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Offshoring, Mismatch, and Labor Market Outcomes

September 23, 2014 Comments off

Offshoring, Mismatch, and Labor Market Outcomes (PDF)
Source: Federal Reserve Board

We study the role of labor market mismatch in the adjustment to a trade liberalization that results in the offshoring of high-tech production. Our model features two-sided heterogeneity in the labor market: high- and low-skilled workers are matched in a frictional labor market with high- and low-tech firms. Mismatch employment occurs when high-skilled workers choose to accept a less desirable job in the low-tech industry. The main result is that–perhaps counter-intuitively–this type of job displacement is actually beneficial for the labor market in the country doing the offshoring. Mismatch allows the economy to reallocate domestic high-skilled labor across both high- and low-tech industries. In doing so, mismatch dampens both the increase in the aggregate unemployment rate and the decline in aggregate wages that come as a consequence of shifting domestic production abroad.

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The Shifting Economics of Global Manufacturing: How Cost Competitiveness Is Changing Worldwide

August 20, 2014 Comments off

The Shifting Economics of Global Manufacturing: How Cost Competitiveness Is Changing Worldwide
Source: Boston Consulting Group

For the better part of three decades, a rough, bifurcated conception of the world has driven corporate manufacturing investment and sourcing decisions. Latin America, Eastern Europe, and most of Asia have been viewed as low-cost regions. The U.S., Western Europe, and Japan have been viewed as having high costs.

But this worldview now appears to be out of date. Years of steady change in wages, productivity, energy costs, currency values, and other factors are quietly but dramatically redrawing the map of global manufacturing cost competitiveness. The new map increasingly resembles a quilt-work pattern of low-cost economies, high-cost economies, and many that fall in between, spanning all regions.

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CRS — Trade Adjustment Assistance for Firms: Economic, Program, and Policy Issues (August 4, 2014)

August 15, 2014 Comments off

Trade Adjustment Assistance for Firms: Economic, Program, and Policy Issues (PDF)
Source: Congressional Research Service (via Federation of American Scientists)

The Trade Adjustment Assistance (TAA) programs were authorized by Congress in the Trade Expansion Act of 1962 to help workers and firms adjust to import competition and dislocation caused by trade liberalization. Trade liberalization, which is widely held to increase the economic welfare of all trade partners, can also cause adjustment problems for import-competing firms and workers. TAA has long been justified on grounds that TAA may be the least disruptive option for offsetting policy-driven trade liberalization. The TAA programs for workers, firms, and farmers represent an alternative to policies that would restrict imports, and so provides assistance while bolstering freer trade and diminishing prospects for potentially costly tension (retaliation) among trade partners.

International Migration: The Relationship with Economic and Policy Factors in the Home and Destination Country

July 18, 2014 Comments off

International Migration: The Relationship with Economic and Policy Factors in the Home and Destination Country
Source: OECD

Unfavourable demographic trends in many OECD countries threaten the sustainability of potential labour resources, GDP growth and fiscal positions. One factor that is expected to mitigate these trends is continued inflows of migrant workers from low income economies. However, a rapid catch-up in productivity and wages in these traditional source countries vis-à-vis the OECD may weaken economic incentives for migration and imply a transition away from current migration patterns. This paper uses data of the high-skilled and low-skilled migrant stock between 92 origin and 44 destination countries to highlight the relationship between economic factors and migration. The paper also attempts to uncover links with policy and demographic factors prevailing in the origin and destination countries. The analysis suggests that higher skill-specific wages in the destination country are associated with more migration. This relationship appears to be particularly strong for migrants from middle-income countries, supporting theories of an inverted-U relationship between origin country economic development and the propensity to migrate. Policy differences between the destination and origin also appear important, for example in terms of regulations on businesses and labour markets, along with the relative quality of institutions. In some instances, the effects on high-skilled and low-skilled migrants differ markedly. Combining the estimated coefficients from the model with the skill-specific wage profile from the OECD long-term growth projections highlights the potential for weaker future migrant flows to OECD countries than implied by past trends and embedded in official projections.

Corporate Inversions

July 17, 2014 Comments off

Corporate Inversions
Source: U.S. House of Representatives, Ways and Means Committee (Democrats)

Congress enacted Section 7874 of the Internal Revenue Code in 2004 as a way to discourage U.S. companies from acquiring smaller foreign companies and moving their tax home to a foreign jurisdiction as part of the overall transaction.

Under current law, a corporate inversion will not be respected for U.S. tax purposes if 80% or more of the new combined corporation (incorporated offshore) is owned by historic shareholders of the U.S. corporation (or, in the case of a partnership, interest owners of the partnership). Alternatively, if at least 60% (but less than 80%) of the combined foreign corporation is owned by historic shareholders of the U.S. corporation, the inversion itself will be respected but the expatriated entity will be subject to an “inversion gain,” including restrictions on the use of certain corporate attributes such as net operating losses. However, these unfavorable rules do not apply if the expanded affiliated group (“affiliated group”) that includes the combined corporation has “substantial business activities” (25% of employees by number, employees by compensation, assets, and income) in the foreign country where it is incorporated.

Since the provision was enacted in 2004, there have been almost 50 corporate inversions.

Global flows in a digital age

June 23, 2014 Comments off

Global flows in a digital age
Source: McKinsey & Company

Global flows have been a common thread in economic growth for centuries, since the days of the Silk Road, through the mercantilist and colonial periods and the Industrial Revolution. But today, the movement of goods, services, finance, and people has reached previously unimagined levels. Global flows are creating new degrees of connectedness among economies—and playing an ever-larger role in determining the fate of nations, companies, and individuals; to be unconnected is to fall behind.

Flows of goods, services, and finance reached $26 trillion in 2012, or 36 percent of global GDP, 1.5 times the level in 1990. Now, one in three goods crosses national borders, and more than one-third of financial investments are international transactions. In the next decade, global flows could triple, powered by rising prosperity and participation in the emerging world and by the spread of the Internet and digital technologies. Our scenarios show that global flows could reach $54 trillion to $85 trillion by 2025, more than double or triple their current scale.

A new McKinsey Global Institute (MGI) report, Global flows in a digital age: How trade, finance, people, and data connect the world economy, examines the inflows and outflows of goods, services, finance, and people, as well as the data and communication flows that underlie them all, for 195 countries around the world.

Do Resources Flow to Patenting Firms? Cross-Country Evidence from Firm Level Data

June 19, 2014 Comments off

Do Resources Flow to Patenting Firms? Cross-Country Evidence from Firm Level Data
Source: OECD

This paper exploits longitudinal data on firm performance and patenting activity for 23 OECD countries over the period 2003-2010 to explore the extent to which changes in the patent stock are associated with flows of capital and labour to patenting firms. While the finding that patenting is associated with real changes in economic activity at the firm level is in line with recent literature, new empirical evidence presented suggests that the impact of patenting on firm size is likely to be causal. Moreover, these data reveal important differences across OECD countries in the extent to which innovative firms can attract the complementary tangible resources that are required to implement and commercialise new ideas. In turn, the contribution of framework policies to explaining the observed cross-country differences in the magnitude of these flows is explored. While further research is required to establish causality, the results are consistent with the idea that well-functioning product, labour and capital markets; efficient judicial systems and bankruptcy laws that do not overly penalise failure can raise the returns to innovative activity. The paper also investigates the heterogeneous impacts of policies and finds that young firms – which are more likely to experiment with disruptive technologies and rely on external financing to implement and commercialise their ideas – disproportionately benefit from reforms to labour markets and more developed markets for credit and seed and early stage finance.

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