EFB336 Chap.8 Globalisation and Inequality
Globalisation and Inequality
Trade changes relative product prices, labour demand and the location of economic activity, so aggregate gains can coexist with concentrated losses. Factor-based models predict broad reward changes, while specific-factor and firm-level approaches emphasise short-run immobility and worker-firm differences. Evidence must be interpreted alongside technology, institutions and domestic policy.
A convincing answer separates between-country convergence from within-country inequality and distinguishes transition costs from long-run adjustment.
What this chapter covers
- 01
Relative prices and factor rewards
- 02
Specific factors and short-run immobility
- 03
Worker and firm heterogeneity
- 04
Between-country and within-country inequality
- 05
Trade exposure versus technological change
- 06
Adjustment policy and compensation
Worked example · free
Trace a price change into factor rewards
- +1The price of the skill-intensive export rises relative to the import-competing good.
- +1Demand for the factor used intensively in that export sector increases, raising skilled labour’s real reward in the basic mechanism.
- +1The relatively scarce factor can lose in real terms, so an aggregate gain does not imply universal gains.
Key terms
- Specific factor
- A productive input that cannot move quickly between sectors in the period being analysed.
- Skill premium
- The wage difference associated with skilled relative to less-skilled work.
- Adjustment cost
- A temporary or persistent cost of moving workers, capital or communities after economic conditions change.
Globalisation and Inequality FAQ
Can trade raise income and inequality together?
Yes. Specialisation can increase aggregate real income while changing product prices and sector demand in ways that reward some factors, firms or regions more than others. Evaluating trade therefore requires separate statements about total surplus, its distribution and the costs of adjustment.
Why is attribution difficult?
Technology, education, bargaining institutions, taxes and transfers also affect wage dispersion and employment. Industries exposed to trade may differ systematically from others. Credible evidence therefore needs a comparison strategy and should avoid assigning every observed inequality change to globalisation alone.
What makes adjustment persist?
Skills may not transfer across occupations, housing can tie workers to declining regions, finance may constrain retraining, and local demand can amplify an initial shock. These frictions mean that a theoretical long-run gain does not erase significant short- and medium-run losses.
Exam move
Prepare this topic with a three-column notebook headed theory, evidence and response. In the theory column, separate the factor-endowment prediction from the specific-factor and firm-level mechanisms. A change in a relative goods price can alter broad factor rewards when factors are mobile across sectors. In the short run, industry-specific capital or skills can experience concentrated gains and losses.
Firm heterogeneity adds wage and employment differences between exporters, import-competing producers and other firms. State the horizon and mobility assumption before selecting a conclusion. In the evidence column, define the inequality measure and comparison. Within-country wage dispersion, regional employment loss, household real income and between-country convergence are different outcomes.
List technology, education, bargaining institutions, taxation and local demand as competing explanations. For a trade-exposure study, ask how exposed regions were identified, what makes the comparison credible and whether pre-existing industrial decline could confound the estimate. Distinguish a local effect over a stated period from the aggregate national gain or loss. In the response column, match policy to friction.
Temporary income replacement insures earnings but does not solve a skill mismatch. Training may help when vacancies require different capabilities, mobility support matters when workers are geographically trapped, and place-based measures address persistent local spillovers. General protection raises consumer and input prices and may preserve the very allocation that needs to adjust.
Practise constructing a household incidence map: employment income, prices of consumed goods, asset ownership, taxes and transfers can move in different directions for one person. Then write a balanced essay plan that begins with aggregate gains, devotes equal attention to concentrated adjustment and ends with feasible compensation rather than assuming transfers occur costlessly.
Always keep between-country and within-country inequality in separate sections. A fall in global inequality driven by growth in poorer economies can coexist with rising dispersion or regional hardship inside a richer economy, and the two observations answer different policy questions.
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