The Economics of Inequality by Thomas Piketty

Author:Thomas Piketty [Piketty, Thomas]
Language: eng
Format: epub, pdf
ISBN: 9780674504806
Publisher: Harvard University Press
Published: 2015-08-02T23:00:00+00:00

Wage Inequality and Globalization

Human capital theory has also been used to explain rising wage inequality resulting from globalization. The rise of North-South trade has allegedly put less-skilled workers in the North in competition with cheap labor in the South, consequently reducing their compensation and increasing wage inequality. Although logically plausible, this explanation encounters a major obstacle: although imports from the Third World have significantly increased since 1970, they accounted for only 2–2.5 percent of Western GDP in 1990, or barely 10 percent of the developed countries’ international trade (Freeman, 1995, p. 16). How can such a small percentage of all goods and services produced in the West be responsible for such a broad increase in wage inequality? It is logically possible, of course, that supply and demand for different skill levels cause rising inequality in a few sectors affected by international trade to diffuse to the rest of the economy, but this hypothesis needs to be verified empirically. Furthermore, it has been shown that in the United States and United Kingdom, the segregation of workers with different human capital endowments in different firms, as measured by the correlation of wages among employees of the same firm, increased significantly in all sectors of the economy and not only in sectors affected by international trade (Kremer and Maskin, 1996). The same kind of segregation has been observed in France (Kramarz et al., 1995), suggesting a growing divide between different production units, some being ultraproductive while others produce far less efficiently. In the current state of knowledge, these findings seem to indicate that the growth of wage inequality stems from internal structural changes in the production process within the developed countries and that similar changes would have occurred if those countries had been closed economies not trading with the rest of the world.

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