Title: Economic Issues No. 16 -- Should Equity Be a Goal of Economic Policy?
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Content: Increased trade, capital and labor movements, and technological progress have led to greater specialization in production and the dispersion of specialized production processes to geographically distant locations. Developing countries, with their abundant supply of unskilled labor, have a comparative advantage relative to developed countries in the production of unskilled-labor-intensive goods and services. As a result, production of these goods in developed countries has come under increased competitive pressure. Economic theory tells us this should apply downward pressure on the relative compensation of unskilled workers in developed countries and upward pressure on the compensation of their counterparts in developing countries. On the basis of this theory, some have claimed that globalization is to blame for growing income inequality in developed countries. Others argue that the widening gap between the wages of skilled workers and unskilled workers in the industrial countries is due to the development and dispersion of skill-intensive technologies rather than to increased trade. Several empirical studies have tried to gauge the relative importance of trade versus technological progress for the decline in wages of unskilled workers in developed countries. Estimates of the contribution of increased trade to the total increase of the wage differential between unskilled and skilled workers range from negligible to 50 percent. This large variation reflects the structure of production in developed countries and the share of the labor market that is in direct competition with low-skilled workers in developing countries. The debate regarding the effect of globalization on income distribution in developing countries mirrors the debate on developed countries.