The New Economics of Income Distribution

The New Economics of Income Distribution

Introducing Equilibrium Concepts into a Contested Field

Friedrich L. Sell

With the increased interest in the role of inequality in modern economies, this timely and original book explores income distribution as an equilibrium phenomenon. Though globalization tends to destroy earlier equilibria within industrialized and developing countries, new equilibria are bound to emerge. The book aims at a better understanding of the forces that create these new equilibria in income distribution and examines the concept at three distinct levels: market equilibrium, bargaining equilibrium and political economy equilibrium. In particular, the author addresses the question of how the main factor markets of labour and capital are related to income distribution.

Chapter 8: International trade and income distribution

Friedrich L. Sell

Subjects: economics and finance, welfare economics

Abstract

In ‘International trade and income distribution’, we show that both rising demand for high-tech goods and increasing supply of low-tech goods tend to widen the gap between the wages of the skilled and of unskilled labour force. It seems that high (low) qualified labour force in the high-tech sectors of tradeables and of non-tradeables share common interests. Therefore, the structure of unions should be reorganized according to the principle of ‘high-tech’ vis-à-vis ‘low-tech’, not following the often used principle of industries. We find that globalization coming along as a stronger integration of the South into the goods markets of the North has negative effects on the income distribution of wages in the North: either the gap between the wages for skilled and for unskilled labour is widened (US scenario) or the rigidity of relative factor prices (Continental Europe scenario) renders part of unskilled labour jobless and hence causes inequality to increase as well. Notice also that the regime of rigid wages in the North reduces inequality in the South (in comparison to the free trade-flexible wages scenario). Terms of trade will be affected when countries bargain over tariff reductions: assuming the North has more bargaining power than the South, tariff reductions will concern in the first place low-tech goods. As a result, the relative price for skilled labour (in relation to unskilled labour) will increase. Given the substitutability in the production functions, the production of both goods will become more intensive in the use of unskilled labour. Whether the distribution of wage income will change in the North in favour of skilled labour and to the detriment of unskilled labour depends on the degree of homogeneity of the production function. For a large country, terms of trade gains will slow any rise in capital income shares. This in turn means that terms of trade effects will tend to mitigate the inequality effects of tariff liberalization. In the framework of a political economy/rent seeking model for the usage of different tax policy instruments such as tariffs and export subsidies, the effects of these instruments on income distribution/social welfare are ambiguous: the imposition of a (higher) import tariff on labour-intensive goods will reduce the Gini coefficient and hence the inequality of wages for skilled and unskilled labour, ceteris paribus. In the opposite case of an (unskilled) labour-abundant country, the imposition of import tariffs on skill-intensive goods will raise the Gini coefficient and hence the inequality of wages for skilled and unskilled labour, ceteris paribus. It is undisputed that export subsidies raise the incomes of the protected sector to the detriment of the unprotected sector. If the protected sector uses intensively (un-)skilled labour, the difference in the remuneration vis-à-vis unskilled labour will increase (decrease), ceteris paribus.

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