Globalisation – Average income increased, but the gains were concentrated among employees of large exporting firms study finds

How does increased openness to international trade affect workers’ wages and job security? This question is central to the public debate concerning the effects of globalisation, but convincing quantitative answers have been difficult to come by.

Trade liberalisations are often accompanied by labour market reforms, making it difficult to isolate their effects. This column discusses the effects of trade liberalisation, globalisation, and labour-market reforms on the Colombian labour market. Reduced trade frictions increased cross-firm wage inequality and shifted the firm-size distribution rightward, with offsetting effects on overall wage inequality. Average income increased, but the gains were concentrated among employees of large, productive firms with access to export markets. Greater trade openness also increased job turnover.

Figure 2 (Figure 5 from the paper) depicts the shifts in firms’ employment policy (left panel) and wage levels (right panel) from the pre-reform period to the post-reform period. In each panel, the variable z shows the productivity of a firm and ln(l) shows the logarithm of its employment level (size). Clearly, employment policies become more sensitive to firms’ productivity while wages become more sensitive to firms’ employment levels. Among other things, these adjustments reflect the effect of better access to export markets. That is, with globalisation, small, productive firms gain more by expanding into these markets, so they hire more aggressively in order to do so. Further, they share the associated revenue gains with their workers. This increases wages in productive and large firms relative to the pre-reform period (right panel).

Chosen excerpts by Job Market Monitor. Read the whole story at  Globalisation, job security, and wages | vox.