causes of income inequality, economics, education, globalization, international relations, poverty, trade, work

The Causes of Wealth Inequality (5): Globalization

Another one in our series about the causes of wealth inequality (see here, here and here). (If you want to know why we think this is a human rights issue, go here or here first).

Globalization is supposed to have lowered the earnings of less-educated workers by putting them in direct competition with low-wage workers around the world. This competition put pressure on wages through international trade in goods and services; through the relocation or threat of relocation of production facilities to overseas locations; through competition with immigrants in local labor markets; and through other channels. …

U.S. and European workers are told that … our societies can no longer afford a generous welfare state. …

Contrary to the standard framing, which presents globalization as something that no nation can escape or even attempt to shape, we can choose the terms under which we integrate capital, product, and labor markets across countries. Over the last 30 years we have indeed “chosen” a particular form of globalization in the United States – a form that benefits corporations and their owners at the expense of workers and their communities. If we had chosen globalization on different terms, however, economic integration would not have required rising inequality. Another globalization is possible. (source, source)

So globalization, as it has occurred and is occurring, causes higher inequality in the West in two ways:

  • The direct competition with overseas workers who can produce at lower wages puts downward pressure on wages in the West, especially for low-skilled workers at the wrong end of inequality.
  • Governments in developed countries react to this competition by restricting social safety nets because the taxes necessary for the funding of these safety nets hurts the competitiveness of local businesses, a competitiveness already under pressure from low-cost labor in the developing world. Less generous safety nets obviously also have a negative effect on inequality.

If these effects are real, perhaps they can explain the decline of manufacturing in many developed countries.

However, I’m not sure this pressure on wages is real and significant (I’ll try to find some data), and we also shouldn’t dismiss the benefits for low-wage workers in the West of cheaper products. This particular result of globalization can offset the possible negative wage effects of wage competition.

Also, I’m not sure governments in the West are actively attacking safety nets (here it says they haven’t during the last decades, but it seems that the recent economic crisis has convinced some to start cutting benefits). And finally, we should remember that inequality isn’t just a national problem. The inequality between countries is just as, if not more, important. And globalization has had a beneficial effect on inter-country inequality because it has redistributed wealth from rich countries to poor countries. For example, it’s hard to imagine how China could have had the same success in poverty reduction without globalization. The question is of course whether this redistribution had to come from low skilled workers in the West, rather than from their more wealthy fellow citizens. The fact that it did come, however, was undoubtedly beneficial to the poor in the receiving development countries.

If we put all the causes of wealth inequality discussed in different posts together, we get this tentative list:

  • globalization (i.e. outsourcing, trade liberalization) and the resulting competition between low-skilled workers in the West and in development countries
  • competition between low-skilled workers in the West and immigrants
  • the development of technology and a decreasing demand for low-skilled workers
  • the increased importance of cognitive skills relative to physical labor
  • declining manufacturing employment
  • shrinking unionization and fragmenting of collective bargaining
  • changes in household size and composition (due to later marriage and more prevalent divorce, more and more households have just one adult, and hence only one potential earner)
  • coupling between people with similar education and thus similar earnings potential (“marital homogamy”)
  • “positive feedback”: wealth begets wealth.

More on income inequality. More on outsourcing. More on globalization.

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4 thoughts on “The Causes of Wealth Inequality (5): Globalization

  1. Tomboktu says:

    To the extent that globalisation is a cause, I have argued that it is incomplete globalisation that is the problem. We use the GATT and WTO thingies to ensure that goods and capital can move freely, but don’t have similar rules to ensure that the labour can also move freely.

    I do get funny looks when (rarely these days — they know me) I respond to somebody who suggests that Xains [should go back home | not be allowed to migrate here anymore] when I say that would be fine if we stop preventing them from extracting value to their [cotton | coffee | copper | ... ] by taking down the trade barriers for goods made from those products not produced behind our “tradewalls”.

  2. There is a problem with “globalization,” and it’s widely recognized. I use the quotation marks because the term as we use it today has been appropriated and really has nothing to do with globalization in any neutral sense. What globalization means, as the way it’s been appropriated, is investors’ rights, and little else. The empirical evidence is virtually undeniable when we talk about inequality. This “globalization” is responsible for inequality within rich nations, within poor nations, and between rich and poor nations. That’s well understood.

    There are plenty of reasons the left goes after this “globalization,” but I find one of the core issues to be the one that Tomboktu already mention, which is the movement of labor. When people talk about “liberalizing markets,” they’re not talking about liberating people, but rather capital. Capital is very free, very mobile. Labor is not. The free circulation of labor is central to the idea of free markets, just as Adam Smith understood it over 200 years ago. Without free movement of labor–which is absent in today’s conception of “globalization”–we cannot honestly speak of free markets in any meaningful sense. It’s a problem that people like Smith recognized and so long as we understand “globalization” to mean “investors’ rights,” then we’re going to continue to be faced with real problems like massive inequality. If we accept your argument, then, it’s also a massive human rights issue as well.

  3. Pingback: Some of the Causes of Wealth Inequality, Ctd.: Minimum Wage Decline and Tax Policy « P.A.P. Blog – Human Rights Etc.

  4. Pingback: The Causes of Wealth Inequality (25): Globalization, Ctd. | P.a.p.-Blog, Human Rights Etc.

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