Globalization, Unemployment and Recessions. What Is the Link?

An examination of globalization and unemployment

A reader recently sent me this e-mail:

It seems to me that we are now engaged in an economy that may look different from any we have experienced. The Globalization of the economy has created huge firm closures in America expecially in manufacturing and forced lower wages on those employed by this sector. Typically and historically manufacturing jobs have created higher wages in this country but now we see all the rules are changing.

Do you believe globalization will bring new trends to the relationship between rececession/depression and firm closures? I believe it already has begun.


Before we begin, I'd like to thank the e-mailer for her very thoughtful question!

I don't think globalization will change the relationship between recessions and firm closures, since the relationship between the two was fairly weak to begin with. In Are recessions good for the economy? we saw that:

  1. We do not see great differences in firm closures between periods of high growth and periods of low growth. While 1995 was the beginning of a period of exceptional growth, almost 500,000 firms closed shop. The year 2001 saw almost no growth in the economy, but we only had 14% more business closures than in 1995 and fewer businesses filed for bankruptcy in 2001 than 1995.
Typically there are more firm closures in recessions than in periods of growth, but the difference is very small.
We see firm closures in boom periods as well, for several reasons. Two of the larger factors are:
  1. Competition between firms in periods of growth: During a period of high economic growth, some firms still perform better than others. Those high performing ones can often squeeze weaker performing ones out of the marketplace, causing firm closures.
  1. Structural changes: High economic growth is often caused by technological improvements. More powerful and useful computers can drive economic growth, but they also spell disaster for companies that manufacture or sell typewriters.
Globalization can be considered a structural change just as technological growth is. As such, the resulting job losses and wage reductions fall into the structural category of unemployment that we saw in Would 0% Unemployment Be a Good Thing?:
  1. Cyclical Unemployment is defined as occuring "when the unemployment rate moves in the opposite direction as the GDP growth rate. So when GDP growth is small (or negative) unemployment is high." When the economy goes into recession and workers are laid off, we have cyclical unemployment.
  2. Frictional Unemployment: The Economics Glossary defines frictional unemployment as "unemployment that comes from people moving between jobs, careers, and locations." If a person quits his job as an economics researcher to try and find a job in the music industry, we would consider this to be frictional unemployment.
  3. Structural Unemployment: The glossary defines structural unemployment as "unemployment that comes from there being an absence of demand for the workers that are available". Structural unemployment is often due to technological change. If the introduction of DVD players cause the sales of VCRs to plummet, many of the people who manufacture VCRs will suddenly be out of work.
    Overall, I believe the rules aren't changing. We've always had structural unemployment, whether it be from technological change or from plants moving to other locales (such as a chemical factory moving from New Jersey to Mexico, or a car plant moving from Detroit to South Carolina). Overall the net effect of technological growth or increased globalization tends to be positive, but it does create winners and losers, something we must always remain aware of.

    That's my take on the question - I'd love to hear yours! You can contact me by using the feedback form.