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Low-Skilled Workers Everywhere Are Getting Squeezed

Geplaatst op mei 8, 2014 in News

The supply chain for German cars is significantly more globalized than it was a decade and a half ago. In 1995, 79% of the value created in the process of manufacturing a German automobile was captured by domestic firms and workers; by 2008, German companies and workers captured only 66%.

The difference is explained by the phenomenon of “production fragmentation,” in which different firms (and countries) specialize in producing different parts of a final good. German car companies still assemble the final product, but the value chain leading up to that last step has become more fragmented in recent years, and the role of foreign firms has increased.

A recent paper from the Journal of Economic Perspectives looks at the phenomenon of fragmentation in manufacturing and seeks to determine who is capturing value in today’s more global supply chains, as well as who is getting left behind.

To answer those questions, the authors look at the share of value in manufacturing captured by high-skilled workers (those with a college degree or equivalent), medium-skilled workers (high school degree), low-skilled workers (less than high school), and capital. (The latter category includes machinery, factories, and other physical capital, as well as natural resources, intellectual capital like patents, and returns to financial capital.)

This method of accounting looks at the sale price of a product and subtracts the cost of raw materials and other inputs. What is left over is the financial value created by the production process, which is split up between wages paid to workers, and returns to capital.

The paper reveals a shift in who captured value from 1995 to 2008, away from low- and medium-skilled workers and toward high-skilled labor and capital. That trend is visible in the context of German car manufacturing:


Globalization, and the resulting fragmentation of supply chains, hasn’t just shifted the geography of production. It has meaningfully changed the returns to various stages of the production process. As the paper explains it:

Production processes in manufacturing have increasingly fragmented across national borders, and the change in their factor content was clearly biased towards high-skilled labor and capital. This pattern was not only found for activities carried out in high-income countries, but also in emerging economies.

It’s no secret that in developed economies, high-skilled workers are leaving their low-skilled counterparts behind. More interesting is the dynamic in emerging economies. Despite the fact that low-cost labor is a source of competitive advantage for many of these economies, the share of value captured by low-skilled workers has decreased in these countries as well:


The bulk of value in emerging market manufacturing is captured by factory owners, financiers, and the like, because these investments are in shorter supply than is the low-skilled labor that complements them. But while capital’s share of value captured did increase between 1995 and 2008, on a percentage-basis it was high- and medium-skilled labor that increased the most.

Behind all of this, the authors argue, is “a pervasive process of technological change that is biased towards the use of skilled labor and capital.”

Less skilled workers in developed nations may be losing jobs to those in developing ones, but ultimately both groups face the same challenge. No matter where a product is assembled, high-skilled labor and capital reap the highest returns.

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