Rising Inequality in the Developed World

In this post I will consider the follow theses:

(1) That rising inequality is a secular trend, driven by the economic forces of globalisation, and is largely unrelated to tax rates.

(2) That the stagnation of the median wage is due to the integration of unskilled labour in the BRICs and other countries, and is likely to continue for some time.

To my mind, points one and two above are really the same point. Let us consider a few graphs, firstly, that inequality, as measured by the gini coefficient, is rising,


although most of that rise was pre the bursting of the dotcom bubble, to my mind, the key point is that even highly progressive countries like sweden are experiencing similar movements. Conversely world inequality is down

world gini coefficient from 1970 to 2006

(I got these images from google images, I have not sourced the data myself, but they look a lot like I expect).

To my mind, the big story in rising inequality is this:




which shows the declining labour share of employees in the manufacturing industry, this comes from a BLS report. I think this graph makes clear where the productivity gains since 1990 have gone in manufacturing, into rising commodity costs, but that, in itself, is not an answer. It is a personal dictum that one should remember that an economy is all people. Paying more for commodities largely means paying more to miners, and basic heavy industries, which are located in the BRIC’s. This makes sense, labour is cheaper there, we have moved unskilled, semi-skilled, and low-skilled labour offshore, and this is hurting those parts of our labour market. What we should expect to see then, is that the wages of brazilian miners are rising rapidly to converge with the wages of labour in the developed world. And we do see this, although data is not so easy to come by, http://laborsta.ilo.org tells us that the wages of brazilian miners and basic metal manufacture doubled between 1994 and 2002.

The integration of more workers into global labour markets, is driving the decrease in global inequality, but it is also reducing the bargaining power and wages of manufacturing employees in developed countries, which has led to stagnant wages. In contrast, the wages of the skilled classes are increasing, if you are a manager, or a technical specialist, your are now in more demand than ever, as your are needed in more countries than ever. It will take time for countries like brazil to develop law schools, universities, and business schools to rival those in developed countries, and until they do we will have a shortage of professionals on the world stage, and their wages will rise. Therefore, I predict that inequality in developed economies will cease rising, at the same time that world inequality stops falling. This will also be the end of wage stagnation in manufacturing in the developed world.

I have not talked much here about the owners of capital. It is a fact, that for those who build companies, larger markets mean larger markets. Google has brought its search function to three billion consumers. IBM has made more microchips than there are people on the planet. Those who built these companies have profited immensely from expanding trade. Rising profits for the 0.01% is not surprising. Nevertheless, I am not too worried. It is harder than one imagines to stay on top. Most companies eventually go bankrupt, and take a lot of their founders wealth with them. Finally, wealth is a lot like insurance, whereas it is inequality of consumption that should worry us.

A final, political, note. It seems to me that the world is changing, and rising inequality will be here to stay until factor price inequality is complete, that it will be maintained until higher education is developed throughout the world, whence it will fall. This, to me, represents a cogent reason why conservative minded persons should support a more progressive tax system in the medium term.


About worldofinterest

I know I live in my own world, but I like it: they know me here.

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