Globalization, Inequality and Labor Market Policies

This paper addresses four questions. First, is globalization associated with more inequality in consumption or earnings? Second, is the labor market an important transmission mechanism? Third, can labor market policies reduce inequality? And fourth, would these policies have important side effects on efficiency? The answers are based on an analytical survey of the literature, including several studies currently under preparation. Some of these studies involve the use of new databases of wages and labor market indicators across countries. While all the answers should be considered tentative, some patterns emerge. Globalization may lead to higher or lower inequality, as different aspects of it have different consequences. Thus, wages fall with openness to trade, but they rise with foreign direct investment. The latter also increases (substantially) the returns to education. Social protection programs are effective at reducing inequality. Minimum wages, public sector employment and “core” labor standards are not. In between these two extremes, collective bargaining works mainly for the “middle class”. Social protection programs do not have a detrimental impact on efficiency, but high public sector employment and trade union membership are associated with weaker performance in the context of adjustment. The most promising way to offset the effects of globalization on inequality, namely increased education, does not fall under the realm of labor market policies.