Globalisation and middle-class jobs
25 May 2017 | Markets and Economy
Global Macro Matters: In many countries, economic nationalists blame globalisation for the loss of industrial jobs. What other economic forces are at work? This discussion features Joe Davis, PhD, Vanguard global chief economist, Roger Aliaga-Díaz, PhD, Vanguard chief economist, Americas, and Jonathan Lemco, PhD, Vanguard senior investment analyst.
Lara de la Iglesia (moderator): Hi, I'm Lara de la Iglesia. Recent election coverage across the globe has put a spotlight on job creation, particularly for the middle class. While globalisation is often cited as the cause of job losses, there are broader economic forces at work too.
To discuss job creation in an era of economic nationalism, I'm joined today by three of Vanguard's top economists: Roger Aliaga-Díaz, Joe Davis and Jonathan Lemco. Thank you guys for being here.
Roger, I'm going to start with you. Globalisation gets a lot of blame for job losses, but it feels like technological innovation might also have a part in that. Can you talk to me about that? What are your thoughts?
Roger Aliaga-Díaz (Vanguard chief economist, Americas): Yes, definitely. Globalisation gets all the blame. If anything, technology is thought to be [an] easier way to offshore jobs because of the lower cost in communications and transportation.
It's a tough period over which we're judging globalisation because China, for example, went from being one of the lowest manufacturing production countries in the world to being the largest.
The reality is that while it's true that US manufacturing shrank, we also saw US manufacturing production increase. So, employment went down, production is up. And as an economist, what we're thinking when we see production happen, employment down is that productivity is increasing. The only way that productivity has increased so much is technology. So, that's where we say, okay, there has to be something else other than globalisation is blaming this trend in US manufacturing, which, by the way, is also global, right?
I think for example the auto industry, like an auto worker could move about 18 cars a day through the assembly line today. In the 1990s, the same person could use technology and move 13 only. Back in the '40s, he moved only five or six cars a day. So clearly, technology is a big part of the explanation, no question about it.
Lara de la Iglesia: And I'm sure changing some of the tasks and what they're doing day-to-day in their jobs as well, right?
Joe Davis (Vanguard global chief economist): Part of the reasons why we see job losses, in this case, manufacturing, not because of global competition. But when you parse out the data, and not just ourselves, but other very respected researchers, explains why manufacturing's share of the economy – to Roger's point is going down in nearly every country. So, it can't be one country at the expense of others, because all the lines are going down. It's because technology's gone up; which is why output is going up.
Now, that said, the data generally also shows, though, that for those communities, highly concentrated in a certain industry, that is either exposed to technology or globalisation can have some persistent pain. So, there was that issue too. We don't need to gloss over it or ignore it.
Roger Aliaga-Díaz: Some studies show that 85% of job losses were traced down to technology; about 15[%] to trade and globalisation. Although it varies by industry where the – there are some industries, some sectors, some geographies I think that clearly could be more reliant on sectors that have been facing more global competition. They are maybe 60/40 total.
Lara de la Iglesia: Jonathan, I was going to ask you about that, because we're in the midst of one of the largest economic expansions ever, but so many middle-class workers across the globe are feeling left out. And we're seeing that come up in a lot of the dialogue around the elections, and Brexit, and the US and France. What are your thoughts on that?
Jonathan Lemco (Vanguard senior investment analyst): I think this is a worldwide phenomenon. I think that although economies around the world are growing, too many people are feeling that they're not a part of this growth. That helps to explain the vote on the Brexit in the UK. That helps to explain the very close election vote in France. It certainly helps to explain to a significant degree the election of Donald Trump in the United States. We've seen elections of a similar kind in the Philippines. We're seeing part of both the developed and the developing world.
The message here, I think, is that economic inequality is growing; the policymakers don't quite know how to deal with this yet. They continue to make all kinds of promises about how there will be "trickle down" so that everybody will enjoy economic growth in benefits and so on.
But in the real world, expectations are high and there's a perception of many, many countries that their expectations are not being met adequately. And so often, middle-class people are feeling they're getting more and more behind and they're looking for alternatives. And looking for alternatives means that they're rejecting many of the established political figures and many established political norms that they've been hearing about all their lives and saying, "We want an alternative."
Maybe that alternative is a Donald Trump and maybe that alternative in France is Marine Le Pen and maybe that alternative is a Brexit or whatever it is. It promotes a measure of fear. Sometimes it's fear of the immigrant or the foreigner; sometimes it's a fear of change more broadly. But it's a sense that in many, many countries, there is job insecurity and in the midst of all of that people are looking for change and alternatives.
Joe Davis: Totally, totally. I don't think it's going to slow down because our diagnosis is that it's more around technology than globalisation as the source for why income inequality has risen and could very well continue to rise.
I think economists in general and policy makers are focusing too much on the level of growth and not enough on why the distribution of growth is changing. Regardless of whether the growth is two, three, four, five, six percent. And so, that mind shift has to occur increasingly because we have yet to see, I think, the global community fully get their heads around this dynamic. And so, this is something I think in the next several years, I think the world economy will have a better understanding – we hope a better understanding for it. We don't have all the solutions for this. We're trying to get our heads around it as well.
Lara de la Iglesia: And our structural reforms may not be coming into play at the same pace, correct, which is where we're finding that disconnect.
Roger Aliaga-Díaz: Absolutely.
Lara de la Iglesia: Thank you guys very much.
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