Rising Income Inequality: Technology, or Trade and Financial Globalization?

The paper examines the relationship between the rapid pace of trade and financial globalization and the rise in income inequality observed in most countries over the past two decades. Using a newly compiled panel of 51 countries over a 23-year period from 1981 to 2003, the paper reports estimates that support a greater impact of technological progress than globalization on inequality. The limited overall impact of globalization reflects two offsetting tendencies: whereas trade globalization is associated with a reduction in inequality, financial globalization—and foreign direct investment in particular—is associated with an increase in inequality.