International Trade and Income Inequality

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International Trade and Income Inequality
Current trends indicate a significant increase in income inequality in countries all over the world, particularly in the developed countries. For example, in Britain, the pay of chief executives is more than $ 5m a year. The salaries paid to top executives increased by more than 300% in 12 years. In the same span of time, the wages of the median British worker remained relatively constant. According to these trends, the mean ratio of the executive to average salary at FTSE 100 companies shot from 47 to 120 times in 12 years (The Economist, 10). There is evidence of the occurrence of job polarization in developed countries, including some European countries and the United States, such that both high-skilled and low-skilled occupations increase their shares in employment while there is a decline in that of the middle-wage profession (Acemoglu & Autor, 1050).
This study aims to answer the following question: How does international trade affect income inequality in a country? The study proposes a simple theory to demonstrate how increased international trade in goods causes job polarization (Manasse & Turrini, 100). The model explains why there is a rise in the earnings of high-income earners and the low-income earners while there is a decrease in that of middle-income earners. The middle-income earners are critical in the political stability of a country. Therefore, severe economic consequences may result from a decline in the middle-income class (Acemoglu & Autor, 1054).
The usual argument is that the factors leading to job polarization and the widening of income inequality are globalization and technological changes. Machines are replacing middle-skilled workers in industries by carrying out routine tasks the workers engage. High-wage countries are offshoring everyday functions to low-wage countries to minimize the demand of middle-skilled workers. This study argues that more opportunities in the international trade of goods and services alone can expand income inequality and cause job polarization among various skill groups of workers.
Advancements in ICT (information and communication technology) make it easier for consumers to get detailed information on products enabling make informed choices by comparing various products. As such even minute differences in the quality of a product can cause considerable differences in the profitability of companies within industries: companies producing high-quality products command top shares in the market (Acemoglu & Autor, 1056). The winner-take-all trend seen in the market today has a significant effect on workers; it results in talent wars since the knowledge of workers (such as managers) determines the product quality. As a result of the fights for talent, workers (particularly knowledge workers) in winning companies earn very high incomes for renting their ability compared to their counterparts. More opportunities offered by increasing international trade magnify this effect. There is also an increase in the volume of business caused by the revolution of ICT which reduces trade costs in foreign countries (such as marketing costs). Growth in international trade results in s...