Is globalization reducing income mobility?

Globalization cannot by itself be credited with the effects of income disparity as many socioeconomic factors come into play when doing a fair assessment of the international arena where the issue takes place. In this respect many professional efforts have been spent studying the issue.

A curve was introduced in a 2012 speech by chairman of the Council of Economic Adviser Alan Krueger called “The Great Gatsby” curve which is a chart plotting between inequality and inter generational social immobility in several countries around the world.

Paul Krugman, Nobel laureate, Princeton economist and New York Times columnist introduced the “Great Divergence” term given to a period in late 1970s, when income differences increased in the US but in a lesser extent in other countries.

Classic economist, use the Gini coefficient which is a measure of statistical dispersion representing the income distribution in a nation as a measure of inequality. It was developed by the Italian statistician and sociologist Corrado Gini and published in his 1912 paper Variability and Mutability.

The Organization for Economic Co-operation and Development (OECD) collects and publishes data focused on eight types of income inequality:

· Dispersion of hourly wages among full-time (or full-time equivalent) workers

· Wage dispersion among workers – E.g. annual wages, including wages from part-time work or work during only part of the year.

· Individual earnings inequality among all workers – Includes the self-employed.

· Individual earnings inequality among the entire working-age population – Includes those who are inactive, e.g. students, unemployed, early pensioners, etc.

· Household earnings inequality – Includes the earnings of all household members.

· Household market income inequality – Includes incomes from capital, savings and private transfers.

· Household disposable income inequality – Includes public cash transfers received and direct taxes paid.

· Household adjusted disposable income inequality – Includes publicly provided services.

According to the 2007 "American Dream Report" study, "by some measurements"—relative mobility between generations -- "we are actually a less mobile society than many other nations, including Canada, France, Germany and most Scandinavian countries. This challenges the notion of America as the land of opportunity."

Other research places the U.S. among the least economically mobile countries. In recent years several large studies have found that vertical inter-generational mobility is lower in the United States than in most developed countries.

In the past two decades, trade deals have also progressively dealt with non-trade areas of international commerce such as foreign investment, intellectual property, and domestic standards regimes. it’s very country-specific, and it depends on where countries started off and on the nature of trade reform.

Current research does not directly address the impacts of globalization on economic mobility. However, a large body of literature addresses the implications that globalization has for unemployment and inequality in the United States. Together, these measures provide a reasonable accounting of the effects globalization is transmitting to all corners of the globe.

Some conclusions regarding the effects of globalization on inter generational mobility will be more speculative, since globalization itself is a relatively new phenomenon that requires more study. However, globalization is a promoter of economic growth and over the long run, it will likely lead to upward absolute mobility.

Research on globalization has been grouped in three main categories according to the type of good or service. The first group seeks to measure the implications of international trade and the increasing tendency of corporations to import intermediate goods for assembly in U.S. products.

The second addresses the commonly termed outsourcing services like customer service call centers that have in the past been reserved for American workers.

The third considers the consequences of foreign direct investment (FDI) such as U.S. firms’ international investments, and foreign investments in the United States. This three area review considers the implications that international trade, outsourcing, and FDI have as patterns of intra generational mobility, on wages, employment, and inequality.

The summary of the research findings are outlined by each area:

International Trade

Changes in trade relationships with less-developed countries decreased the relative wages of high school dropouts by about 10 percent between 1980 and 1995 (Borjas, Freeman, and Katz 1997).

Approximately 36 percent of displaced manufacturing workers in import-competing industries are reemployed at similarly paying or higher-paying jobs; about 35 percent experience earnings losses of more than 15 percent (Kletzer 2004).

Services Outsourcing

Between 2001 and 2003, workers in trade-competing service industries were approximately 75 percent more likely to experience job loss than were workers in service industries that did not compete with trade (Jensen and Kletzer 2005).

Services outsourcing increased labor productivity by about 5 percent between 1992 and 2000—approximately 10 percent of the total increase over the period (Amiti and Wei 2006).

Foreign Direct Investment

Foreign investment by U.S. firms likely has little impact on exports or aggregate domestic employment (Lipsey 2004). Investment by foreign firms in the United States has not contributed noticeably to skill-based technical change, one of the major drivers of increasing inequality (Blonigen and Slaughter 2001)

The research also concludes that international trade over the long term, mobility consequences will likely be more positive. By allowing countries to specialize in what they do best, trade may increase real income, at least at the aggregate level. Frankel and Romer (1999), for instance, estimate that, ceteris paribus, a one percentage-point increase in the ratio of trade to GDP increases a country’s average per capita income by at least half a percent.

Defined as the internationalization of services--Service Outsourcing like computer programming and call-answering—are the frequent subject of political inquiry. However, because the technology required to integrate the service sector has only recently become available, long term effects are too recent to measure properly. Economic theory suggests that the mobility consequences could be pronounced: just as importing intermediate outputs could exert downward pressure on wages of U.S. workers who produce competing goods, importing services traditionally, provided by middle-class service and IT workers could depress wages for those workers while raising corporate profit.

Foreign Direct Investment

Here a controversy surfaces on the measurement of FDI which is closely linked to both international trade and services outsourcing. By definition--purchasing intermediate goods abroad is international trade; purchasing the foreign company that produces those goods is FDI. Likewise, employing a foreign firm to process insurance claims is services outsourcing, while purchasing that firm is FDI. As with these examples and other manifestations of globalization, FDI is continuing to play an increasing role in production economics the world over.