The Income Gap
Is globalization to blame? Only in part
Yet even if globalization pushback is a political idea whose time has come, do the economic facts support it? The consensus view is that there has been a big increase in income inequality, notably at the very top. The portion of earned national income going to the top 1 percent, according to economists Thomas Piketty and Emmanuel Saez, has nearly doubled from the high single-digits three decades ago to 16.2 percent in 2004. Meanwhile, the share going to the top one tenth of 1 percent has more than tripled to 6.9 percent. Include capital gains from stock and bond sales, and the numbers are even more dramatic: The top 1 percent grabs 19.5 percent of income, and the top 0.1 percent snags 9.2 percent.
In essence, the first set of numbers represents wage inequality, while the second-including gains from financial assets-represents broader income inequality. The difference between the numbers gives a big clue to how globalization is affecting wages and income. Saez, an economics professor at the University of California-Berkeley, notes that the first set of numbers has been "relatively stable" since the early 1990s, though gradually moving higher. But if you include capital gains, inequality increased at a brisk clip throughout the 1990s-particularly for the top tenth of 1 percent-until the 2001 recession and bear market.
Talent search. "At the top, what you primarily have is executives at large companies who are paid very large salaries with bonuses and stock options," Saez says. "It has really become a truly global market for the talent of executives." So it's not so much that globalization has driven down wages because the average U.S. worker has to compete with a low-paid competitor in China or India. (About a quarter-million jobs are lost annually to offshoring, which works out to only 0.18 percent of the workforce.) Rather, globalization has increased the demand for top corporate managers, and it has made companies more valuable as it has spurred economic growth and higher stock market values. That has boosted executives' income-from salaries, stock options, and capital gains.
Consider this: The stock market has boomed far in excess of overall economic growth for the past quarter century. So, anyone who derives income from wages alone probably can't keep up with those who have big stock portfolios. Since 1981, U.S. gross domestic product has doubled to $11.4 trillion, while total stock market capitalization has increased 14-fold. The real economy-the one that pays wages-just isn't growing as fast as the financial economy. "Globalization has been a magic wealth machine," says Smick. "But you can't keep up if you are only tied to wages."
Rapid technological change, which itself is driving globalization, is also pushing wage inequality. "Inequality is related to technology, and ... you really require more skills to operate in a challenging economy driven by technology," says Daron Acemoglu, an economics professor at MIT. According to the liberal Economic Policy Institute, inflation-adjusted wages for male high school graduates have slipped 6 percent since 1980, while rising 20 percent for college graduates and 35 percent for those with an advanced degree. Technology places a premium not only on computer skills but on the managerial and organizational abilities needed to run a modern, networked company. The continuous pace of technological change means that as one new invention enters the market, Columbia University economist Jagdish Bhagwati says, workers can barely adjust before another arrives. Better education means quicker adaptation-and higher incomes.
advertisement
