Globalization and Inequality

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Goods and services now move more freely among countries than ever before. Ongoing declines in the cost of long-distance communication and transportation and in national restrictions on international trade and investment have allowed economies around the world to become increasingly integrated, thereby enhancing productivity growth and expanding consumer choices. In parts of the developing world and especially in East Asia, globalization has been accompanied by an increase in living standard hardly imagined just a generation ago. At the same time, globalization has also become the focus of widespread controversy. In particular, concerns about adverse consequences for income distribution have fueled policy initiatives that threaten to turn back the clock.

An especially troubling development was the emergence of a popular backlash to globalization in the United States, even when the country was enjoying record growth and the lowest unemployment rate in decades. An article in The Economist ("Globalization and the Rise of Inequality," January 18, 2007), written while the U.S. economy was expanding, highlights "a poisonous mix of inequality and sluggish wages" as the force underlying a globalization backlash in the United States as well as Japan and the European Union. Once America's long period of expansion reached an abrupt end, market-opening trade accords such as the North American Free Trade Agreement (NAFTA) became lightning rods for public concern about stagnating real incomes, job losses, and increased economic insecurity.

In the midst of the global recession that followed, most Americans and their counterparts abroad continued to acknowledge the benefits of globalization in terms of overall productive efficiency, lower prices, and increased consumer choices. The backlash, both in the United States and worldwide, has largely been a response to the perceived redistributive consequences of increased openness, especially openness to imports and immigration. Even if a country "as a whole" is made better off, and not everyone accepts this premise, there remain concerns about the well-being of particular groups within its borders. Indeed, increased globalization has been accompanied by increased inequality not only in the United States but in many other countries. But is globalization a major cause of increased inequality?

While there is little disagreement that globalization has been accompanied by increased inequality within many countries, both rich and poor, this is not the same as establishing a causal relationship. On the contrary, numerous systematic studies have concluded that the redistributive changes the public and policy makers often attribute to globalization are due mainly to other changes in the economy. Thus, while discussions of globalization frequently turn to its contribution to inequality, discussions of rising inequality often fail even to mention globalization or dismiss it as playing at most a minor role in explaining recent trends in income distribution. Many U.S. trade and labor economists conclude that the primary cause of increased wage inequality is that the rate of skill-biased technical change has exceeded the growth rate of skilled labor. However, most technical change is not exogenous but the result of profit-motivated investment. By altering the incentives firms face, openness to trade may promote development and adoption of new production methods. The rate of skill-biased technical change may also respond to increases in the availability of skilled labor, so that demand and supply interact over time.

Finally, even the fact of increased inequality is subject to challenge. While most studies confirm substantial inequality both within countries and between them, conclusions regarding recent trends are highly sensitive to specifics of the methodology: definition of inequality, data sources, and estimation techniques. Do we mean greater wage inequality? For the United States, trends in...
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