Globalization: The Real Cause Essay, Research Paper

Globalization: The real cause of unemployment in Canada?

Globalization and unemployment are among the most widely discussed subjects in an economic debate today. In Europe, for example, the tendency of unemployment to rise since the 1970s has become a centre of political conflict. Among the most effected are those politicians and their advisors whose ability to react to the dynamic changes in the market place has negatively been pursued and criticized. In Canada, unemployment has steadily been rising ever since the 1950s. Unemployment in that year was 3.6 percent; in 1960 was 7 percent; in 1980 was 7.5 percent; in 1990 was 8.1 percent, and in 1995 was 9.5 percent . Statistically, unemployment in Canada still remains at a crisis level even though we are now in the sixth consecutive year of economic recovery since the recession of the early 1990s. But it wasn t until the last couple of decades that a new cause was very quickly discovered which diverted the responsibility from politicians to a new factor called globalization.

The definition of globalization differs from discipline to discipline. But here I will just focus on the economical and political terms. An economical definition of globalization refers to an evolving pattern of cross-border activities of firms involving international investment, trade, and collaboration for purposes of product development, production and sourcing, and marketing. A political economic definition of globalization refers to the changes in the organization and functioning of capitalism, including the emergence of really integrated markets as well as globalizing enterprises and the lagging behind of supra-national institutions. But there are other more specific definitions as well. For example as Hirst and Thompson describe it a development of a new economic structure in which distinct national economies are subsumed and rearticulated into the global system by international processes and transactions in which transnational firms are the principal actors (Leisink 4, 1999).

In the same respect, a clarification of unemployment would be better for understanding many of the issues involved. The official definition of unemployment is the proportion of the labour force that is not employed and is actively seeking it. However, using this definition the concept of voluntary unemployment makes little sense (Can you be actively seeking a job you voluntarily do not want?). It has therefore become customary to speak about involuntary unemployment. This is defined as the proportion of the labour force which is actively seeking employment at the existing wage level, but unable to get it. Further complications arise with the definition of unemployment due to the discouraged worker effect (if one wants a job but is not actively seeking it because it seems hopeless) and underemployment (taking a job below your level of skills). Both mechanisms lead us to underestimate the true unemployment figure. The problems in defining unemployment are, as this paragraph has showed, significant and the distinctions should be kept in mind throughout the essay.

Before getting into any discussion, I will first try to outline the different claims by hyper-globalizers and alarmists of globalization that the real cause of unemployment in many developed countries, like Canada, is due to globalization. I will try to analyze the impacts of globalization on the labour market and to what extend it effects unemployment. In the second part of the essay, I will try to prove that all these claims by alarmists of such a phenomenon are indeed wrong and that they are applying the wrong statistical data to support their claims. Then, I will try to bring my own arguments to prove that these claims are indeed wrong or overly exaggerated. Here, three main arguments will be analyzed. One of the arguments that they (alarmists) bring forth is that increasing unemployment in developed countries is due to the movement of multinational corporations from developed into developing countries. As a result, they create jobs in developing countries rather than at home. Secondly, due to the interdependencies of the integrating of the economy and the mobility of capital, an economic recession in one country affects other regions of the world, therefore decreasing employment there as well. Thirdly, because of the increase in the application of technology, especially in globally operating companies, they have reduced the use and dependence of human labour and thus intensifying job insecurity.

For those hyper-globalizers, there is an increasing concern of the impacts of what this phenomenon will have on our lives. It intensifies economic integration, creates cultural mixtures, liberalises trading barriers, creates environmental pollution, and furthers the inequality gap between the developed and the developing nations. These are all examples of problems that we should be concerned about. But, one of the most debated concerns of a large proportion of people is what globalization has done, or will do, to their opportunities in the labour market due to the rising of multinational corporations. The number of multinational companies has risen from 7,000 in 1970 to 37,000 in 1992 . One of the reasons for this expansion has been the fact that former national companies have been merging with those from other countries, and they maintain a dependence on the largest ones. The economic power of multinational companies is greater than that of many national states. Their sales, for example, have risen to 5.5 billion dollars, 90 percent of which are made in the imperialist (northern) countries and just 10 percent of which are made in the producer (southern) countries . The economic power of the multinationals gives them an unlimited political power over national states. Therefore, alarmists of globalization claim that this phenomenon is largely responsible for the deterioration of many countries economic and social conditions.

There is a widespread view among them that in the dawn of the new millennium, doing business has become a different concept with a different meaning in the global village, especially among the multinational corporations. In the era prior to globalization, the idea of doing business had just one concept and goal: profit. But now in an era of globalization, the whole idea of business has a new dimension. It is no longer just about making money, but also about competition. Every action of the multinational corporations is in lieu of competition. But this is not only due to the fact that competition is becoming a new priority for corporations, but also the conditions that globalization poses in which it encourages big corporations to compete through the openness of the economies. If any one corporation chooses not to compete, it will be forced out of the market. For example, treaties like the North Atlantic Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico, allows multinational corporations to produce in better ways by reducing costs. For example, a Canadian company can produce in Mexico using cheaper labour and yet sell the same product in its home country at the existing local price, therefore making a profit in the process, which will give a competitive advantage. Consequently, other companies will be forced to repeat these actions, as failure to do so will result in their losing market share. The result of this is that companies become involved in an intense war of competition. As it is evident, the goal of competition is adopted survival purposes due to the phenomenon of globalization. As author Martin Hans-Peter claims, competition in the global village is like a flood tide no one can escape it (Hans-Peter 115, 1997). For these corporations, the ability to survive the flood tide of competition depends on their skills to adjust to such inevitable happenings as globalization. This can be achieved through modern logistics and low transportation expenses only in those developing countries since in the era of globalization, the services of large segments of the population can be more easily substituted by the services of other people across national boundaries. Therefore, multinational corporations such as Nike have changed their operations into those of transnational corporations (TNCs) in which they don t have a permanent production base. They no longer have their factories and production lines in their own countries, but are simply placing production orders with shifting manufacturing plants located wherever the lowest labour cost may be at a given time. For instance, Nike gets its shoes punched and sewn by 120,000 Indonesian employees in Indonesia where the company s sub-contractors pay a daily wage of less than $3 per worker . Also such places are attractive companies such as Nike for manufacturing and production as labour regulations are weak (for example, health and safety standards) and firms don t face any union repression or the worry about social welfare schemes, such as pensions. The Canadian packing corporation, Kanapack International Ltd , is another example. Its manufacturing factories are in Guangdong, China because the labour is much cheaper there compared to Canada. But what really concerns alarmists is that, broadly speaking, these TNC are responsible for about 80 percent of total foreign direct investment (FDI) around the world but they only employ about 3 percent of the world s labour force . When these corporations don t have their production bases at home, they are able to move from place to place depending on where production expenses are the cheapest. The flexibility of moving from place to place, where the labour is the cheapest, allows TNC to gain a competitive advantage. But, this is done at the expense of its own labour market as these jobs could have been made available to the people of it s own country. As Oliver Landmann claims, there is a seemingly strong correlation between the decline in the share of manufacturing employment and the increase in manufactured imports from developing countries for a sample of advanced industrialized countries (Wagner 182, 2000).

They also claim that the effects of globalization not only increase unemployment but also deteriorate the conditions of developed countries labour market. There has been an ongoing debate between the OECD (Organization for economic co-operation and development) countries over the impact of increased economic linkages between the developed and the developing nations regarding the quality of employment of those developed countries such as Canada. The basic argument for a linkage between increased global economic integration and the rising concern for the deteriorating of the standards of employment is fairly strait-forward. As was mentioned above, if goods can be can be produced more cheaply with much lower wages in developing countries, and if those goods and services can be exported freely back to those developed countries, it is obvious that TNCs will explore there. This will result in a loss of jobs for the domestic market. However, if governments in the developed countries want to remain attractive to TNCs and to keep their production and manufacturing at home, then they will be forced to equalize downwards on their market wages, benefits, and working conditions at the same level as those industrialized countries. As leading Canadian industrial relations academic M. Gunderson argues: the economic forces of free trade, global competition and capital mobility put pressure on countries to harmonize their labour regulations, and these pressures tend to be in the direction of harmonizing downwards towards the lower common denominator As an example, consider the Employment Standards Act in Canada. This statute allows every worker the right to a minimum level of work standards within the country. Under the pressure of this statute, employers have to worry about health and safety regulations, compensation, wages, vacations, and other issues of the sort for every employee. However, if the Canadian government realizes that it is loosing many of its major firms to the lower cost countries, it may be forced to reduce these minimum standards even further, thereby lowering the overall working standards within the Canadian economy.

The Alarmists second main concern is that unemployment is a result of the interdependency between economies. Globalization not only has dislocated the whole structure of the economy, but has also created a system where each region is heavily interdependent on the other. Any slight changes or downturns in one economy will have the same effect on the other. A perfect example of this notion of interdependency can be illustrated from the effects of the collapse of the Japanese house market on the Canadian Lumber Industry in 1997. Canada has always been Japan s leading trading partner in lumber where an estimated 2.6 billion board feet were shipped to Japan 1996. However, the Japanese house market was hit by numerous complex factors that ultimately resulted in the stoppage of British Columbia s lumber shipments. The result of this occurrence had a huge impact on employment lines in the province. Over 5,000 workers received layoff notices due to the sudden decrease of employment. Therefore, globalization of the market forces and government policies were blamed due to the interdependencies of the Canadian economy on its exports to Japan.

The perception that the nature of jobs and employment in industrialized nations has been shifting more into technology-intensive has also raised a growing concern among the alarmists on employment instability. New culture within business emphasizes ideas such as restructuring, downsizing, flexibility, re-engineering, and outsourcing . These have all become part of the whole notion of staying competitive. By introducing new information technologies, the companies are able to achieve long run economies of scale, which in turn allows them to remain competitive. This strategy can not only increase productivity and efficiency, but also reduce time, resources, and expenses in the long run by eliminating low-skilled employees. As a result, long run job security has become an issue for workers, especially in sectors such as agriculture, service, and manufacturing where major dislocation of workers on a massive scale has been moved by the corporate sector. Case studies of Japanese car transplants in Canada broaden this picture by giving a more direct impact of major transnational corporations on the labour market. The lean production has intensified the work effort, employment security in the long term is doubtful, labour costs are cut by contracting-out or by the introduction of work teams, making supervisors redundant (Leisink 15, 1999).

A major factor contributing to this job insecurity is the continuously changing skill requirements for employees with the introduction of new information technologies. The increasing importance of knowledge, technological change and associated changes in workplace practices are some of the profound changes that are contributing, either directly or indirectly to increased insecurity faced by workers. Firms will eliminate low skilled workers and keep only those high skilled labourers who can cope with the demands of the new information technologies and systems. For instance, the Human Resource and Development of Canada found that the impact of computer-based technologies in Canadian firms, created only high-skilled jobs while most of the jobs that were eliminated were low skilled jobs (McMullen 1996). Also, for example, the proportion of the unemployed that has been permanently laid off has increased from an average of 38 percent per year in 1976 to almost 48 percent in 1995 . In addition, despite the fact that overall, average tenure remains unchanged, the proportion of jobs lasting less than 6 months has increased significantly over the last fifteen years – from 46 percent of all jobs over the 1981-85 period to 54 percent over the 1991-94 period . Rifkin, too, noted that the only new sector emerging is the knowledge sector, made up of a small elite of entrepreneurs, scientists, technicians, computer programmers, professionals, educators, and consultants. While this sector is growing, it is not expected to absorb more than a fraction of the hundreds of millions who will be eliminated in the next several decades. Furthermore, there is a very high correlation between technology and skill level, where firms with higher technology employ more highly skilled workers (Black 6, 1998) while leaving the low skilled workers unemployed.

As unemployment is increasing, it seems that trade unions can do nothing about it in the face of rising globalization. In the past, trade unions were able to do what they have been doing all their lives: to fight for job security, out of competition wages, favourable and safe working conditions, health care, and education and training for their bargaining units. But unions at this level are seeing much of what they have achieved being undermined by global financial and industrial decisions. The union s bargaining and collective rights to increase employment and the quality of employment are slowly being eroded by multinational corporations because governments simply do not have the power they use to.

All the issues raised could not have surfaced without the favouring conditions for a liberalisation of barriers. Critics attack the Neo-liberal theory of free trade and liberalization of markets because it assumes that from liberalized trade, there will be full employment since workers displaced from some job move to others. They claim that this model is clearly unrealistic in the context of the high and rising rates of unemployment in many advanced countries, including Canada. Unemployment may be the result of the theory s macro-economic policies, but it is nonetheless the context in which liberalization of free trade and investment has been taking place.

These are some of the main arguments that advocates of globalization are concerned about. Clearly, from their point of view, it seems that multinational companies are getting out of the control of the state. Firms will locate wherever economic advantage is, they will seek to dump costs on local governments and taxpayers, they will threaten to move if challenged, and they will seek to drive down both wages and social costs. But this is just an exaggerated view of multinational firms. In fact, if such companies really pose such threats, why don t we ask whether output and employment in the internationally traded sectors of the world economy as well as in the industrialized countries are being dominated by multinational firms? The answer is that they are not. In terms of the amount of internationalized production, the share of production by multinationals is far from being a big player. As Paul Hirst and Grahame Thompson claim: the share of internationalized production by multinational firms outside their home countries in world output was only about 7 percent of world GDP in 1990 (Lipsey, Blomstrom and Ramstetter 1995). This source is quite old (from a 1990 study) but today s percent of share wouldn t be too different from the 1990 figures since past figures had a quite slow and steadily increasing trend. In 1970, 4.5 percent; in 1977, 5.4 percent; in 1982, 5.7 percent; in 1988, 6.6 percent; and in 1990 6.8 percent (Lipsey, Blomstrom and Ramstetter 1995). These figures show that the share of production in GDP by multinational firms is very steady, and hardly a share of world output that would alarm the domination of world markets in the way the more pessimistic proponents of the globalization thesis claim.

Alarmists might respond that the real fear of multinational corporations is not their amount of contribution in the world s output, but the significant loss of jobs in their home countries as their production shifts to exploit places where there are benefits of low wages. As was mentioned form an above example, NAFTA brought many rumours that the agreement will result in massive loss of jobs in the United States and Canada as firms will shift south of the US border to exploit low wages. But by looking at the FDI, it is not a valid claim to state that there would be a shortage of jobs in industrialized countries. Firstly, theoretically speaking, when economies engage in liberalized trade, they often engage in trading something that they specialize in. In other words, multinationals would only trade something that they can specialize in producing so they can have a comparative advantage. An example would broaden the understanding here. For example, Canada enters in a free trade with Mexico. Canada has lots of forests so it can specialize in lumber. Here, Canada has the comparative advantage regarding natural resources. Mexico, on the other hand, has lots of sugar cane, and therefore, will specialize in producing sugar. It would not make any sense for Canada to attempt trading sugar with Mexico since Mexico has its own sugar market. Therefore, Canada will trade with Mexico only those materials that Mexico does not have or cannot produce. Open trading between countries certainly means that employment in those sectors in which the country does not have a comparative advantage is likely to shrink. But it is also the case that opportunity for new employment in sectors where the country does have a comparative advantage is likely to increase. As a result there are certainly job displacements, but alarmists of globalization must not forget that there will also be job creation, as the economy specializes in the production of a different mix of goods. Secondly, to think that liberalized trading leads to unemployment is often due to think that increase trading is to increase employment. But in fact, an increase trading is to increase wealth, not work. Once countries start to trade, it increases individuals income. When individuals are wealthier, they consume more goods and services, both domestic and foreign. In doing so, more opportunities for employment arise because consumer demand increases. The reason free trade is desirable is that it increases wealth, and thereby enables us to consume more of all goods leading to an increase in employment. Thirdly, capital flows from industrialized countries to industrializing countries totalled over $100 billion in 1993 (Leisink 37, 1999). This figure is so small compared to the combined Gross National Product output (GNP) of North America, Western Europe and Japan totalling $18 trillion, to assess that this mass of capital movement to the developing nations really leads to a loss in investment of creating new jobs in developed countries. These staggering numbers foul alarmists to believe that the loss of investment at home is caused by the outflow of FDI. Furthermore, the Alarmists claimed that TNCs are responsible for about 80 percent of total FDI worldwide. But 80 percent is of what? If it is a total percentage of the total capital flows from industrialized countries to industrialized nations, then this figure is too small to generate some kind of panic over the massive outflow of investment to developing countries. But even if such FDI had no real effect on reducing developed countries employment, those figure are just not big enough to create panic. As Hirst and Thompson claim, those figures are just as small as some economic aid or contribution from developed countries or a transfer of capital during a crisis from a developed nation to developing nation. Fourthly, despite the big capital flows from developed countries to developing ones, FDI and trade remains massively concentrated within the advanced countries. Closer integration is above all between only three blocks: North America, Japan, and the European Union. Statistically, in 1992, the triad represented about 70 percent of total world trade where its members invested mainly in each other and in other developed nations (Leisink 41, 1999).

The issue of lowering the quality of employment in developed nations due to globalization is another irrelevant claim by pessimists. Their claim is that because of a more liberalized trading system, third world countries like Mexico will be able to exploit low wages to gain competitive edge and penetrate into the developed nation s markets. And with a transfer of relatively well-educated workers combined with a technological transfer, they will be able to match developed countries quality in manufacturing. The result will be that those developed countries standards and conditions will be forced to equalize downwards. If one thinks about it, how can this scenario be possible? How can a developed nation like Canada lower its wages to the same standards as those in Indonesia to attract TNC. In other words, this means that governments in developed nations will be changing their whole labour structure to the same level as those in the developing countries. To lower its own standards to compete is something that governments would never do. Even if they could, they will be faced with internal obstacles, such as labour unions, interest groups, worker s compensation boards, environmentalists, and so on. Therefore, domestic labour regulations are the last things that government would do to remain competitive. In fact, under treaties like NAFTA, each sub-national jurisdiction within each country is allowed to set their own labour standards as high as they want, provided that a scientific basis is provided and both imports and domestic producers are treated the same way . For example, Canada is allowed to set its own safety standards regardless of its southern neighbour countries standards. Furthermore, the supplemental agreements to NAFTA include a commitment by the United States, Canada, and Mexico to harmonize food and health regulations upwards . Hence, concerns that globalization will result in a downward slide in health and food safety regulations are simply unfounded. If anything, these standards are likely to move standards upward rather than downwards.

In addition, critics claim that due the forces of globalization, new inventions and technologies, changing preferences and external shocks are constantly changing the structure of the markets. This only occurs because of the new creativity of a capitalist society in an era of the free market economy. Other studies that have been done, such as the OECD Jobs Study, forecasted high unemployment among those developed nations during the next wave of technological change . So far, all these studies and claims have all wrong. Firstly, theoretically speaking, when technological progress accelerates, so do growth, living standards, and employment. A recent study by the Conference Board of Canada can be brought up as a Canadian experience. Its findings indicate that industries that intensively purchase and use information technology (IT) goods and services have created more jobs than industries that do not, and are outperforming these industries in terms of production. All of the major occupational groups in the high IT intensive industries have grown, while most of those in the low IT intensive industries have contracted. Even though unemployment rates have been rising, a greater proportion of Canadians have held jobs. In 1966, when unemployment was low (3.4 percent), only 55 percent of Canadians over the age of 15 considered themselves part of the work force; in 1989, that had grown to 67 percent, and 65 percent in 1995 . Compared to the past, more Canadians now have work, and the gender balance is much better. Secondly, those who claim that information technology is the cause of unemployment often see the problem from a broad perspective, and the issue they blame it on is globalization. But what they often forget is that unemployment is a very complex phenomenon. It involves both macro and micro economic theories. On the macro level, they omit many effects such as disruptions in the market, union pressures, governmental policies, increase of minimum wage, inflation, and so on, when all of these factors could be a combined effect leading to unemployment. On the micro level, the information technology that globalization brings causes both structural and frictional unemployment, but not demand-deficient unemployment. Structural unemployment is unemployment due to the mismatch between the needs of employers and the skills and training of the labour force. For example, the big impact by the Japanese house market left the 5000 workers in the lumber industry in British Columbia jobless. It will take them time to learn new skills and technologies to move to other industries. Frictional unemployment refers to the time that jobseekers are unemployed during the search for jobs, preparing resumes, contacting new employers, and so on. These two types of unemployment are the natural rate of unemployment which is considered as being harmless to the economy because there are jobs out there and it only takes time for jobseekers to find their jobs. In other words, these two types of unemployment will prevail in any economy. On the other hand, demand-deficient unemployment refers to the fact that there are no jobs throughout the industries. This is what really concerns most economists because it means there is a lack of employment in the whole economy. Therefore, Alarmists should not be concerned about the dislocation between jobs because at least, there are jobs available. Thirdly, this brings us to the issue of whether or not information technology really contributes to this natural unemployment rate or is it the unemployed him or herself that does not want to work anymore because of discouragement or lack of motivation. For example, an autoworker has been laid-off from a car manufacturing industry because the industry brought new technology into the plant. Days later, that same person was offered a job at a steel industry, at a higher pay than the previous job, and refused the job because it was not the area for which he was trained. Is the car-manufacturing worker really willing to work at the going wage? or should just be considered out of the work force because of his unwillingness to work given the opportunities available to him? The point I want to make here is that information technology does create other opportunities for new jobs, but whether to take those opportunities or not, depends on the individual. Sometimes, due to the lack of motivation or discouragement, people are unwilling to start a new job at a new location. Therefore, they should not be counted as unemployed due the change in technology.

In conclusion, the claim by critics that globalization is the cause of unemployment in many developed nations like Canada, comes under scrutiny and questioning when it seems that the role played by multinational corporations on the labour markets is ambiguously defined. True, more and more corporations have gone multinational and moved to developing countries, but they have not taken the jobs with them. In fact, they have created employment through extensive trading between countries. Furthermore, as mentioned earlier, transnational businesses are heavily concentrated in the industrial world where most of the trading occurs. Therefore, concern that these transnational corporations will be out of the government s control just because of a huge FDI figure is just an overly exaggerated concern. In the same respect, the view that the increase in information technology has increased or will increase unemployment is another fallacious argument by critics. Clearly, with increased technology, there will be more jobs available. But the question is whether the population is willing to accept these new jobs or not.

All the issues that have been discussed have been centred on globalization. It seems that this phenomenon is truly a global phenomenon that is deteriorating our lives. But even before considering whether globalization is the real cause of unemployment or not in Canada, or whether globalisation is deteriorating our lives, my perspective is that globalization is not even global to start with.

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