What contributes to income inequality in OECD countries and how does globalization affect this inequality?
Introduction
In the introduction globalization is described and that it has both pros and cons for most countries.
Also it introduces the setup of the rest of the essay.
The impact of globalization on income inequality around the globe
Globalization has a great impact on humanity, there is no doubt about that, however it is not clear if globalization is a positive or a negative thing in general. Often globalization is mentioned as the main reason that income inequality around the globe is rising, within as well as between countries. In this paragraph the impact of globalization on income inequality will be discussed.
Shipping jobs abroad
A large number of authors conclude that globalization increased income inequality within as well as between countries, yet the poverty has still decreased (Gunter and Van der Hoeven, 2004). Globalization led to an increase in economic welfare, the incomes of the poor have increased, but much slower than higher-skilled workers (Preble, 2010). Worldwide globalization leads to more income inequality as the rich are getting richer and the poor getting poorer, a reason for this is that jobs are outsourced abroad (Preble, 2010). These jobs are moved abroad to countries with lower costs. This causes job losses in countries in which the companies leave. The employees who lost their job receive no more wage and need to find a new job (Preble, 2010). The countries with the lowest production costs often also have the weakest labour standards, the companies in developing countries abuse the human rights for their own benefit, resulting in the fact that most employees do not get a decent wage (Preble, 2010). Globalization led also to rising competition among developing countries to rise their production, most developing countries made arrangements with multinational corporations (MNCs) so that MNCs have even more benefit of the lower cost locations. (Gunter and Van der Hoeven, 2004). It can be stated that outsourcing jobs to lower cost locations does not benefit either country optimally. By improving the labour standards in developing countries the employees there will receive a decent wage, and for most companies there will be less advantageous to move to lower cost locations.
World trade
Globalization also changed the world trade, the liberalization of world trade led to an increase in international trade. The growing world trade is a benefit of globalization. This leads to enhanced efficiency and productivity, which leads to higher standards of living. Another benefit is the international competition which is enlarged, resulting in falling prices (Preble, 2010).
Higher openness levels of trade in low and middle income countries results in more inequality, while in higher income countries it results in less inequality (Wade, 2004). The increase liberalization of world trade motivates companies to chose for a lower cost location. This consequences of this decision are already mentioned in the previous paragraph. International trade affects inequality, however the consequences of poverty by international trade is not clear. It can have both a positive or a negative impact on poverty (Gunter and van der Hoeven, 2004).
The cause of income inequality in OECD countries
Most of the time income inequality is illustrated as a huge deal in developing countries. Income inequality, however, is also applicable to OECD countries. OECD is an abbreviation of Organisation for Economic Co-operation and Development. The countries which are a member of the OECD are all well developed. Income inequality is also present here. The average income of the richest 10% is approximately nine times as high of that of the poorest 10% (OECD, 2011). Also the incomes in OECD countries increased by 1.7% a year for over twenty years. The richest 10% saw their income increase faster compared to the poorest 10% (OECD, 2011). The Gini coefficient, an indicator of income inequality which ranges from 0 (when everyone has the same incomes) to 1 (when all income goes to only one individual), increased from 0.29 around 1980 to 0.316 in the late 2000s (OECD, 2011). All these data suggest that there certainly is an income inequality in OECD countries. The question that is discussed further is: what causes income inequality in OECD countries and how does this correlate with globalization?
Globalization as a cause
Globalization is often mentioned as the main cause of rising inequality. Globalization, as illustrated, leads to an increased international trade. Trade integration, to some concern, causes increased income inequality, because of the traditional international trade theory. Which causes higher skilled workers in richer countries to have a higher relative wages.
Some studies however illustrate that the rise of import in advanced countries leads to declining income inequality (OECD, 2011).
Globalization also went along with technological progress. Technological progress is often cited as one of the factors that contributes the most to income inequality. New technologies are a disadvantage for the workers who do not have the necessary skills to use the technology to their advantage. These technological ‘improvements’ are skill-biased, resulting in it to be an inequality increasing factor (OECD, 2011). IMF (2007, as cited in OECD, 2011) states that the ICT revolution is the forefront of the explanation of inequality.
The discoveries in this paragraph show that globalization affects income inequality in OECD countries.
Policy as a cause
Policy choices, regulations and institutions also have a great influence in income inequality. They affect how technology and globalisation influence the distribution of income. Through some extend they even influence the distribution of income directly (OECD, 2011). It depends on the policies whether the taken measure increases income inequality or whether it counteracts income inequality. Most OECD countries wanted to strengthen their competition in the markets for goods and service, consequently they reformed regulations. The flexibility of the labour markets was also a consequence of the will to strengthen the competition (OECD, 2011). This resulted for example in reducing the taxes on labour for low-income workers and many countries also loosened employment protection legislation for persons who are employed with contracts for a small amount of time, which contributes to a decline in income inequality (OECD, 2011). ‘These changes in policies and institutions affected the ways in which globalization and technological changes translated into distributional changes’(OECD, 2011). Other examples, however, show that some reforms and institutional changes led to an increasing income inequality. More flexible product market regulation is an example which led to an increase in income inequality.
Structural changes in OECD countries mainly benefitted the highly skilled workers and thus increased income inequality, these structural changes quickly emerged from the mid-1990s. (OECD, 2011).
Other causes for inequality
Work and jobs plans have also an effect in income inequality. There is a wage gap in OECD countries between male and female workers who do the same work. Also the number of part-timers increased from 11% in the mid 1990s to 16% by the late 2000s. This increasing number of part-timers contributes to an increased Gini coefficient (OECD, 2011). There is also a remarkable effect going on regarding the change in working hours. Low income workers lose more working hours than high income workers, which again contributes to increasing income inequality (OECD, 2011).
The shift in household structure also effects income inequality. There are more smaller households, what results in the fact that these household can not benefit from sharing resources and expenditures. There is also a phenomenon going on in all OECD countries which is described as ‘assortative mating’. This means that people with a high income are more likely to marry a person with also a high income (OECD, 2011).
Consequences of income inequality
The main reasons for income inequality in both, developing and OECD countries, are discussed. In this paragraph the consequences of income inequality are discussed, some of these consequences will be provided with a solution.
Higher income inequality within countries results in: higher poverty, slower economic growth, higher unemployment and higher crimes. The first two, higher poverty and slower economic growth, especially appear in large countries because it constrains the growth of mass demand (Wade, 2004).
Conclusion
It can be concluded that globalization contributes to income inequality, but as OECD (2011) mentions, there are also other contributions that lead to income inequality.
References
• Wade, R. (2004) Is Globalization Reducing Poverty and Inequality?. World Development, Vol. 32, No. 4, 567-589. doi:10.1016/j.worlddev.2003.10.007
• OECD (2011) Divided We Stand: Why Inequality Keeps Rising. OECD Publishing, 21-44. doi :10.1787/9789264119536-en
• B.G. & van der Hoeven, R. (2004). The social dimension of globalization: A review of the literature. International labour review, 143(1-2), 7-43. doi: 10.1111/j.1564-913x.2004.tb00545.x
• Preble, J.F. (2010). Toward a framework for achieving a sustainable globalization. Business and society review, 115(3), 329-366. doi: 10.1111/j.1467-8594.2010.00367.x