Working Paper
Globalization, Technology, and Income Inequality

A Critical Analysis

Much of the vast literature on changes in income distribution in advanced countries during the last two decades attributes these either to globalization (specifically in the form of trade liberalization with low-wage developing countries), or to skill-biased technology, or to a combination of the two. A transatlantic consensus has emerged to suggest that these two factors have led to reduced relative demand for unskilled labour and to an increase in that for skilled workers. This in turn leads to a unified explanation of income inequality in the US and the UK (because of the greater labour market flexibility in these two countries) and mass unemployment in continental Europe (owing to their rigid labour markets). The paper challenges this transatlantic consensus both on analytical and empirical grounds. The central result of the present study with respect to developed countries is that neither trade nor technology are necessarily the most important factors in causing increased income inequality in the recent period. Although there is still considerable theoretical controversy surrounding this issue, there is robust empirical evidence to indicate that the concentration on these two factors to the exclusion of others is not justified. The paper highlights the role of social norms, economic institutions, as well as variations in employment, in causing the observed changes in income distribution. With respect to developing countries, the paper suggests that there is not sufficient empirical evidence for establishing robust conclusions. Available data indicates that globalization (in the form of financial liberalization rather than trade) and technology are both likely to be significant factors in accounting for the increased inequality in developing countries during the last two decades. However, there is no reason to believe that the contribution of the other relevant factors (e.g. social norms, labour market institutions such as unions and minimum wages, macroeconomic conditions) is likely to be any less important in explaining the observed distributional changes in poor countries. The analysis of this paper naturally leads to a rather different policy perspective from that of economists who attribute changes in income distribution mostly to globalization and technology.