SOMETIMES topics debated here are part of a much bigger picture – that bigger picture is globalisation.

Attending the Institute of Directors’ annual bash at the Albert Hall last week, I was struck by how global the focus was; it included a live broadcast from the Arctic Circle and an address by the European Commission president.

The big issues for business are those that extend beyond these shores – the world economy, protectionism, climate change and energy security – and the focus of globalisation is shifting.

At first globalisation was about trade, and the free movement of goods and services. Then the emphasis was on capital, and the free flow of funds, around the globe. Now, while those things are still very important, the new big thing is the globalisation of labour.

The forces of globalisation thus include the rise in the share of gross domestic product (GDP) taken by profits, at the expense of wages. Boardrooms are doing better than living rooms; investors gain at the expense of wage slaves.

These forces appear to be consigning trade unions to the history books. Department of Trade and Industry figures show union density, the proportion of unionised workers, fell by 0.6 percentage points to 28.4% last year, its biggest drop for eight years. Only 16.6% of private-sector workers are in a union.

The unions would argue they are being deserted when they are most needed. Their members, perhaps, have realised unions are no more capable of holding back globalisation than Canute was in preventing the tide coming in.

The big story that underpins much of what is happening is an enormous increase in the worldwide supply of labour.

I had been comfortable with the calculations of Professor Richard Freeman of Harvard University, who estimated that the opening up of China and India, together with the collapse of the iron curtain in Europe, had in effect resulted in a doubling of global labour supply.

But the International Monetary Fund, in its latest World Economic Outlook, has come up with an even more dramatic number. It suggests global labour has quadrupled in the past quarter-century, because of the factors outlined above and because of demographic factors – rapidly growing populations – in many of the economies that have burst onto the world stage, particularly in east and south Asia.

It was partly this that prompted me to write my new book, The Dragon and the Elephant, about the emergence of China and India. See today’s News Review for a piece on the book, and there will be a chance to win copies here in the coming weeks.

What do we mean by extra labour supply? It means the flood of low-cost workers into Chinese manufacturing jobs at wage rates that undercut the West. It means outsourcing to India at a rate that is gathering pace. Citigroup and Barclays have recently announced plans to shift 20,000 banking jobs between them to India. Barely a week goes by without a new announcement.

The increase in the global labour supply is clearly evident in Britain’s offices, factories, farms and bars – large-scale immigration. We don’t know exactly how many migrants from the new east European members of the EU have come to Britain since May 2004, but it is likely to be around 500,000-600,000, and half to two-thirds have stayed.

Economists debate the extent to which immigration has held down wages in Britain, but to me this is one of those cases where, if it looks like a duck and quacks, it probably is a duck.

Additional labour supply has helped to hold down the price of labour: wages.

A rise in labour supply has not been the only factor holding down wages, as the IMF study points out. Technology, which has permitted large-scale international outsourcing, has also played into the hands of companies, and tended to squeeze pay.

But labour-market reform – increased flexibility – has also benefited workers in Britain.

One big benefit of globalisation, in addition, has been to hold down or reduce prices, so pay packets stretch further.

What should we do? On immigration, the government has moved from something like a free-for-all to a more restrictive policy.

Liam Byrne, the immigration minister, has been lauding the tougher, Australian-style, points-based immigration system to be introduced in Britain next year. In a paper to be published by Policy Exchange today, he talks about moving “from free movement to fair movement” of labour.

The government, which will get it in the neck politically over immigration in this week’s local elections, is responding. The aim is to allow in only those migrants with skills or wealth. We want skilled workers or people with wealth (what would Britain be without its nondomiciled billionaires?) but we don’t much want the unskilled, “your tired, your poor, your huddled masses” as the Statue of Liberty has it.

This probably makes political sense, but I am not sure it makes economic sense.

Allowing in people with skills may seem sensible, but if this deters the UK-born population from acquiring those skills the effect will be damaging. Think of newly qualified medical staff squeezed out of jobs by foreign doctors or nurses. Or, on a trivial level, English Premiership players on the bench because of the influx of foreign footballers. In each case, controlled immigration acts as a disincentive to British people to acquire the skills we are told we need to get on in the world.

On the other hand, immigration by unskilled workers, which we are told we do not need, fills all those gaps in the labour market that local workers can’t or won’t do. Stopping them coming could be damaging.

Globalisation brings benefits, but it also brings strains. The government is trying to move to a policy that retains the benefits but reduces the political costs.

I doubt it will work. Either open up your labour market to foreign workers and take the rough with the smooth, or you close it off completely, within the bounds of our international commitments. I’d favour openness; others would disagree. In a globalised world, you cannot pick and choose which bits you want.

PS: Economists can’t usually agree on anything, but are curiously addicted to round-robin letters. You know the thing: somebody has the idea of penning an open letter and persuades like-minded colleagues to put their names to it. The daddy of them all was in 1981, when 364 economists signed a letter protesting at the Thatcher government’s policies. That did not set a great precedent; things started to go right even as the ink was drying.

A smaller open letter, from nine economists, was published last week.

Led by Tim Congdon, who has fought a tireless campaign to keep the broad money supply (M4) on the agenda, its signatories included Charles Goodhart, a founder member of the monetary policy committee (MPC), and several members of the “shadow” MPC. The nine were concerned that in setting out the reasons for the current inflation overshoot, Mervyn King, the Bank of England governor, did not mention M4.

These are murky waters. The Bank sees M4 as just one of a series of indicators worth monitoring. The MPC does not adopt a simple monetarist approach of the sort that says money growth now equals inflation later. There are good reasons for that. You quickly get into the debate about whether the moment you focus on a money-supply measure it becomes distorted. Goodhart knows about that; his own “Goodhart’s Law” described exactly that situation.

M4 is growing at 12.8%, and is distorted by lending to “other financial corporations”, currently growing by 23.5%, and to other businesses, up by 19.7%. It is not being driven by households. It does not, either, have a great relationship with inflation.

Since early 1993, M4 has risen by 200% and inflation (measured by the retail prices index) by just 45%. GDP in cash terms (money GDP) – growth and inflation – has risen by 105%. So while M4 growth does look heady, it would be a mistake to overreact to it.

david.smith@sunday-times.co.uk

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