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Globalization and Inequality

Arnold Kling

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Tim Worstall writes,

The theory is the Stolper-Samuelson Theorem. Stripped to its essentials this says that we would expect the process of globalization to have the following effect: it will lower wages in the US and raise corporate profits (more precisely, returns to capital). In the poor countries that the US is trading with it will have the opposite effect: it will lower returns to capital and raise wages.

One might also change the wording to read "earnings of high-skilled workers" instead of corporate profits and "earnings of low-skilled workers" instead of wages. The point is that high-earning foreigners must now compete with high-earning Americans; meanwhile, low-skilled Americans must now compete with low-skilled foreigners. The result, Worstall says, will be to narrow the distribution of income worldwide, but to widen it within the United States.

Anthony de Jasay writes,

The elasticity of supply of labour in Western economies has been drastically increased by the addition to their labour force of hundreds of millions of Chinese, Indian and Indonesian workers who have for practical purposes become part of the Western labour market due to the vastly reduced cost of bringing their output to Western product markets. There is, as yet, no matching increase in the supply of capital, even though its accumulation has accelerated somewhat. Elementary reasoning leads one to expect that income distribution in the West will tilt in favour of capital. The facts bear out this expectation. The Inequality Machine of capitalism is guilty as charged.

...The factor price equalisation theorem is hard at work thanks to the fusion of insulated compartments into an open world economy. Here, the Inequality Machine is producing more equality on a colossal scale by lifting the Eastern very poor to near the level of the Western poor. Nothing else, no development programme, no "war on poverty," no humanitarian campaign is in sight that would be remotely capable of doing the job. The envious and the morally indignant may hate capitalism for making the rich richer, but would they rather have the very poor remain very poor?

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CATEGORIES: Growth: Consequences

COMMENTS (6 to date)

Latest Comment

Robert writes:

So this would seem to argue that the recent increase in corporate profit share of national income and the decrease in labor share is permanent.

I am in favor of the world-wide increase in wealth caused by globalization. I am opposed to the race to the bottom at the low end the US labor market caused by unrestricted immigration. All of those mansions being built for the holders of capital are being build by immigrants: many of them illegal.

Posted February 5, 2007 7:57 PM

Tim Worstall writes:

Arnold,

Yes, thanks for the clarification. I should of course have said returns to capital, both financial and human.

Tim

Posted February 6, 2007 4:35 AM

Josh writes:

Robert, why should it be permanent? We've added in just the past decade literally a billion people to the low-wage force in the West. Why should we expect that new capital won't be created to absorb those people the way it always has in the past (after all, didn't the "glory days" of the 1950s follow less than a half century after the largest mass immigration America had ever seen?). This effect is not permanent and like it always does in a capitalist society, rapid changes to supply or demand take time to re-balance.

Posted February 6, 2007 6:11 AM

Fundamentalist writes:

Is the Stolper-Samuelson theorem relative, that is, relative to a more closed economy? Also, we have seen an increasing supply of capital to the US in the foreign savings coming here as a result of better integration of the world's financial institutions. That's one reason interest rates are so low. In other words, the returns to capital have shrunk, too, because of the influx of foreign capital.

The other thing to keep in mind is that the Stolper-Samuelson theory works if nothing else changes. But lots of things change. Productivity still has a major influence on wages. US workers have actually seen huge increases in wages since 1990, making up about half the loss from 1973 to 1990, due mainly to productivity growth.

Posted February 6, 2007 9:45 AM

Robert writes:

Josh,
Your point is that in a half century or so, we will rebalance to the historical (or a workable) capital/labor allocation. I am OK with this. Stuff happens.
My second point was that we could reduce the impact of globalization on the low end wage earners if we reduced the amount of illegal in-sourcing of low cost labor.

Posted February 6, 2007 12:10 PM

flix writes:

My second point was that we could reduce the impact of globalization on the low end wage earners if we reduced the amount of illegal in-sourcing of low cost labor.

maybe. Or maybe you'd just increase labour out-sourcing...

Posted February 6, 2007 2:01 PM

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