June 1, 2000

The differential impact of the South on wage inequality in the North

Globalisation affects Japanese and European workers more than American workers

Press release
Increasing income inequality in the United States and high unemployment among low-skilled workers in continental Europe have stirred up concerns about the process of globalisation. The fear is that low-skilled workers suffer from intensified linkages between developed and developing countries.

This paper shows that the effects of globalisation on the United States, Japan and Western Europe are different in magnitude. Low-skilled workers in Japan and Western Europe have more to fear from trade liberalisation than those in the United States. This outcome largely reflects differences in production and specialisation patterns. The United States is more specialised in skill-intensive production, especially in production of services. Besides, Japan and Western Europe impose and face higher trade barriers. For these reasons, the effects of trade liberalisation are stronger for Japan and Western Europe than they are for the United States. This suggests that the one-sided concentration on the United States is misleading.

Moreover, this paper shows that the effects on wage inequality are not only caused by lower trade barriers. Structural changes in developing countries have at least the same impact on wage inequality in developed countries as trade liberalisation. Consumer demand shifts from low-skilled labour-intensive goods such as agriculture toward high-skilled labour intensive goods such as services. This exerts globally a downward pressure on relative wages of low-skilled workers. Labour reallocation from the low-productivity sectors in developing countries to the high-productivity sectors contributes to this pressure as well.

Arjan Lejour and Paul Tang of CPB Netherlands Bureau for Economic Policy Analysis come to these conclusions in Research Memorandum 167, The differential impact of the South on wage inequality in the North. They simulate the process of globalisation with WorldScan: a large general-equilibrium model for the world economy.

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Read also the accompanying press release.

The focus is on wage inequality in Japan, Western Europe and the United States. Inequality rises for several reasons: barriers to trade fall, and in developing countries demand patterns change and at the same time workers shift from traditional low-productivity toward modern high-productivity activities. Even though inequality does not rise dramatically, one should not ignore the characteristics of the growth process in developing countries: trade liberalisation is not only reason behind growing inequality.

Another interesting result is the different impact on industrialised countries. Simulations show that the United States is least sensitive to falling trade barriers and changes in developing countries. The impact on Japan and Western Europe is larger.

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