Globalization And Inequality

The United Nations Conference on Trade and Development (UNCTAD) recently examined the causes of rising inequality in developing and developed countries.  In what follows I discuss its analysis of the developed country experience, particularly the United States.

As its 2012 Trade and Development Report (TDR) notes, economists are well aware that the post-1980 growth in inequality has been accompanied by accelerating technological change and globalization.  Studies in the 1990s attempted to determine whether technological change or globalization best explained the rising inequality over the 1980s and early 1990s.  The eventual consensus was that the primary cause was skill-biased technological change.  In other words, as production became more complex, businesses needed workers with ever greater skill levels and were willing to pay a premium to attract them.  This boosted income inequality and the only reasonable response was greater skill acquisition by lower paid workers.

Drawing on more recent work, the TDR argues that this consensus needs to be reconsidered.  It finds that the post-1995 inequality explosion is best explained by globalization, or more specifically transnational corporate globalization strategies.

According to the TDR (page 83):

The new aspect of income inequality in developed countries – also termed “polarization” – concerns employment in addition to wages. The trade-inequality debate in the early 1990s focused on the divergence between the wages of high-skilled and low-skilled workers. However, the more recent period has been characterized by a very different pattern of labor demand that benefits those in both the highest-skill and the lowest- skill occupations, but not workers in moderately skilled occupations (i.e. those involved in routine operations). The moderately skilled workers have been experiencing a decline in wages and employment relative to other workers.

To highlight polarization trends, the TDR first “decomposes wage developments of earners between the 90th (top) and the 10th (bottom) percentiles” which “allows a comparison of the ratio of wages at the 90th percentile with that of the 50th percentile (the 90–50 ratio)” as well as a comparison of “the ratio of wages at the 50th percentile with that of the 10th percentile (the 50–10 ratio).”

The chart below shows that in the United States the 90-50 ratio has steadily grown, reflecting increased earnings for those at the top relative to those in the middle of the income distribution.  However, beginning in the 1980s, the 50-10 ratio largely stopped growing.  In other words it is the hollowing out of the income distribution that underpins current inequality trends.  And, according to UNCTAD, this hollowing out is largely due to the destruction of middle income jobs.

Wage ratios

As the next chart shows, this polarization of employment has taken place in almost every developed capitalist country, which helps to explain the almost universal growth in income inequality in the developed capitalist world.


UNCTAD argues that this development is primarily the result of the growth in transnational corporate controlled cross-border production networks.  Competition between leading transnational corporations drove them to find new ways to lower costs.  Their preferred strategy has been to divide their production processes into discrete segments and then locate as many segments as possible in different low-wage countries. They control their respective networks through direct ownership of the relevant foreign affiliates or increasingly through their control over the relevant technologies and/or distribution channels.

These networks have helped leading transnational corporations increase their profits. Their operation has also transformed developed country economies, reducing mid-level jobs and earnings as well as increasing dependence on imported parts and components as well as final goods and services.

The growth in production networks has boosted the share of developing countries in world exports from 25% in the 1970s and 1980s to 40% in 2010.  China, of course, is the leading production platform for most transnational corporations. One way to highlight the growth in global production and its consequences for the U.S. economy is to chart the growth in merchandise imports from low-wage economies, which are defined as those countries with a per capita income less than 5% of that of the United States before 2007.  “The resulting group of 82 developing and transition economies includes many small economies but also some of the large economies in Asia, especially China, as well as countries such as India, Indonesia, and the Philippines.”


As the above chart shows, most of the world has been affected by this development, although the rise in U.S. imports from low-wage countries, primarily from China, stands out.  Having said that, it is worth emphasizing that most U.S. imports from China are produced by foreign owned firms operating in China–often under the direction of U.S. transnational corporations–not Chinese companies; Apple products are a good example.

This development means that the polarization in U.S. income and employment is now structurally rooted in the operation of the U.S. economy.  As the TDR points out (page 91):

Sector-specific evidence for the United States for the period 1990–2000 indicates that all of the four sectors with the largest growth in productivity (computers and electronic products, wholesale trade, retail trade and manufacturing, excluding computers and electronic products) experienced positive average employment growth, adding a total of nearly 2 million new jobs. By contrast, the sectors with the largest productivity gains during the 2000s experienced a substantial decline in employment. Computers and electronic products, information, and manufacturing (excluding computers and electronic products), accounted for a sizeable share of overall productivity growth, but employment fell, with a loss of more than 6.6 million jobs, about 60 per cent of which occurred before the onset of the Great Recession of 2008.

In other words, strengthening the corporate bottom line will do little to reverse income and employment polarization.  As the TDR explains (page 80):

The evidence presented in the chapter indicates that, in developed countries, the effect of the forces of globalization on income inequality since the early 2000s is also largely due to behavioral changes in the corporate sector in response to greater international competition. Companies have given less attention to upgrading production technology and the product composition of output through productivity enhancing investment with a long-term perspective; instead, they have increasingly relied on offshoring production activities to low-wage locations, and on seeking to reduce domestic unit labor costs by wage compression. This trend has been associated with a polarization of incomes in developed countries. For the United States, evidence suggests that a new mode of corporate governance aimed at the maximization of shareholder value is pushing corporations to maintain external competitiveness through wage repression and offshoring, and to increase profits through, often speculative, financial investments, rather than by boosting productive capacity.

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