Dynamic Globalization and Its Potentially Alarming Prospects for Low-Wage Workers

Working Paper: NBER ID: w14527

Authors: Hans Fehr; Sabine Jokisch; Laurence J. Kotlikoff

Abstract: Will incomes of low and high skilled workers continue to diverge? Yes says our paper's dynamic, six-good, five-region -- U.S., Europe, N.E. Asia (Japan, Korea, Taiwan, Hong Kong), China, and India -- general equilibrium, life-cycle model. \n \nThe model predicts a near doubling of the ratio of high- to low-skilled wages over the century. Increasing wage inequality arises from a traditional source -- a rising worldwide relative supply of unskilled labor, reflecting Chinese and Indian productivity improvements. But China's and India's education policies matter. If successive Chinese and Indian cohorts become more skilled, major exacerbation of inequality will be precluded.

Keywords: wage inequality; globalization; low-wage workers; education policies; dynamic general equilibrium

JEL Codes: F0; F2; H0; H3; J20; O0; O23

Causal Claims

Cause	Effect
Increasing global relative supply of unskilled labor (F66)	Rising wage inequality (J31)
Productivity improvements in China and India (O49)	Increasing global relative supply of unskilled labor (F66)
Rising worldwide relative supply of unskilled labor (F66)	Ratio of high-skilled to low-skilled wages will nearly double (J31)
Productivity improvements in China and India (O49)	Increasing the relative supply of low-skilled labor (F66)
Education policies in China and India (H52)	Mitigating the exacerbation of wage inequality (F66)
Shutting down trade with China and India (F19)	Improving low-skilled workers' prospects (J24)
Shutting down trade with China and India (F19)	Significant economic cost to developed countries (F69)
Wage rate of high-skilled workers (J31)	Rising wage inequality (J31)
Wage rate of low-skilled workers (J31)	Rising wage inequality (J31)
Ratio of high-skilled to middle-skilled wages (J31)	Rising wage inequality (J31)