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Vol. 4, No. 10
DECember 2009­­

Insights from the

Federal Reserve Bank of Dall as

Labor Market Globalization
in the Recession and Beyond
by W. Michael Cox, Richard Alm and Justyna Dymerska


In recent decades, technology and trade liberalization have propelled

virtual immigration

globalization in product and financial markets, leading to substantial gains in

has held up better

international trade and capital flows. Labor market globalization has proceeded

than traditional

at a slower pace, largely because restrictive immigration policies hinder workers’

physical immigration.

movement across borders.
Today’s computer and telecommunications technologies have provided a way to circumvent barriers to labor market globalization’s traditional
mode—the physical immigration that brings the workers to the work. This
virtual immigration moves the work rather than the workers, and it typically
involves the long-distance delivery of services.
Virtual immigration has unleashed forces that shape globalization in
two important ways: First, it has fueled an offshoring boom that shifts some

services from high-wage countries to
low-wage ones. Second, it has allowed
highly paid workers in the U.S. and
other wealthy countries to sell sophisticated services around the world.
Both physical and virtual
immigration have contributed to
globalization of the labor force
over the past quarter century. This
integration has largely taken place
in good times, where unemployment has been low and the number of jobs has been increasing,
particularly in the U.S. Recessions
have been brief and shallow.
In the past two years, however,
the economic climate has changed
dramatically. Recession has spread
to most parts of the world, slowing or even reversing globalization’s momentum. Trade has been
squeezed. Financial flows have
been contracting. The slowdown
has also taken a toll on both physical and virtual immigration—a consequence largely related to market
forces rather than inward-looking
policies to preserve existing jobs.
In recovery, the long-term factors supporting cross-border inte-

gration of trade, finance and labor
are likely to reemerge, although
it may take time to fully restore
globalization’s momentum. The
outlook could change if hard times
linger and countries succumb
to protectionist temptations, setting off a destructive process of
Labor Goes Global
The World Bank describes
three waves of globalization.1 The
first came between 1870 and 1914,
and the second from 1950 to 1980.
The third and current wave began
in 1980, triggered by the entry of
many developing countries into
the global marketplace, declining
transportation costs and revolutionary innovations in information
The third wave, like the two
globalizations that preceded it,
brought a surge in physical immigration. As the world economy
grew in recent decades, workers
moved across borders in search of
better jobs—from Latin America to
the U.S., from Eastern to Western

Chart 1

More Immigrants Seek Work in U.S.

Foreign-born workers
as share of U.S. labor force

















SOURCE: Bureau of Labor Statistics.

EconomicLetter 2

Federal Reserve Bank of Dall as


Europe and from South Asia to the
Middle East and elsewhere.
Data on global labor flows
are sketchy, but United Nations
estimates for net annual immigration from developing to developed
regions show a sharp third-wave
spike from 1.1 million in the early
1980s to 3.2 million in the first half
of this decade. An estimated 100
million people are working outside
their home countries, about 3 percent of the global labor force.2
We’re on firmer ground in
tracking the U.S. immigrant labor
force. The latest data, covering both
legal and illegal workers, show an
increase of 68 percent to 24 million
in the past 12 years.3 As a share of
the labor force, the foreign born
rose from 10.8 percent in 1996 to
15.6 percent in 2008 (Chart 1).
Any accounting of physical migration underestimates the
impulse toward labor market globalization. Many more workers
might choose to go abroad and
many companies might want to
hire them if not for laws that limit
legal immigration and the illegal
route’s risks and high costs. In
short, physical immigration has
been steadily globalizing the labor
market—but at a slower pace than
the market would dictate.
Given the barriers and costs to
physical immigration, it’s not surprising that a signature feature of
globalization’s third wave has been
a technology-driven alternative—
virtual immigration.4 Work that
doesn’t require local market knowledge or face-to-face contact with
customers is increasingly performed
in far-flung locations and “shipped”
back across national borders.
Virtual immigration is an intuitively satisfying concept for the
Information Age, but no country’s
labor market reports measure it
explicitly. So how can we track it?
Much of virtual immigrants’ work
involves importing or exporting
specialized knowledge and infor-

mation—just the kind of intangibles that distinguish services from
goods in international trade.
Looking at U.S. services trade,
we see a wide swath of economic
activity, only some of it properly
classified as virtual immigration.
The key is physical separation
between services providers and
their customers, a distance bridged
by remote delivery of work across
international boundaries.
An American company may
send financial data to New Delhi,
where an Indian bookkeeper cobbles it into a report. An American
tourist may fly British Airways from
New York to London. Services
trade statistics would capture both
transactions as imports, but only
the bookkeeper can be called a
virtual immigrant.
Now consider services exports.
A U.S. consulting firm’s Dallasbased staff may map out a longterm strategic plan for a Taiwanese
company. A surgeon may treat a
Mexican patient at a San Antonio
hospital. The consultants are virtual
immigrants, not the doctor.
The U.S. tracks imports and
exports for about two dozen
types of services. Based on the
Commerce Department’s descriptions, nearly a third of the categories contain low concentrations of
virtual immigrants. Three of them
involve travel and transport. Others
are hands-on business services—
for example, equipment installation, maintenance and repair. Low
virtual immigration also characterizes personal services such as medical procedures and education.5
Two-thirds of the Commerce
Department’s categories are likely
to include high concentrations of
virtual immigrants. They consist
largely of business-to-business services—computer and information
processing, engineering, accounting, insurance, advertising, finance,
legal work, leasing, management
and consulting.6

U.S. exports and imports from
high virtual immigration services
industries have risen 180 percent
since 1998, growing far faster
than the low virtual immigration
categories (Chart 2). Since overall services trade rose sharply in
the decade, virtual immigration
represents a growing share of an
expanding pie, suggesting a labor
market globalization that parallels the one driven by physical
Virtual immigration has
become increasingly significant
in the past decade as computer
and telecommunications advances
ratchet up our capacity to move
vast amounts of data around
the world cheaply and quickly.
Particularly significant has been
the Internet’s reaching critical
mass in two key areas. First, it has
spread widely enough to become
an indispensable tool for modern
international business. Second,
data-transmission capacity has
become big enough to move large
amounts of information anywhere
in the world.

Much of virtual
immigrants’ work involves
importing or exporting
specialized knowledge
and information.

Chart 2

Technology Spurs Virtual Immigration

Services industries with
high virtual immigration


Services industries with
low virtual immigration











SOURCE: Bureau of Economic Analysis.

Federal Reserve Bank of Dall as

3 EconomicLetter




Now, labor
market globalization
faces a stern test—
a long, severe slump.

For U.S. companies and entrepreneurs, virtual immigration creates
opportunities. Offshoring cuts production costs and enhances global
competitiveness, and U.S. services
firms grow and profit by expanding overseas. For workers, virtual
immigration brings competition. U.S.
computer programmers vie with
lower-wage rivals in India, while
U.S. lawyers, architects and consultants take on foreign countries’
homegrown firms.
Developing nations, with an
abundance of relatively unskilled
labor, focus on exporting routine
services such as computer programming, claims processing, debt
collection and other back-office
operations. These businesses are the
mainstays of an offshoring industry
in which India ranks as the global
kingpin, employing about 800,000
workers in 2007.7
Developed nations, with an
abundance of highly skilled workers,
gravitate toward exporting knowledge-intensive and high-value-added
services—the work of lawyers,
accountants, architects, consultants

Chart 3

U.S. Holds Widespread Edge in Services Trade
Operational leasing
Film and television shows
Mining services
Architecture, engineering and related services
Legal services
Royalties and license fees
Medical services
Financial services
Industrial engineering
Installation, maintenance and repair of equipment
Management and consulting
R&D and testing services





Passenger fares
Freight and port services
Computer and information services
Accounting, auditing and bookkeeping

Ratio of U.S. exports to imports (2008)




SOURCE: Bureau of Economic Analysis.

EconomicLetter 4

Federal Reserve Bank of Dall as


and engineers. The U.S. has taken
advantage of it. As the Internet facilitated a wave of virtual immigration,
we saw the overall surplus in services trade grow from $78.8 billion
in 1998 to $161.4 billion in 2008.
High virtual immigration categories account for eight of the
11 industries with trade surpluses
of better than two to one in 2008
(Chart 3). We exported $830 for
every $100 in imports in operational
leasing, a segment of the industry that handles short-term deals
on airplanes, vehicles and other
Our edge was six to one in
distributing movies and television shows and nearly four to one
in architectural, construction and
engineering services. Royalties and
licensing fees, one of the largest
categories in dollar terms, came out
better than three to one, as did law,
finance and advertising. Mining,
education and medicine are among
the low virtual immigration categories with surpluses.
The U.S. imports more than it
exports in a few high virtual immigration categories. The deficits are
relatively small in areas related
to the offshoring of back-office
functions—computer and information services and accounting. Only
in insurance did the U.S. run a significant deficit, a persistent outcome
that reflects foreign prowess in the
reinsurance end of the business.
These patterns hold over time.
The pecking order may change from
year to year—for example, the biggest surpluses were for industrial
engineering in 2006 and film and
television in 2007—but the data
consistently show the U.S. is highly
competitive in a wide range of services categories. Critics complain
about U.S. jobs lost as services work
goes overseas, but the trade data
show virtual immigration is a twoway street, going out as services
imports and coming in as services

Facing Global Recession
Even in the favorable environment of recent decades, labor
market globalization generated a
backlash. U.S. politicians and interest groups, for example, have been
railing against offshoring in particular and immigrants in general.
These sentiments didn’t gain much
traction while the nation needed
foreign-born workers to build
houses, assemble manufactured
goods, handle back-office work
and grow technology industries.
Now, labor market globalization faces a stern test—a long,
severe slump. As recession deepened and spread, signs pointed to
collapsing demand for immigrant
labor. In the U.K., work applications from eight new European
Union member states fell 50 percent in the first three months of
2009. Japan, Spain and the Czech
Republic resorted to programs that
paid foreign workers to go home.
United Arab Emirates’ recruiting of
new migrants declined 60 percent.
Take a look at America’s H-1B
temporary work visas, awarded
principally to educated foreigners.
When the U.S. economy is growing, applications typically reach
their cap minutes after online filing
opens.9 In 2009, nearly a third of
the slots were still available three
months into the process, indicating companies had little immediate need to hire workers that in
previous years had been in short
Mexico tracks the outflow of
workers on a timely basis. Recent
census reports show a precipitous
drop in emigration—both legal and
illegal—as the U.S. economy faltered. The decline began in 2006—
at about the time the U.S. housing
bubble burst, delivering a severe
blow to homebuilding, a big
employer of foreign-born workers.
It continued in 2007 and 2008 as
America’s economy plunged into
recession (Chart 4). Mexican work-

ers have responded to the job market’s deterioration by staying home
and waiting for the U.S. economy
to rebound.11
The U.S. Current Population
Survey indicates recession has
shrunk employment of foreignborn workers. At the start of 2007,
with the U.S. economy in growth
mode, 25.6 percent of foreign-born
workers had jobs in two highly
cyclical industries—construction
and manufacturing. Native-born
workers’ exposure was 18 percent.
By October 2009, the recession was in its 22nd month, and
foreign-born employment had
fallen 35.4 percent from its peak
in construction and 16 percent in
manufacturing. The financial industry, which provided work for 5.6
percent of immigrants in January
2007, cut foreign-born employment
31.4 percent. The heavy toll in
building and finance squares with
a housing-led recession that roiled
financial markets. Immigrants faced
smaller job losses in some lesscyclical sectors—for example, the

In 2009, companies had
little immediate need
to hire workers that in
previous years had
been in short supply.

Chart 4

Global Recession Reducing Emigration from Mexico
Quarterly change (in thousands)*

Quarterly change (in thousands)



Emigration from Mexico





U. S. employment



’06:Q1 ’06:Q2 ’06:Q3 ’06:Q4 ’07:Q1 ’07:Q2 ’07:Q3 ’07:Q4 ’08:Q1 ’08:Q2 ’08:Q3 ’08:Q4

*Seasonally adjusted.
SOURCES: Instituto Nacional de Estadística y Geografía; Bureau of Labor Statisics.

Federal Reserve Bank of Dall as

5 EconomicLetter

5.7 percent decline in leisure and
The data suggest that foreignborn workers were among the
first jettisoned as business activity
soured. Employment fell at least
two times faster for immigrants
than for natives in mining, financial
activities, nonhospital health care
and two categories of professional
services (Chart 5). Large gaps also
show up in construction and transportation and utilities.
Overall, demand for foreignborn labor declined 8.7 percent
from its prerecession peak, well
above the natives’ 5.5 percent
rate. In recent months, the gap in
job losses has shrunk, suggesting
employers who began by laying
off immigrants have now turned to
trimming their payrolls by cutting
native workers.
All told, the anecdotal reports
and data suggest physical migration is highly sensitive to the business cycle in general and labor
demand in particular.

Virtual immigration’s
continued growth in
recession contrasts with
the evidence of declines
in demand for physical

Chart 5

Job Losses Hit Foreign-Born Workers in U.S.





& utilities

Professional Professional







NOTES: Employment trends represent the percent change from each category’s employment peak in 2007 or 2008 to the
latest available data in October 2009. FIRE stands for finance, insurance and real estate.
SOURCE: Bureau of Labor Statistics (unpublished data).

EconomicLetter 6

Federal Reserve Bank of Dall as

What about virtual immigration? Offshoring data are rarely
reliable or up to date, creating
difficulties for measuring the recession’s impact on sending work to
low-wage nations overseas. Hard
times might pressure companies to
cut costs, quickening offshoring’s
pace. At the same time, companies might pull back on offshoring
because of cuts in IT budgets and
plentiful labor close to home.
India shows these contradictory forces at work. Forecasts call
for continued expansion in the
country’s software and IT services
exports, a sign of relatively healthy
demand for outsourcing (Chart
6). However, the projected 17
percent growth rate for these sectors in 2009 is less than half the
pace of the previous four years.
Industry reports document deals
being canceled or postponed and
clients seeking price cuts of up to
10 percent.12
U.S. services provide another
view on how virtual immigration
responds to recession. Services
trade in industries with high concentrations of virtual immigrants
grew an average of 11.3 percent
a year from 1998 to 2007. The
growth rate slowed to 7.3 percent
in 2008, the first year of the downturn.13 In the eight-month recession
in 2001, the growth rate of these
high virtual immigration categories
retreated to 2.4 percent.
Several sectors actually sped
up significantly in the recession
year of 2008, led by R&D and testing services, accounting, legal services, management and consulting,
and telecommunications (Chart 7).
Finance, insurance and most other
categories still grew last year—but
at a slower pace. Only two categories showed outright declines—film
and television rentals and industrial
engineering. Data aren’t available
to track services trade in high virtual immigration industries into

Virtual immigration’s continued growth in recession contrasts
with the evidence of declines in
demand for physical immigrants in
2008 and into 2009. Most likely, the
difference stems from the jobs the
two types of immigrants typically
do. Physical immigrants work in
construction and other highly cyclical industries. Virtual immigrants
are more likely to work in the
services economy. It has traditionally been less sensitive than goods
to cyclical fluctuations, largely
because services aren’t subject to
the kind of inventory bulges that
make goods production unstable.
Recession will pass. At some
point, the world economy will
begin to grow again, raising questions about whether the labor market integration we’ve seen in globalization’s third wave will resume
and, if so, at what pace.
The long-term economic forces
that have propelled both physical and virtual immigration should
reassert themselves once labor
demand rebounds. Large wage differentials and developing nations’
labor surpluses will once again
spur migration to the richer countries. The same forces will create
incentives for more companies to
globalize production and cut costs
through offshoring.
Cox is a senior fellow in the Dallas Fed’s
Globalization and Monetary Policy Institute
and director of the William J. O’Neil
Center for Global Markets and Freedom at
Southern Methodist University’s Cox School of
Business. Alm is a senior economics writer
in the Dallas Fed’s Research Department.
Dymerska, a former consultant in the
Research Department, is an associate with
Best Associates in Dallas.

Chart 6

Outsourcing Market in India Continues to Grow
Billions of dollars

Engineering services and R&D, software products


Business process outsourcing
IT services


FY 2004

FY 2005

FY 2006

FY 2007

FY 2008

SOURCE: “Impact of Economic Crisis on Outsourcing,” Nasscom Research & Intelligence, June 5, 2009.

Chart 7

Recession Takes Varied Toll on Virtual Immigration
R&D and testing services
Accounting, auditing and bookkeeping
Legal services
Management and consulting
Royalties and license fees
Architecture, engineering and related services

Prerecession average

Recession year

Operational leasing
High virtual immigration (total)
Computer and information services
Financial services
Film and television shows
Industrial engineering







Annual percent change


SOURCE: Bureau of Economic Analysis.


FY 2009

“The New Wave of Globalization and Its Eco-

nomic Effects,” by Paul Collier and David Dollar,
in Globalization, Growth and Poverty: Building an
Inclusive World Economy, New York: World Bank
and Oxford University Press, 2002.

Federal Reserve Bank of Dall as

7 EconomicLetter







The estimate of 100 million migrants comes

Sept. 18, 2008. The latter come from “India’s

from the International Labor Organization Mes-

Knowledge Process Outsourcing (KPO) Sector:

sage by Juan Somavia on International Migrants

Origin, Current State and Future Directions,” by

Day (Dec. 18, 2008). According to the ILO, about

Evalueserve, July 5, 2007.

200 million people are living outside their home


countries, half of them economic migrants. The

“Opportunity Knocks: Selling Our Services to the

majority of the world’s migrants move from one

World,” by W. Michael Cox and Richard Alm, Fed-

developing country to another rather than from a

eral Reserve Bank of Dallas 2007 Annual Report.

developing country to a developed one. This is a


consequence of restrictive immigration policies.

ers carries an annual cap of 65,000, plus an


Bureau of Labor Statistics civilian labor force

For more on globalization and services, see

The H-1B temporary visa program for foreign-

additional 20,000 spots for graduates with U.S.

data cover workers 16 years old and above.

master’s and doctoral degrees. Foreigners hired

Immigrant population includes legally admit-

by universities, higher-learning research institu-

ted immigrants, refugees, temporary immi-

tions and nonprofit organizations are exempt

grants (students, workers) and undocumented

from the cap. The H-1B visas are awarded for


three years and renewable one time for another


For a more detailed discussion, see Virtual

three years.

Migration, by Aneesh Aneesh, Durham N.C., and


London: Duke University Press, 2006.

migration Services announced it had received


Seven categories are low in virtual immigration:

On Dec. 21, 2009, U.S. Citizenship and Im-

enough H-1B petitions to meet the statutory cap

educational services; freight and port services;

for fiscal year 2010.

travel services; passenger fares; medical servic-


es; mining services; and equipment installation,

send home—also suggest that fewer Mexicans

maintenance and repair services.

are working abroad. According to Banco de


Fourteen categories are high in virtual im-

Remittances—the money expatriate workers

México statistics, remittances grew strongly from

migration: computer and information services;

the start of this decade and peaked in mid-2007.

accounting, auditing and bookkeeping; insurance;

They registered an annual decline for the first

royalties and licensing fees; R&D and testing;

time ever in 2008. In April 2009, remittances

financial services; film and television show

were $1.7 billion, down 18 percent in a year.

distribution; architecture, engineering and related


services; management and consulting; legal

recession comes from Nasscom Research & In-

services; advertising; operational leasing; tele-

telligence, an industry group. See “Impact of the

Information on India’s outsourcing in the

communications; and industrial engineering. A

Economic Crisis on Outsourcing,” June 5, 2009.

catchall for other services couldn’t be character-


ized as high or low virtual immigration.

tion categories of U.S. services trade grew 11.3


Estimates combine employment in business

is published by the
Federal Reserve Bank of Dallas. The views expressed
are those of the authors and should not be attributed
to the Federal Reserve Bank of Dallas or the Federal
Reserve System.
Articles may be reprinted on the condition that
the source is credited and a copy is provided to the
Research Department of the Federal Reserve Bank of
Economic Letter is available free of charge
by writing the Public Affairs Department, Federal
Reserve Bank of Dallas, P.O. Box 655906, Dallas, TX
75265-5906; by fax at 214-922-5268; or by telephone
at 214-922-5254. This publication is available on the
Dallas Fed website,

In recessionary 2008, the low virtual immigra-

percent, well above their decade-long average

process outsourcing levels and knowledge

of 5.3 percent. Outside of the small construction

process outsourcing. The former come from

category, the largest gains from the previous

“The Indian Offshoring Story—Over 170 Years in

year came in demand for passenger fares. In the

the Making,” by Amit Paul Babu and Ullas Marar,

2001 recession, these low virtual immigration
categories fell 7.5 percent.

Richard W. Fisher
President and Chief Executive Officer
Helen E. Holcomb
First Vice President and Chief Operating Officer
Harvey Rosenblum
Executive Vice President and Director of Research
Robert D. Hankins
Executive Vice President, Banking Supervision
Director of Research Publications
Mine Yücel
Executive Editor
Jim Dolmas
Richard Alm
Associate Editor
Jennifer Afflerbach
Graphic Designer
Ellah Piña

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