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been changing. Increased product market competition associated with globalization and deregulation has brought about two types of change: (1) downward pressure on prices and therefore on labor and other production costs and (2) increased pressure to compete in terms of speed, innovation, variety, and customization.
Increasing Price Competition
The heightened price competition facing U.S. industry is the result of both increased international trade and the deregulation of domestic industries. Between 1980 and 1995, imports as a percentage of U.S. gross domestic product rose sharply from 8 to 14 percent (Economic Report of the President, 1995). U.S. manufacturers faced lower-priced, high-volume goods from low-wage countries as well as relatively lower-priced, high-quality goods from high-wage countries such as Japan. Price competition in manufacturing fueled the demand for cheaper services as inputs and, as a result, many service providers no longer enjoy protected or local markets. Changes in technology and deregulation (in such industries as financial services, transportation, utilities, and telecommunications), accelerated domestic competition among service providers, and the mobility of information technologies coupled with international deregulation in services led to higher international competition in services (Office of Technology Assessment, 1987; McKinsey Global Institute, 1992). Deregulation in service industries has led to an influx of new entrants that have lower cost structures because they: (1) have no sunk costs in outdated technologies; (2) pay lower wages than those negotiated and enforced through collective bargaining in the oligopolistic structures of the regulated industries; and (3) utilize work systems and employment contracts that are more flexible and that in some cases rely more on nonstandard employment arrangements that shift risks associated with market uncertainty from the firm to the workforce (e.g., Belzer, 1994; Keefe and Batt, 1997; Lipsky and Donn, 1987). Deregulation has also increased wage inequality by shifting employment to the nonunion sector, in which wage inequality is greater (DiNardo et al., 1996; Fortin and Lemieux, 1997).