7 - Globalisation and euro area prices and labour markets: some evidence on the impact of low-cost countries

Summary

Introduction

Globalisation is generally used to describe the increasing global interdependence of national economies through trade, production and financial market linkages. At the current juncture, one aspect of intensifying trade relations is the increasing importance of low-cost countries in international trade, with an impact on the domestic economies of developed countries, basically through an effect on the competitiveness, import prices and labour markets of these countries. The impact on import prices is ambiguous. While import prices have moderated due to increased trade integration with low-cost emerging economies, the combined effect of rising global demand and the existence of important supply bottlenecks have boosted prices of commodities, particularly energy. As regards labour markets, the trade integration with low-cost countries has shifted relative labour demand in developed countries towards high-skilled workers, but the impact on aggregate labour demand is less obvious. Globalisation has also resulted in an increase in the effective labour supply, i.e. domestic firms – via offshoring – now have easier access to global labour markets.

This paper will quantify some of the consequences of globalisation for the domestic euro area economy. A comprehensive survey of the transmission channels and the literature on globalisation effects can be found in chapter 2. Given the number of channels via which globalisation affects the domestic euro area economy and the variables on which globalisation is expected to have an impact, we limit the analysis in the current paper to a narrow range of channels and impacts of globalisation.