Globalization, economic freedom, and wage inequality: A panel data analysis

Abstract

This paper examines the impact of globalization and liberalization on wage inequality using the KOF globalization index, the Economic Freedom Index (EFI) of the Fraser Institute and the Theil industrial pay inequality statistic compiled by the University of Texas Inequality Project (UTIP). Both static and dynamic fixedeffects models are estimated using a 5-year panel data set consisting of about 90 developed and developing countries for the 1970-2005 period. Estimation results from the dynamic panel data specification suggest that wage inequality has a significant and slowly changing component. The overall KOF and EFI indexes are found to be statistically insignificant in the full sample, but the results show that economic freedom is associated with more wage inequality, especially in Organisation for Economic Co-operation and Development (OECD) countries. The estimation results from country groups indicate that more deregulation is associated with more earnings inequality in OECD countries. The results from the models with subcomponents of the EFI imply that access to sound money has a negative effect on wage inequality. A more stable price system in an economy implies a more equal wage distribution in emerging markets (EM), non-OECD countries, and European Union (EU).

An investigation of the nexus between globalisation dimensions and income inequality

“…Tsai (2007) reveals the affirmative effect of political globalisation on human welfare. The results of Yay et al (2016) from fixed-effects estimations show that political globalisation measured by the KOF index has an affirmative impact on wage inequality. Bergh and Nilsson (2010) found that political globalisation does not increase inequality.…”

The handicap for enhanced solidarity across advanced economies: The greater the economic openness higher the unequal distribution of income

“…However, it conceals the change in skill composition of workers, which is crucial to understanding the change in “skill premium” over time. Despite the limitations of the traditional theorem for further analyses on widening income inequality in developing economies, Yay, Taştan, and Oktayer (2016): 583) use several approaches to clarify the global rise in the skill premium such as purchasing‐power differences, outsourcing, differences in goods prices and factor returns, high technology transfers, and foreign direct investment. First, trade specialization may not be beneficial for poor countries because their purchasing‐power differs significantly from rich countries in that the demand for the goods is different between those countries.…”

“…However, this may not be the case when the labor markets are subjected to rigidities among domestic markets (Goldberg & Pavcnik, 2007). Additionally, besides the current problems in labor markets, there may be other factors which restrict to reach an optimal point in the economy and lead to prices and wages to change over time (Yay et al., 2016: 583).…”