Globalization and Inequality in Advanced Economies

Working Paper 2021-575

Abstract

We review the channels through which the different dimensions of globalization and their interactions impact inequality in advanced economies. North-South trade of final goods, of intermediate goods and of tasks (offshoring) and the interplay between trade and technology generate winners (high skilled workers and capital owners) and losers (low and medium skilled workers) and raises inequality. To make everyone win, a share of the winners’ gain should be redistributed to the losers. But the increasing international mobility of the winners and of the tax bases they own (capital and high incomes) generates tax competition and a race to the bottom of the related tax rates. This tends to reduce the existing social transfers but it also hinders the redistribution necessary to offset trade-driven inequality. In addition, globalization (i) modifies anti-inequality policies by producing an inequality-unemployment tradeoff and a redistribution-progressivity tradeoff, and (ii) fosters public debt and/or over-taxation of the middle class if the governments compensate the increase in social risks, generating a middle class curse and a social democracy curse. It can also hamper skill upgrading which is a major means to fight growing inequality in the longer term. Finally, (i) partial approaches and estimates which do not encompass the diverse interactions highlighted here could reveal to be misleading and (ii) combating globalization-related inequality should focus on tax and social rules avoidance rather than on trade restrictions.

Authors: Joel HELLIER.