Globalization and Inequality: Where do we stand?

Over the last thirty years, both developed and developing countries have experienced a huge globalization of their economies, which has coincided with an increase in intra-country income inequality, both within and between skill groups. This article surveys the key mechanisms of the globalization-inequality relationship. Four strands of literature are reviewed. First, the extension of the North-South HOS approach by relaxing certain simplifying assumptions makes it possible to generate most of the observed facts on trade and inter-skill group inequality, but also between unequally talented workers. Second, production segmentation and offshoring reveal several factors that increase inequality, particularly in developing countries. Third, accounting for firm heterogeneity generates intra-skill group inequality. Fourth, globalization causes changes in technologies and in institutions that can foster inequality. The mechanisms by which globalization raises inequality are thus numerous. A large part of the reviewed literature combines globalization with technological or/and institutional changes, which reconciles the three major explanations that have been given to the observed rise in inequality.