Globalization and the Swedish labour market

There is a global trend toward increasing economic integration. One consequence of globalisation is that a large share of workers is employed in foreign-owned firms, in firms with foreign affiliates, and in firms with that export their products and outsource production. Globalisation leads to an increased level of national specialization in countries’ production. Furthermore, globalisation results in increased competition, which in turn forces firms to streamline and improve the efficiency of their operations. Finally, globalisation enables firms to benefit from economies of scale in production, which is particularly important for firms domiciled in relatively small countries. These effects have resulted in increased economic growth, higher incomes, and an improved standard of living for large segments of the population. However, that which benefits individual countries and the majority of the population is not necessarily beneficial for everyone. Structural changes resulting from increased economic integration render more difficult the situation of some groups in society.

The nature of globalisation is gradually changing. Structural change does not take place between different industries to the same extent as before; rather structural change is occurring within firms and between firms in the same industries. This change has an impact on the relative demand for different types of labour: some occupations face decreasing demand when their tasks are relocated to foreign countries, whereas others experience an increase in demand because of globalisation.

This report departs from the recent developments explained above and analyses labour market effects of increased globalisation with a focus on the relative demand for different occupations. Our analysis focuses on changes within firms and industries and how these alter the demand for different types of labour. Our empirical analysis focuses on Sweden, using detailed matched data on workers and firms during the period 1997–2013. We start by describing the mechanisms behind globalisation and changes in labour demand, distinguishing between effects taking place between industries, between firms, and within firms. We show how the distribution of occupations in firms has changed over time, and then take a closer look at the interaction between globalisation and new technologies, as well as how globalisation affects matching between firms and workers. The report ends with a policy discussion.

In summary, our empirical analysis shows that:

• The share of employees in foreign-owned firms, as well as the number of foreign-owned firms, has increased dramatically in Sweden during the last two decades. At the same time, we have seen an increase in jobs offshored abroad.
• Firms with different degrees of international involvement differ in terms of their relative demand for different occupations. Multinational enterprises (MNE) have the most skilled workforce, followed by exporting firms. Local firms have the least-skilled workforce.
• Recent labour market effects of globalisation are mainly driven by changes within industries, rather than between industries.
• Job polarisation seems to have increased as a result of increased globalisation, in part driven by a decrease in demand for routine jobs located in the middle of the wage distribution.
• Globalisation is systematically related to the matching of workers and firms. This matching has increased in more internationally exposed industries.
• Increased globalisation has a positive effect on wages, but it also implies higher wage inequality. Around one third of Swedish wage inequalities can be linked to globalised firms.
• New technologies and digitalisation are closely related to globalisation, implying that recent trends in ICT amplify how globalisation affects labour markets. One such effect is the de-routinisation of jobs in Sweden.

Based on our empirical findings we also present some specific policy recommendations.

• Globalisation benefits Sweden and Swedish living standards. In times of increased protectionism, it is important to work towards maintaining an internationally open trade regime. This work should preferably be done through the EU.
• The effect of globalisation on the labour market is increasingly complex. However, the most significant effect remains an increased demand for skilled workers and a decline in demand for unskilled workers. Improving quality at all levels of education must be a highly prioritized policy area if wages for Swedish workers are to remain high.
• Increased labour market flexibility is important to enable workers to move from declining to expanding industries and occupations. Well-designed social security systems, education and training for negatively affected workers, and policies enabling geographic mobility are all important for increasing labour market flexibility.

Authors

Fredrik Heyman, Associate Professor at the Research Institute of Industrial Economics (IFN), and Lund University

Fredrik Sjöholm, Professor of Economics at Lund University and the Research Institute of Industrial Economics (IFN)