Published on real-world economics review, by John Schmitt [Center for Economic and Policy Research, USA, Issue no. 51, 1 December 2009.
… (page 2/8): Inequality as policy: Changing power relations
Early on, many conservative analysts in the United States went to great lengths to deny the increase in inequality, a particularly difficult task given that a host of survey and administrative data sets covering wages, compensation, incomes, and even net worth all showed sharp increases in inequality. From the late-1980s, however, the mainstream of the economics profession had turned its attention instead to explaining the rising inequality. The bulk of the profession fairly quickly settled on two likely suspects: “skills-biased technical change” and, to a lesser degree, “globalization.”
According to the first explanation, the diffusion of computers and related technology in the early 1980s steadily increased the demand for skilled workers relative to less-skilled workers, driving up the wages and incomes of more-educated workers and depressing the wages and incomes of less-educated workers. From a political perspective, the skills-biased technical change view had several convenient features. At face value, it appeared to be broadly consistent with the data (even though economists on the left, such as David Howell and Lawrence Mishel, and more mainstream economists including David Card, John DiNardo, Alan Manning, and others have presented strong critiques3). At least as importantly, however, the technological explanation removed policy, politics, and power from the discussion of inequality, by attributing rising economic concentration to “technological progress,” a force that could be resisted only at our peril. The skills-biased technical change explanation also put significant limits on the terms of policy debates: the problems of the three-fourths of the U.S. workforce without a university degree were either the result of the poor personal decision not to pursue enough education, or, at most, a sign that, as a society, we needed to invest more in education.
The second standard, though less favored, explanation for rising inequality was the elusive idea of “globalization.” In the most common view, globalization is supposed to have lowered the earnings of less-educated workers by putting them in direct competition with low-wage workers around the world. This competition put pressure on wages through international trade in goods and services; through the relocation or threat of relocation of production facilities to overseas locations; through competition with immigrants in local labor markets; and through other channels.
Globalization is the less favored explanation in the standard political discourse not because it does not offer what is at face value a coherent explanation of the rise in inequality, but because, by acknowledging the social costs of the increased integration of markets, the globalization explanation threatens to derail an important economic project of the elite. Economists and politicians in the United States spent much of the 1980s and 1990s arguing that the expansion of trade was the only path to national prosperity. In this context, blaming widening inequality on the same process of globalization that was supposed to be making us richer became quite awkward. (As an aside, I note that globalization has proved itself to be a flexible political tool in the U.S. and European debates. On the one hand, it seems, U.S. and European workers are told that their future prosperity depends on more globalization. On the other hand, they are also told that globalization means that our societies can no longer afford a generous welfare state.) … (full long 8 pages text).