Wage inequality and globalization : evidence from manufacturing industries

The purpose of this study is to examine the recent trend of the relative distribution of wages in the manufacturing industries and its relationship with globalization. This study takes advantage of a comparable and consistent data set on wage inequality across industries covering most OECD and non-OECD countries for the past thirty years, and various parametric and non-parametric statistical techniques. The principal questions are 1) whether wage inequality has been rising in recent year; 2) how to explain the observed trend of wage inequality, and; 3) what is the role of globalization in this change. For the first question, this study finds that there is a sharp increase in inequality after the early 1980s, and this trend appears not only due to national conditions but also to global economic conditions that affect countries altogether. For the second question, three pervasive explanations such as international trade, skill-biased technological change, and institutional differences are reviewed and critiqued. An alternative hypothesis based on the rents sharing model, in which interindustry wage inequality is regarded as a result of the skewed distribution of the industrial premiums (economic rents) due to the differences in monopoly power in the product market, is presented and analyzed. The statistical results indicate that the profit rate is positively associated with the level of industrial wage, and widening wage differentials are mostly led by the upper part of the industrial wage distribution rather than by the shrinkage of the lower part. For the third question, international trade and foreign direct investment (FDI) are used as proxies for globalization to examine their effects on wage inequality. The empirical evidence shows that FDI is clearly associated with the increases in wage inequality in developed as well as developing countries but international trade is only weakly associated with. And both FDI and international trade are positively associated with increases in the upper part of the wage distribution in developed countries but this pattern is weakly observed in developing countries. Finally other macroeconomic conditions and the institutional factors in the labor market appear to have been important in determining the impacts of globalization. Some policy implications and new research directions for a macroeconomic dynamics of inequality based on the findings in this study are discussed.