are likely to be opposed by stakeholders who
may be disadvantaged by higher import prices.54
Nevertheless, as economists constantly point out, the role of trade policy in
preserving or creating jobs in the overall economy is very limited. While trade policy
measures to increase market access for U.S. exports and investments or to impose
restrictions on U.S. imports can affect the composition of employment, the overall
level of employment is determined primarily by fiscal and monetary policies and by
business cycles. Dislocation, moreover, is an inevitable byproduct of capitalism,
with or without trade.
Domestic Standards
Finding ways to create more high-wage jobs in the United States is another
approach that has been proposed for helping those who lose out to the global
economy. A number of different elements are sometimes included in this approach,
including a higher minimum wage, universal health care, a union-friendly workplace,
and expanded funding for research and development for new industries, particularly
in the area of alternative energy.55
This approach is based largely on the model of universal unions, high minimum
wages, and strong welfare state benefits provided by Norway and Sweden. These
two Scandinavian countries, which enjoy among the lowest unemployment rates in
Europe, are highly open to international trade and to job churning (hiring and firing)
in their economies. In the view of one proponent, the key to their success is high
wages. Firms are not free to compete by undercutting the union rate, but must try to
keep productivity high if they are to survive.56
The premise of this high standards job creation approach is that the foundation
of a strong American middle class rests with laws, regulations, and standards
developed at home. Instead of worrying about what impact trade with low-wage
developing countries has on U.S. wages, this approach maintains that a high-wages
domestic economy will have a favorable impact on trade. “The big problem is simply
that unions, laws, regulations, and standards have been undercut by conservative
54 Drezner, Daniel W., Council on Foreign Relations, “U.S. Trade Strategy: Free Versus
Fair, 2006.
55 Galbraith, James, K. “Why Populists Need to Re-think Trade,” American Prospect, May
10, 2007 - web only version.
56 Ibid., p.7.
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policymakers, right here at home.”57 A high-wage strategy, of course, depends on the
ability of companies to invest in capital and technology to generate high labor
productivity to pay for the wages.
Free Markets and Limited Government
In stark contrast to the domestic standards job creation approach, this approach
touts the principles of free enterprise, open markets, and limited government as the
best way to achieve economic prosperity and security for all Americans. The basic
idea of this approach is that individuals are best helped not by government
intervention, but by making their own choices in a free marketplace.58
Under this view, today’s global economy provides unprecedented opportunities
for the United States to derive large-scale economic benefits. Free trade policies are
seen as creating higher-paying jobs for a growing number of Americans working in
export-oriented industries. High corporate tax rates, a relatively high minimum
wage, domestic subsidies, and weak protections of property rights are viewed as the
real threats to American jobs.59
When it comes to policies for alleviating worker anxiety, most supporters of
this school of thought oppose government programs that redistribute income or
protect workers from market forces. Rather, many supporters of this approach urge
a focus on removing barriers to job creation, as well as various forms of retraining
and relocation aids to help workers find new jobs in a growing economy.
57 Ibid.
58 Griswold. Daniel, “Free Trade, Free Markets: Rating the 108th Congress,” CATO Institute,
Center for Trade Policy Studies, No. 28, March 16, 2005.
59 Markheim, Daniella, “Why Free Trade Works for America,” Heritage Foundation,
Backgrounder No. 2024, April 16, 2007.