What explains the dramatic widening of wage inequality in the UK over the past 20 years?
According to new research by Professors Jonathan Haskel and Matthew Slaughter, published in
the latest issue of the Economic Journal, it is globalisation - the opening of markets to
international trade - that is chiefly responsible rather than the introduction of new technology, as
many believe. They cite the film The Full Monty to explain how the impact of trade makes itself
felt on the wages of unskilled workers.
The researchers first note that UK workers in the bottom 10% of the income distribution have seen
almost zero real growth in their wages over the last 20 years. In contrast, workers in the top 10%
of the income distribution have had real wage increases of around 50%. Two potential causes have
been cited for this widening wage inequality: international trade and technical change. Which
really is to blame?
The view that trade is the culprit is based on the fact that developed countries have become
increasingly open to trade with developing countries. The latter are rich in unskilled labour, it is
argued, and can supply goods where production is 'unskilled-intensive' - such as T-shirts from
China - at a fraction of developed country costs. Hence, unskilled wages in developed countries
must fall if domestic producers are to remain competitive.
The 'technology' story is that there has been rapid technical change in recent decades, especially
with the widespread introduction of computers. This technical change has been 'skill-biased',
raising the relative productivity of skilled workers but reducing demand for unskilled workers and
thereby lowering their wage.
The main counter-argument to the trade view is that only a small fraction of goods in developed
economies are internationally traded. The service sector makes up an increasingly significant part
of production - from restaurants to haircuts to prison services - and although some services are
traded, such as financial services, the bulk are not.
The Full Monty, a film about a group of unskilled ex-steelworkers in Sheffield, shows why this
argument against trade is incorrect. At one point in the film, the character Dave takes a job as a
security guard in the local supermarket. Security seems a fine example of the services that a
modern economy increasingly produces - surely a canonical case of a non-traded good. So one
might suppose that security guard wages are unaffected by trade.
But the film shows why this reasoning is false. Dave is unemployed because the local steel
industry has been forced to close, presumably because of increased competition from abroad. Such
closures create a flow of 'Daves', unskilled workers potentially available as security guards, who
drive down security guard wages. So even though supermarket output is non-traded, the wages of
people who work there are still affected by trade.
The same reasoning is true for technology. The occupation of security guard is not subject to
dramatic technical progress, so are security guard wages unaffected by it? Once again, it depends
crucially on what is happening to comparable workers in other sectors. If technical progress is
moving faster elsewhere, and if it needs more skilled workers, that again creates a flow of 'Daves',
reducing security guard wages in the non-traded sector.
What matters for wages is the potential flow of workers between sectors so the question is whether
technical change and the pressure of foreign competition - measured by output prices - are moving
more in some sectors than others. It is differences across sectors that potentially cause wage
adjustments. Unskilled wages will fall when prices fall in mostly unskilled-intensive sectors.
Over the 1980s, this was exactly what happened. Haskel and Slaughter find that price rises were
concentrated in skill-intensive sectors and price falls in unskilled-intensive sectors. At the same
time, technical change was pretty much uniform across sectors. So it was the price changes
resulting from globalisation rather than new technology that led to the dramatic change in wage
inequality.
ENDS
Note for Editors: 'Trade, Technology and UK Wage Inequality' by Jonathan Haskel and Matthew
Slaughter is published in the January 2001 issue of the Economic Journal. Haskel is at Queen
Mary and Westfield College, London; Slaughter is at Dartmouth College in New Hampshire. The
research was supported by the Economic and Social Research Council (ESRC) and the Russell
Sage Foundation.
For Further Information: contact Jonathan Haskel on 020-7882-5365 (email:
j.e.haskel@qmw.ac.uk); RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or 07768-
661095 (email: romesh@compuserve.com); or RES Media Assistant Niall Flynn on 020-7878-
2919 (email: nflynn@cepr.org).