1. Candidate Number: 131768
Both theory and evidence support the view that globalization is the primary cause of rising
income inequality in developed countries. Do you agree?
The term globalisation has been used widely by scholars to explain why there has been rising
income inequality in developed countries but there is still no precise definition of what it
exactly is. The OECD’s definition summarises the key areas globalisation covers. It states how
“the term globalisation is used to describe an increasing internationalisation of markets for
goods and services, the means of production, financial systems, competitions, corporations,
technology and industries”1. This essaywillcontribute to the debate on whether globalisation
is the primary cause of rising income inequality in developed countries and will provide
evidence to suggest that despite the effect globalisation may have had on income inequality,
that other factors may be equally as important a cause for rising income inequality in
developed countries in particular the large increases in technology progress.
The Hechkscher-Ohlin model has been a theory used by scholars to explain why income
inequality has risen as a direct result of globalisation and the internationalisation of the
means of production that comes with this. The model predicts that two countries A and B,
with different resource endowments but share the same technology, “will export
commodities that are produced with relatively more of the the factor of production that is
abundant in country A and import commodities produced with relatively more of the factor
of production that is relative in country B”2. For workers in a developed country this, from the
theory, causes income inequality and the factor price equalisation theorem shows this. It
1 OECD Glossary of Statistical Terms. (2011). Avaliable at:
https://stats.oecd.org/glossary/detail.asp?ID=1121 (Accessed 1 April 2016)
2 Burtless, G. (1995). International Trade and The Rise in Earnings Inequality. Journal of
Economic Literature, 33(2), pp 803.

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states how under the Heckscher-Ohlin model with free trade, “prices of the factors of
production will be equalised among trading partners”. Gary Burtless, in his work on
international trade and the rise in earnings inequality, states that if you accept this theory to
be true then the North America Free Trade Agreement between USA and Mexico means bad
news for US workers. This is because “Mexican worker’s skills are probably equivalent to
those of a less-skilled U.S worker and factor price equalisation will require the less skilled U.S
workers to accept a reduction in their real wage”3. The Heckscher-Ohlin model supports the
view that globalisationis the primary causeof rising income inequality in developed countries
and several scholars have built on this and provided real evidence to reinforce this view.
The amount income inequality has increased in developed countries can be highlighted by
facts such as those raised by The Economist which describes how, “since 2001 the pay of the
typical worker has been stuck, growing less than productivity. If you also look back 20 years
the total pay of the typical American manager has increased from roughly 40 times the
average to 110 times the average now”4. For several scholars the primary cause of this is
globalisation. Adrian Wood, during his work on how trade hurts unskilled labour, provides a
graph (labelled here figure 2) which shows the correlation between deindustrialisation and
developing country import penetration.
3 Burtless, G. (1995). International Trade and The Rise in Earnings Inequality. Journal of
Economic Literature, 33(2), pp 804.
4The Economist (2007) Globalisation and the rise of inequality. Available at:
http://www.economist.com/node/8554819 (Accessed 1 April 2016)

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5
The graph shows for Wood how barrier reductions have increased trade in manufacturing
with developing countries, which he has associated with even larger falls in manufacturing
employment in the developed country that is trading. Wood describes how during this period
of deindustrialisation and developing country import penetration, where “the goods
imported by developed countries are more labour intensivethan those they export”6, had the
overall effect of “lowering the economy wide relative demand for unskilled labour by about
20%”7. This economy wide fall in demand for unskilled labour compared to almost no fall in
the demand for skilled labour, which Wood believes to be the direct result of trade. It has
caused huge differentials in wages and the gap is only widening. Woods does acknowledge
5 Wood, A. (1995). How Trade Hurt Unskilled Workers. The Journal of Economic Perspectives,
9(3). pp 63.
6 Wood, A. (1995). How Trade Hurt Unskilled Workers. The Journal of Economic Perspectives,
9(3). pp 66.
7 Wood, A. (1995). How Trade Hurt Unskilled Workers. The Journal of Economic Perspectives,
9(3). pp 68.

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he is in a small minority who believe this however his evidence suggests, to some extent at
least, that the Heckscher-Ohlin model can be used to explain why globalisation may be the
primary cause of rising inequality in developed countries.
Many scholars do disagree with Woods and his view that globalisation is the primary cause of
rising inequality in developed countries. Paul Krugman is one of those who does disagree that
globalisation is the primary cause of this. He argues that despite the fact imports from
developing countries grew while industries such as manufacturing shrank, this does not
provide evidence that globalisationand the internationalisation of factors of production were
the primary reasons why income inequality rose in the USA. He argues it was domestic
reasons that have caused this. One of Krugman’s strongest arguments in this case is his
argument that the fall in blue collar (low/un-skilled workers) wages relative to white collar
(high skilled) wages is the result of other factors such as technological change, “especially the
growing use of computers”8. The OECD’s report on “Why inequality keeps rising” from 2011
also suggests that technological change is an important factor that has shaped wage
inequality in developed countries. The report concluded that “technological change is
positively related to increasing wage dispersion and predominately affects the upper half of
the wage distribution”9. The huge technological progress that has occurred in developed
countries has made demand for skilled labour higher than for unskilled labour and thus
significantly contributed to growing inequality in developed countries. The OECD report on
8 Krugman, P and Lawrence, R. (1994). Trade, Jobs and Wages. Scientific American, 270(3) pp
15.
9 OECD (2011) Divided We Stand: Why Inequality Keeps Rising. Available at:
http://www.oecd.org/els/soc/dividedwestandwhyinequalitykeepsrising.htm
(Accessed 1 April 2016)

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inequality agrees with Krugman’s work on explaining some of the causes of income inequality
in developed countries.
On the contrary, an IMF report released in 2007 looking again at what has caused inequality
suggests that instead of either Krugman and his work on domestic technological progress, or
Woods and his work on globalisation being the primary cause of rising inequality, that it is
instead a combination of these factors.
Figure 310.
Figure 3, from the 2007 IMF Report on Globalisationand Inequality supports the OECD’s work
from 2011 that technology progress is an important factor in why income inequality is
10 IMF (2007) World Economic Outlook: Globalisation and Inequality. Available at:
https://www.imf.org/external/pubs/ft/weo/2007/02/
(Accessed 1 April 2016).

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increasing in advanced countries. It shows the positive correlation between an increase in
technology and a rise in inequality are associated. They also concluded similar findings to the
OPEC report that “in advanced economies, the use of technology is widespread in both
manufacturing and services, raising the skills premium in a substantial portion of the
economy”. Despite their findings on how technology has affected rising income inequality in
advanced countries, figure 4 also taken from the IMF 2007 Report shows how in advanced
economies the contribution of globalisation and contribution of technology to changes in the
Gini Coefficient are almost identical. They both contribute significantly and it is hard to
suggest if one is the primary cause of the rising inequality in advanced countries.
11Figure 4
They conclude that globalisation in an open economy has had the effect on advanced
economies, “in which skillfactors are relatively abundant, with an increaseinopenness comes
higher inequality”12. The IMF does however disagree with Woods’ work that this is also linked
11 IMF (2007) World Economic Outlook: Globalisation and Inequality. Available at:
https://www.imf.org/external/pubs/ft/weo/2007/02/
(Accessed 1 April 2016).
12 IMF (2007) World Economic Outlook: Globalisation and Inequality. Available at:

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to import penetration. Woods argued import penetration, as aresult of globalisation,is linked
to rising income inequality in advanced countries but the IMF suggests that “imports from
developing countries are associated with a reduction in inequality. This would be explained
through the substitution of lower paying manufacturing jobs with higher paying servicesector
jobs such as in retail”13. The IMF 2007 Report instead suggest that it is the link between
financial globalisation and advancements in technology. They looked at where Foreign Direct
Investment has been most invested and found that it tends to be in high skilled sectors which
has the effect of “increasing the relative demand for skilledworkers”14. Despite the difference
in reasons as to why globalisation causes income inequality, it is hard to ignore the fact that
globalisation and technological progress are almost blended together when it comes to
explaining rising income inequality in advanced countries.
Technological progress and globalisation over the past 30 years has allowed for income
inequality to rise significantly. Many scholars have suggested that either globalisation or
technological progress is the primary cause of this however research by the IMF suggests that
it is a combination of both of these factors. It is also extremely hard for scholars to separate
both globalisation and technological progress, the two are extremely interlinked and to say
globalisation is the primary cause of rising income inequality ignores the primary effects of
https://www.imf.org/external/pubs/ft/weo/2007/02/
(Accessed 1 April 2016). pp 38. (Accessed 1 April 2016)
13 IMF (2007) World Economic Outlook: Globalisation and Inequality. Available at:
https://www.imf.org/external/pubs/ft/weo/2007/02/
(Accessed 1 April 2016).
14 IMF (2007) World Economic Outlook: Globalisation and Inequality. Available at:
https://www.imf.org/external/pubs/ft/weo/2007/02/
(Accessed 1 April 2016).

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domestic policies such as technological progress on developed countries inequality. The mix
of both globalisation and technological progress has created huge amounts of wealth in
developed countries but has also caused drastic rising income inequality and to say that
globalisation is the primary cause of this ignores the evidence that suggests instead it is
technological progress. I conclude that instead it is hard to identity a primary cause of rising
income inequality in developed countries and it is a mixture of both globalisation and
technological progress which have caused rising income inequality in developed countries.

9. Candidate Number: 131768
Bibliography
Burtless, G. (1995). International Trade and The Rise in Earnings Inequality. Journal of
Economic Literature, 33(2).
IMF (2007) World Economic Outlook: Globalisation and Inequality. Available at:
https://www.imf.org/external/pubs/ft/weo/2007/02/
(Accessed 1 April 2016).
Krugman, P and Lawrence, R. (1994). Trade, Jobs and Wages. Scientific American, 270(3).
OECD Glossary of Statistical Terms. (2011). Avaliable at:
https://stats.oecd.org/glossary/detail.asp?ID=1121 (Accessed 1 April 2016)
OECD (2011) Divided We Stand: Why Inequality Keeps Rising. Available at:
http://www.oecd.org/els/soc/dividedwestandwhyinequalitykeepsrising.htm
(Accessed 1 April 2016)
The Economist (2007) Globalisation and the rise of inequality. Available at:
http://www.economist.com/node/8554819 (Accessed 1 April 2016)
Wood, A. (1995). How Trade Hurt Unskilled Workers. The Journal of Economic Perspectives,
9(3).