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Globalization Breeds Income Inequality, Research Shows

Globalization’s rise in recent decades has widened income inequality in the U.S. while padding executives’ pockets, according to a study put out by the National Bureau of Economic Research that directly links globalized commerce with the country’s prominent wage gap.

Researchers from the University of Colorado–Boulder and Williams College in Massachusetts surveyed executive compensation at thousands of U.S. companies between 1993 and 2013 and concluded that “recent globalization trends have increased U.S. inequality by disproportionately raising top incomes.”

“Globalization and income inequality are currently the two most important economic issues, with dissatisfaction about both of these forces shaping elections throughout the developed world,” the researchers said. “The source of globalization’s impact on top incomes matters because it influences society’s willingness to tolerate inequality.”

Extensive research efforts in recent years have looked at executive pay dynamics, income inequality and the effects of globalization, but seldom have the three topics been tackled simultaneously. On the CEO compensation front, the left-leaning Economic Policy Institute in 2015 found executive pay had grown by 997 percent between 1978 and 2014, while the average compensation for a private-sector production and non-supervisory worker increased by just 10.9 percent.

That trend in higher executive pay appears to have coincided with broader and disproportionate upper-income gains in the U.S. when compared with gains for middle- and lower-income Americans. The Pew Research Center in 2015 calculated that upper-income households saw their pay rise 47 percent between 1970 and 2014. Middle-income households enjoyed a median gain of only 34 percent over that window, while lower-income households posted a softer 28 percent gain.

Broadly, global trade dynamics underwent a significant shift during this same time frame – particularly in the 1990s and 2000s, which saw the signing of the North American Free Trade Agreement and China joining the World Trade Organization. Both events have been touted by globalization critics, particularly by President Donald Trump, as key turning points for the U.S. economy.

“More recently there has been a growing consensus that trade, driven in part by the integration of China into the world economy, has played a role in rising income inequality in many high-income countries,” the study authors wrote, indicating their research “complements this work.” “Rising import competition has adversely affected manufacturing employment, led firms to upgrade their production and caused labor earnings to fall.”

Researchers looked specifically at increased executive compensation as a sign of rising inequality. And in their efforts to examine connections between executive pay and globalization, they looked at how top company officials’ compensation matched up with industry exports. They found a “significant positive impact.”

“Quantitatively, the results indicate that a 10 percent increase in exports leads to a 2 percent increase in the compensation of executives,” the researchers wrote.

On the one hand, it makes sense that an executive’s compensation would go up as his or her business expands internationally. As the researchers point out, such individuals “need to navigate the logistics of selling to many markets, deal with the complexity of setting up production stages that span numerous countries and deal with bargaining and contractual issues in foreign countries.”

“In short, globalization may raise the importance of top (‘superstar’) talent, with compensation rising accordingly,” they wrote.

On the other hand, the researchers identified executives that benefit from globalization for reasons “unrelated to the market talent of the executive.” The researchers suggest a more globalized world provides more opportunities for lobbying and tariff discussions – practices that don’t generate broader economic wealth but can increase company profitability.

And those opportunities were found to be more prevalent in “poor governance environments” in which executives can do more wheeling and dealing. The authors found executive pay “is rising with exports beyond simply the increase in firm size necessary to accommodate these exports.”

“[T]his finding is not simply reflecting the fact that talented, high-ability executives are needed for expanding abroad, and thus the invisible hand of the market ensures that they are more highly compensated,” the report said. “Executives do not seem to be simply in the right place at the right time, but rather their rising compensation due to globalization comes about in part through the executive’s (visible) hand pursuing non-market reward strategies.”

What the research suggests is that executives are seeing pay gains in part because they’re expanding into new markets, but in part because they’re getting bonuses and perks from their efforts in areas where they have less regulatory oversight or more political leeway.

“Our finding that recent globalization trends have increased U.S. inequality by disproportionately raising top incomes represents an important step forward,” the report said. “In recent elections throughout the developed world, anger about globalization is leading to a populist resurgence. To the extent that top income earners disproportionately benefit from globalization through the exploitation of poor governance settings, these attitudes are understandable.”

Still, the researchers were quick to note that “these findings should not be interpreted as a rationale for protectionist policies, since globalization has likely generated large increases in the standard of living.”

“The key question for policymakers is to devise ways to address the distributional implications of globalization, such as those identified in this paper, without compromising aggregate welfare gains,” they said.


First published in the U.S. News
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