Among the alleged ills of globalisation, few have dominated the headlines in the past decade as much as worsening inequality.

From the Occupy Wall Street movement to the rise of US Senator Bernie Sanders and President Donald Trump, the resurgence of nationalism in Europe and South America, to burgeoning populism in much of Asia, the yawning rich-poor gap looms large, be it in the forefront or background.

Existing economic research does not draw a clear link between globalisation of trade and the income of the very rich.

Researchers usually focus on the wage difference between skilled and unskilled workers in the economy, or what is termed the “skill premium”. However, this premium cannot easily explain the income of the richest of the rich, the top 0.1%, whose earnings usually consists of executive compensation, business profits and capital gains.

Lin Ma of the National University of Singapore and I sought to fill some of this knowledge gap of the interplay of globalisation and top income shares, a subject that is becoming increasingly important in the design of public policies around the world. Our paper examines how globalisation shapes the income gap between the ultra-rich and the rest of the population.

We found that inequality in firms in the United States – measured as the difference between CEO compensation and the average wage in the rest of the firm – was 50 percent larger among firms that exported overseas compared to those that sold only domestically.

We showed that this larger inequality came from export-driven growth: With globalisation, the exporters increased in size and became more unequal in terms of compensation. This globalisation-driven increase in inequality accounts for 44 percent of the income surge for the very top earners in the US.

The exporter premium

For this project, we combined firm-level data from three sources: tax records from the US Internal Revenue Service combined with the US Census Bureau detailed each firm’s payroll expenses; data from the US Border Customs provided firm-level exports; and data from Standard & Poor’s described executive compensation.

Our matched firm-level data comprised 17,233 firm-year observations between 1992 and 2007, with 2,561 unique firms. The combined dataset covered around half of US public firms, and about three quarters of those firms exported abroad.

With this new dataset, we documented how globalisation disproportionately benefits the top executives relative to the workers within the same firm. We found that the CEO-to-worker pay ratio was 50.7 percent higher among exporters than among non-exporters, rising to 73.3 percent in the manufacturing sector. A 1 percent increase in firm exports was associated with a 0.12 percent increase in within-firm inequality.

We then showed that this “exporter premium” for within-firm inequality is mediated through firm size: Exporters in our study had a higher CEO-to-worker pay ratio precisely because they were larger than non-exporting firms. A 1 percent increase in headcount was associated with a 0.39 percent higher CEO-to-worker pay ratio. More…

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INSEAD Knowledge is the expert opinion and management insights portal of INSEAD, The Business School for the World. Knowledge showcases the latest business thinking and views from award-winning faculty and global contributors

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