Does Globalization Increase Inequality?

The word globalization comes up so much in our day-to-day language, that it has almost lost all meaning.  Fortunately, that meaning is actually pretty simple. It’s that technology has reduced the time it takes to transmit information by so much that trade and outsourcing work has become much easier.  This fact, coupled with laws that are more favorable to trade, have led to more global linkages between economies.  Indeed, the Swiss Economic Institute maintains a “Globalization Index” that shows a steady worldwide increase in economic globalization since the 1980s. The pattern has been similar in the U.S.  So, inequality in the U.S. among workers has increased at the same time as globalization. So, is globalization a cause of this rising inequality?

The economics of globalization comes down to my old friends supply and demand (see video here). After all, compared to the rest of the world, the U.S. has a high number of well-educated workers.  For example, in China, about 10 percent of the working age population has at least an Associate’s degree, compared to over 40 percent in the United States. 

This difference matters, because when you trade with someone you get what they have in abundance.  The thing that China and many other countries offer the U.S. are workers who can do tasks that require less education. This fact means that globalization increases the available supply of less-educated workers, potentially pushing similar workers’ wages down in the U.S. Foreign workers also produce certain goods that compete with those made by their U.S. counterparts. These extra goods can drive prices down in the U.S. which, while good for consumers, can reduce the demand for the U.S. workers who make them.

The converse is that other countries demand our more educated workers and the types of goods they produce. This increases the demand for these workers, potentially pushing their wages up. Falling wages for the less educated and rising wages for the more educated? Sounds like rising inequality.

So, is there actually evidence linking rising globalization and trade to rising inequality within the U.S?  The answer seems to be a qualified yes. Recent evidence suggests globalization can have an impact on localities affected by trade. For example, the figure below shows how the economy of a locality responds to an influx of imported goods. The data come from an article by David Autor, David Dorn, and Gordon Hanson on exposure to imports from China. They find that increases in imports of $1,000 per worker significantly reduce employment in manufacturing, with a corresponding increase in unemployment. And, when you read “manufacturing,” you might as well read “middle-income.” So yes, exposure to trade can hurt the middle class. Indeed, the authors find that increased imports from China are associated with lower wages overall, with larger effects for those without a college education.

Figure 1. Change in Manufacturing Employment and Unemployment when Imports from China in a Labor Market Increase by $1,000 per Worker

Source: Adapted from David, H., David Dorn, and Gordon H. Hanson. “The China syndrome: Local labor market effects of import competition in the United States.” American Economic Review 103, no. 6 (2013): 2121-68.

So, why do I say that the link between globalization and inequality is “qualified?” Well…because I’m an economist, and economists are kind of famous for hedging. Harry Truman supposedly once said “Give me a one-handed Economist [because] all my economists say ‘on the one hand…’, then ‘but on the other hand.”  As an economist I find this quote a little insulting.  But on the other hand, I understand where President Truman was coming from.

So what is the other side of this story? If the issue was really all trade, then we would expect to see occupations with little exposure to trade doing well…and we don’t. For some examples, let’s look at wages in two industries that should not be negatively affected by trade. The first example is the food-service industry (e.g., chefs, waiters/waitresses, etc.). After all, those jobs must be done by people right here, with little opportunity for import competition. The second is trucking, which moves goods around the country regardless of where they were made initially.

Figure 2. Median Wage in Two Industries with Little Trade Exposure, 2018 Dollars

Note: Includes men aged 25-54 working full-time and full-year.
Source: Current Population Survey March Supplement, 1976-2018.

The figure above shows that in these two industries, wages have been pretty darn stagnant. Indeed, in trucking, the median wage even dropped slightly, despite the fact that one might imagine trade is good for trucking. So, while globalization and trade have likely done real damage to middle-class workers in some areas, it certainly does not tell the whole story. Other factors must be at work.

Indeed, as this blog closes out it’s discussion of our first stylized fact, I think the message is: “many factors are at work.” Technology that augments well-educated workers while replacing middle-income ones, the loss of bargaining power, and globalization all play a role in driving down middle-income workers’ wages while increasing those at the top. Next week’s post will look at what all this means for policy. But until then, know that globalization is likely a factor in driving wage inequality — it’s just not the only one.

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