Many workers are missing out on the rewards of globalisation

RICH countries have democratic governments, so continued support for globalisation will depend on how prosperous the average worker feels. Yet workers' share of the cake in rich countries is now the smallest it has been for at least three decades (see chart 5). In many countries average real wages are flat or even falling. Meanwhile, capitalists have rarely had it so good. In America, Japan and the euro area, profits as a share of GDP are at or near all-time highs (see chart 6, next page). Corporate America has increased its share of national income from 7% in mid-2001 to 13% this year.

Like so many other current economic puzzles, the redistribution of income from labour to capital can be largely explained by the entry of China, India and other emerging economies into world markets. Globalisation has lifted profits relative to wages in several ways. First, offshoring to low-wage countries has reduced firms' costs. Second, employers' ability to shift production, whether or not they take advantage of it, has curbed the bargaining power of workers in rich countries. In Germany, for example, several big firms have negotiated pay cuts with their workers to avoid moving production to central Europe. And third, increased immigration has depressed wages in sectors such as catering, farming and construction.

Most of the fears about emerging economies focus on jobs being lost to low-cost foreign competitors. But the real threat is to wages, not jobs. In the long run, trade and offshoring should have little effect on total employment in rich countries; rather, they will change its composition. So long as labour markets are flexible, job losses in manufacturing should eventually be offset by new jobs elsewhere. But trade with emerging economies can have a big impact on both average and relative wages.

Over long periods of time, real wages tend to track average productivity growth. But so far this decade, workers' real pay in many developed economies has increased more slowly than labour productivity. The real weekly wage of a typical American worker in the middle of the income distribution has fallen by 4% since the start of the recovery in 2001. Over the same period labour productivity has risen by 15%. Even after allowing for health and pension benefits, total compensation has risen by only 1.5% in real terms. Real wages in Germany and Japan have also been flat or falling. Thus the usual argument in favour of globalisation--that it will make most workers better off, with only a few low-skilled ones losing out--has not so far been borne out by the facts. Most workers are being squeezed.

If GDP per person is growing fairly briskly, why are most workers missing out on real pay rises? Partly because a bigger share is going to profits, and partly because high earners have pocketed a huge slice of the gains in income, causing inequality to widen. America's top 1% of earners now receive 16% of all income, up from 8% in 1980. Wage inequality in Europe and Japan has also increased, but not by as much.

A decade ago, the consensus among economists was that increasing wage inequality was caused mainly not by trade but by information technology, which has raised the demand for skilled workers relative to unskilled ones. Today, a growing number of economists agree that trade is playing a bigger role. It is hard to separate the impact of globalisation and IT on relative wages because they both reduce the demand for low-skilled workers. But now that the majority of workers are losing out, the finger of blame points at globalisation.