Better communications, enhanced transport links, integration agreements between governments, and other factors have all helped increase global economic interconnectedness over the past few decades. Yet, comparing a state-of-the-art gravity model for trade versus migration reveals important differences in the evolution of globalization over time on flows of goods versus people. For trade, the boost from free trade agreements declines the farther apart signatories are, but for migration the boost increases with distance between signatories. Further, while both border and distance frictions have declined for trade over time, this is not the case for migration flows.
The openness of the UK economy — measured by international trade and labour flows — has increased substantially in the past twenty years (Charts 1 (a) and (b)). In this post we explore three structural changes to the economy arising from globalisation that we have observed daily in our visits to companies around the UK. These are increases in: (a) openness of product markets; (b) access for UK businesses to overseas labour; and (c) outsourcing of non-core activities to lower-wage economies. There is a long-running debate whether globalisation of markets has weakened the link between domestic factors, such as the amount of domestic slack (spare capacity among UK-based firms and workers), and inflationary pressures. In our view, these structural changes have provided an additional source of slack in product and labour markets that has borne down on UK inflation in recent years. Looking to the future, the vote on 23rd June to leave the EU might affect the pace of change of these forces, making future trends uncertain.