Global movement of labour and trade have led to an increase in inequality within developed countries. Immigration may decrease wages of low paid people by a small amount (up to approximately £25 per year) and increase the pay of those already on high salaries, while trade liberalisation leads to an increase in foreign competition which decreases the wages of low-skilled workers.
Research suggests that global trade, and possibly immigration, drive economic inequality by causing a wage decrease for those with a low level of education while causing a wage increase for others with a high level of education[1]. The effect of global trade on the wage distribution is substantially larger than the influence of immigration.
Trade Liberalisation
Liberalisation of export rules may increase pay inequality between people working in the same industry[2]. Research suggests that this may be because increased trade with developing nations has improved average living standards (by making goods more affordable) but decreased wages of low-skilled workers due to foreign competition[3], thereby increasing the gap between the middle and the bottom.
Criticism and Issues
- There is disagreement about whether trade liberalisation increases or decreases inequality.
- Some research suggests tariff reduction may be associated with a decrease in inequality in developed countries due to productivity gains[4].
- Other research suggests trade liberalisation has less of an effect on inequality than that caused by technology. According to this argument, countries spending more on technology see higher inequality than those that have the most immigration and trade[5].
Tax Avoidance
Globalisation increases the scope for tax avoidance which can increase financial fragility and inequality[6].
Immigration
Research suggests the impact of immigration on inequality is small:
- An analysis of how immigration affects the wage distribution in the UK suggests that it increases the incomes at the very top but decreases incomes for those in the bottom 20% of the income spectrum[7].
- By increasing the supply of labour more than it increased demand, Eastern European immigration has decreased the inflationary pressure on wages in the UK[8].
- The size of the effect of immigration on wages is small. It has reduced income for those in the bottom 10% by £1 per year. There is also a greater effect for people in certain occupations. For example, professional carers’ wages have decreased by £25 per year[9].
Criticism and Issues
There is evidence to show that immigration may have no impact on employment or hours worked by citizens born in the country. Research suggests that it may have had a positive effect for low paid workers by allowing technology which only needs low-skilled operators to be economically viable. This makes it less likely that low-skilled workers’ jobs are replaced.[10] More than that, immigration increases productivity in the unskilled sector.[11] The effect on unskilled wages of immigration is very small and actually positive on average wages.[12]
A Single Global Labour Market
Research suggests that by creating a single global labour market, immigration and increased trade between countries will reduce inequality across the globe as spending power of those in India and China increases to the level seen in advanced economies. This process may, however, increase inequality within both developed and developing countries.[13]
The globalized economic system may allow for concentrations of wealth at the top of the income spectrum. Some suggest that this is only achieved through complicity of the local political system and that political decisions are crucial in understanding how economic factors influence inequality.
[1] Borjas, Freeman and Katz 1991
[2] Verhoogen 2007
[3] Wood 1994
[7] Dustmann, Tommaso and Preston 2012
[8] Blanchflower, Salheen and Shadforth 2007
[9] Migration Advisory Committee 2012
[10] Freeman 2011
[11] Peri 2009
[13] Bonica et al 2013