As globalization has spread, there has been growing concern that it has contributed to a rise in inequality, with suggestions that this has helped to support the growth in populist politics around the world.  Existing research into the topic has shown that a skills premium certainly applies between the skilled and unskilled, but new research from INSEAD aims to understand precisely how globalization has affected the fortunes of the average worker versus those at the top of their organizations.

The paper found that the difference in pay between the CEO and the average worker was some 50% higher for firms that exported globally compared to firms that only sold domestically.  This differential was clearly a result of the international trade, as exporters were generally bigger in size and their compensation more unequal.  Indeed, the researchers believe that this globalization-driven increase in inequality accounts for around 44% of the rise in income for the biggest earners.

The researchers pooled together tax record data from the US Internal Revenue Service along with payroll data from each firm (including executive compensation), and export data from the US Border Customs.  In total, they measured 2,561 firms from 1992 to 2007.

The analysis revealed that the CEO-to-worker pay ratio was over 50% higher among exporting firms than it was among non-exporting firms, with this gap over 70% in the manufacturing sector.

Size matters

Interestingly, these exporting firms were also bigger than their non-exporting peers, with the researchers identifying that a 1% rise in headcount led to a 0.39% rise in the CEO-to-worker pay ratio.  Perhaps pertinently, when firms of a similar size were compared, any premium for exporters disappeared.

Suffice to say, there aren’t that many large firms that don’t export, and indeed, the researchers argue that it is largely the willingness and ability to export that makes firms as big as they are.  The noticeable thing, however, is that this success does not result in higher pay for workers.

To explore this matter, the researchers looked specifically at China’s ascension to the World Trade Organisation in 2001.  They looked at firms that had existing trading ties with the country before 2001, and firms that didn’t.  After joining the WTO, those firms that were already connected to China exported more and subsequently grew more than their peers without such connections.  Indeed, the premium for both was roughly double.

As before, however, this didn’t translate into higher wages for the average worker, with the executives alone gaining from the growth of their firm.  Interestingly, however, this wasn’t the case for firms who weren’t exporting to China before 2001.  These firms became less unequal during the same timeframe.

So while globalization can’t explain all of the changes seen in income inequality in the last few decades, it does indeed appear to have played a significant part.