applied economics

Wage inequality has increased since the 1970s, and has reached the highest level by now. Income measurement during money transfers and taxation process presents evidence that wage inequality is high in the country. However, various issues such as availability of effective measurement methods, causes, solutions, and effects of the wage inequalities have raised many questions. The 1980s were marked by extensive increase of inequality in almost all the industrial sectors. The process enabled the middle-wage earners to advance to higher levels away from those at the bottom. Similarly, the gap between the middle and high earners widened. High earners have benefited more from the wage inequalities resulting to massive widening of the gap between the poor and the rich.

Globalization has encouraged extended wage inequalities particularly in the UK and US. For instance, advancement in technology encourages employment of skilled workers at a higher cost. Such workers demand higher salaries based on their skills and expertise resulting in evident inequalities. On the other hand, globalization has facilitated growth of industries that has created room for employment of highly skilled workers. The economic growth has opened up opportunities in many countries through supporting international trade. The investment opportunity is always supported by acquiring skilled workers at a higher cost.

Unfortunately, some companies do not have effective policies and strategies to find workers. The failure tends to increase the wages discrepancies and subsequent widening of the gap between the poor and the rich. Positive correlation exists between outsourcing processes and income inequalities. The international trade theory argues that openness in the business encourages a rise in both nominal and real return. Plentiful supply of human and physical capital such as the liberation and openness has played an essential role in the improvement of nominal and real income. The economic relationship increases inequalities in developed countries such as the US and UK. Fraser index of economic liberalization and KOF index of globalization offers data confirming that economic liberalization promotes inequalities in the US and UK. KOF index of globalization has various components such as number of Internet users and telephone calls.

Globalization has created a correlation between the levels of inequality and foreign direct investment (FDI) in the United States. The process has resulted in a significant rise in the flow of direct investment and influence on the subsequent distributive consequences. Foreign direct investment results to an increase in the capital quantities and physical product of labor. Analysis by standard Gini coefficient indicates that United States is leading in terms of income inequality. The rate of inequality is one of the highest in the world far above that of the developing countries such as India and Russia. Unfortunately, the process results in reduced opportunities for the poor people while offering excellent environment for economic advancement to those who are already wealthy. Lack of equal opportunities has catalyzed the development of several movements to influence economic mobility. Although there are many causes of unequal economic opportunities, technological advancement and globalization have played a significant role. The process has created stiff competition for the few available jobs in the United States and UK.

Globalization has encouraged automation of most of the industrial activities in the developed countries. Advancement in technology has facilitated development of efficient machines that have replaced the need for the low-skilled workers. It means that most of the industries are no longer interested in the services offered by workers without skills. Instead, they are employing a few highly experienced and skilled workers for much higher compensations. The advancement has slowly widened the gap between the poor and rich resulting in economic imbalances. Unfortunately, unskilled workers do not receive much protection from the unions because of lack of sufficient information and understanding of their rights.

Congressional Budget Office (PDF) explained that in the US, the rate of wage inequality has increased over several decades. Although the negative effects of globalization have been realized by many countries, US have felt the greatest impact because it is a leading country in terms of economic advancement. Between the year 1968 and 2010, national income acquired by the top 20 percent went up to 50.2 from 42.6 percent. It is evident that most gains were accumulated at the most top end. On the contrary, the middle class faced a reduction from 53.2 to 46.5 percent. US Gini coefficient has indicated a steady increase to 0.378 in the late 2000s from 0.316 in the 1970s. The country is leading in terms of uneven distribution of resources among the major developed nations.

Increasing income inequality has risen with economic enhancement due to which skilled people have benefited at the expense of manual workers. Globalization has supported extensive competition for professional jobs both within and outside the country. Outsourcing of professional workers to other countries has encouraged wages stagnation and reduced union’s powers. Unions are slowly losing their meaning and roles because professional workers have power to express themselves and negotiate for favorable working conditions and compensation. Professional workers are always given an opportunity to express their feelings during the interview process. They have an option to reject or accept an offer based on their principles, qualifications, and requirements.

Globalization has encouraged many people to migrate to US in search of better economic opportunities. The process has encouraged stagnation of the wages particularly affecting middle and low-level workers. Windmeijer revealed that a 10 percent rise in the immigrant’s population translates to a 1.3 reduction in the labor cost. Increased labor competition may result in undesirable outcomes to many Americans. It is beneficial for the government to develop effective strategies to support the displaced workers and help them attain alternative sources of income. For instance, there is a need to reform the education system, encourage entrepreneurship and innovation, as well as facilitate stronger safety net.

Globalization has improved the level of education resulting in an increase in the pool of experts around the world. Many educated experts from other countries particularly developing countries are seeking every opportunity to work in the US and UK because compensations in those countries are better. The increased availability of skilled workers has encouraged employees to consider skilled workers even for those jobs that do not require much education. Most jobs in America today require workers with commensurate educational levels. The rate of workforce consisting of college and university graduates is higher than the available opportunities in the country. The high supply and low demand have posed many threats to unskilled workers. In 2011, the percentage of average Bachelor degree workers was more than 65 % higher than that of high school workers. On the other hand, professional degrees such as MBA, MD, and JD earned a 161 % premium.

Attainment of Higher Education

Attainment of higher education translates to reduced opportunities but higher earnings.The high rate of technological advancement influenced by globalization does not guarantee any job to the high school and college graduates. Reduced prices of computers and availability of cheaper and convenient communication methods have resulted to automation of various jobs that were previously done by experts. Some of the most affected areas include accounting, pharmaceutical and finance jobs. The wages difference among workers with a mere Bachelor degree and advanced degrees continues to widen. Although the premiums for the advanced degrees have been steadily increasing since the year 2000s, wage premiums have remained stagnant since that time.

Progressive tax code (PDF) is an effective tool to handle the issue of wage inequalities in the country. Shifting some resources from the wealthy to the poor population can facilitate a reduction in the marginal utility. Cut top income tax rates are some of the strategies being applied to influence inequalities in the distribution of resources. Capital gains from dividends and tax rates investment income have significantly reduced and reached 15 percent. Although many economic theories and models have attempted to estimate the relationship between growth and inequalities, it has turned difficult to determine the optimum balance empirically. Although globalization has resulted in economic advancement, it has contributed to increased poverty among the unskilled workers.

In conclusion, companies with larger markets prefer skilled workers and offer them better terms of employment to motivate and retain the experts. Globalization rise means higher wages for advanced professionals and wages stagnation for the unskilled workers. Computer programming is an example of technological advancement encouraged by globalization. A single computer expert can write many programs and thus render many workers irrelevant to their employers. In addition, one copy of a program can be easily duplicated to serve in various sectors. Larger markets demand programs that are more valuable and are likely to employ several programs. On the other hand, big markets require products that are more differentiated. Such an environment involves a skill-intensive activity. Skilled workers benefit more than unskilled people because globalization facilitates development of huge world markets. The large market demands abilities and capabilities of skilled workers.

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