Rich man, poor man: Globalisation and the rise of inequality

The Economist: Rich man, poor man:  Globalisation and the rise of inequality

Since 2001 the pay of the typical worker in the United States has been stuck, with real wages growing less than half as fast as productivity. By contrast, the executive types gathering for the World Economic Forum in Davos in Switzerland next week have enjoyed a Beckhamesque bonanza. If you look back 20 years, the total pay of the typical top American manager has increased from roughly 40 times the average—the level for four decades—to 110 times the average now.

These are the glory days of global capitalism. The mix of technology and economic integration transforming the world has created unparalleled prosperity. In the past five years the world has seen faster growth than at any time since the early 1970s. In China each person now produces four times as much as in the early 1990s. Having joined the global labour force, hundreds of millions of people in developing countries have won the chance to escape squalor and poverty. Hundreds of millions more stand to join them.

That promises to improve the lot of humanity as a whole incalculably. But in the rich world labour's share of GDP has fallen to historic lows, while profits are soaring. A clamour is abroad that Mr Nardelli and his friends among the top hundredth—or even the top thousandth—of the population are seizing the lion's share of globalisation's gains. Meanwhile everyone else—not just blue-collar factory workers but also the wider office-working middle class—shuffles along, grimly waiting for the next round of cost-cuts. They are not happy.

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The panic comes in part from a rush to lump all the blame on globalisation. Technology—an even less resistible force—is also destroying white- and blue-collar tasks in a puff of automation and may play a bigger role in explaining rising wage inequality and the sluggish growth of middling wages. The distinctions between technology and globalisation count, if only because people tend to welcome computers but condemn foreigners (whether as competitors or immigrants). That makes technology easier to defend.

For economists, the debate about whether technology or globalisation is responsible for capital's rewards outpacing those of labour is crucial, complicated and unresolved. One school, which blames globalisation, argues that the rocketing profits and sluggish middling wages of the past few years are the long-lasting results of trade, as all those new developing-country workers enter the labour market. This school says that technology helps workers by increasing their productivity and eventually their wages. The opposing school retorts that technology does not increase wages immediately, and some sorts of information technology seem to boost the returns to capital instead (think of how much more a dollar's worth of computing power can do these days). And it questions whether Western incomes will remain flat: recent wage rises in America and pay claims in Europe and Japan may start to reverse the balance back away from capital.

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Instead, the way to ease globalisation is the same as the way to ease other sorts of economic change, including the impact of technology. The aim is to help people to move jobs as comparative advantage shifts rapidly from one activity to the next. That means less friction in labour markets and a regulatory system that helps investment. It means an education system that equips people with general skills that make them mobile. It means detaching health care and pensions from employment, so that every time you move your job, you are not risking an awful lot else besides. And for those who lose their jobs—from whatever cause—it means beefing up assistance: generous training and active policies to help them find work.