Global trade has surged in the developing world, but that hasn’t helped workers find jobs, as many are still stuck in their country’s “informal” (read: unregulated and unstable) economy.
A new study on employment and globalization released this week finds that, on balance, workers in the developing world have not benefited from globalization. Instead, many are still poor and lack job security and social safety nets.
“Globalization and Informal Jobs in Developing Countries,” a joint study by the International Labour Organization (ILO) and the World Trade Organization (WTO), rebuffs traditional economic thinking that suggests international trade increases quality of employment and living standards. It points to the importance of “Decent Work” objectives and trade reforms designed to be employment-friendly and conducive to job growth.
The high incidence of workers in vulnerable conditions has diminished the benefits of globalization, the report finds, and the number of workers in the informal economy — defined as unregistered businesses not subject to law or regulations— has increased or remained constant.
“Informal” work has accounted for 60 percent of new jobs in developing economies. The incidences range anywhere from 30 percent in Latin American to as much as 80 percent in sub-Saharan and South Asian countries. The report concludes:
Our study shows that the earlier hope, that the effects of growth and international integration would trickle down and automatically eliminate informal employment, is not warranted. Instead, certain types of informal employment arise in reaction to a failure on the part of public authorities to provide proper social security and to bring taxes down to levels compatible with strong work incentives and formal job creation.
The conventional wisdom for developing economies was to specialize in industries that created jobs in labor intensive, low-skilled industries. Critics — like those protesting last month’s G‑20 meeting in Pittsburgh — have long chastised that model for encouraging multinational companies to outsource their work into areas with little or no regulation.
The WTO has long been associated with supporting commercial interests over workers’ welfare, so one might take this self-reflexive report with a grain of salt. But perhaps the report represents a wake-up call to WTO officials that the “race to the bottom” of finding cheapest labor has not only backfired in its intentions to ostensibly improve work conditions, but has also failed as a solution to create legitimate jobs.
It was hoped that this would result in an increase in wages for low-skilled labour or improved working conditions, including by means of an increase in the number of formal sector jobs for low-skilled workers. Evidence suggests, however, that the skill premium has increased both in developed and in emerging economies, making low-skilled workers (relatively) worse off,” the report says. The ever shifting dynamic of globalization has caused demand for more highly skilled workers, leaving laborers in poverty or stuck in informal workplaces.
The report also argues that the informal employment sector hurts economies. An increase in the size of the informal economy is proportionally equivalent to export reductions in the same amount. The analysis found that some countries in the study lose up to 2 percentage points in economic growth due to their informal markets. High rates of informal work can also make countries more vulnerable to shocks, like the current global financial crisis.
The takeaway lesson: Encouraging the creation of jobs in regulated “formal” sectors will provide basic social protections and give people the chance to access decent work conditions. Globalization, in its current form, isn’t helping most of the world’s poor people secure better lives.