In the past quarter century income and earnings disparities increased markedly in the United States. One explanation for rising inequality is globalization. The economies of industrial countries have become more closely linked with one another and, even more importantly, with the economies of the developing world. Opponents of free trade argue that liberalized trade with poor countries has reduced the incomes of unskilled workers.
This paper shows how income inequality has changed in rich countries and considers how much of the change can be explained by closer economic integration between rich and poor countries. Globalization can explain part of the growth in wage inequality. Even if globalization fully explained the rise in earnings inequality, however, it would explain only about half the increase in U.S. income inequality. Between 1989 and 2004, U.S. income inequality would have increased substantially even if earnings inequality had remained unchanged. Other factors, unconnected to globalization, contributed to the rise in inequality. These include changes in household composition and changes in female employment patterns that have tended to increase the correlation between the earnings of husbands and wives.
Many kinds of economic and demographic shocks will produce labor market disruption, even if an economy is completely sealed off from the rest of the world. International trade probably adds to these disruptions, but globalization is only rarely the main source of disruption. Many workers who suffer serious loss as a result of economic dislocation receive scant compensation under existing social safety net programs. If we want to ensure the survival of the institutions that allow flexible wages and labor markets and that permit free trade to flourish, it is crucial to improve the protection we provide to vulnerable workers.
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