GLOBALIZATION AND TOP INCOME SHARES

Lin Ma

Working Papers from U.S. Census Bureau, Center for Economic Studies

Abstract: How does globalization affect the income gaps between the rich and the poor? This paper presents a new piece of empirical evidence showing that access to the global market, either through exporting or through multinational production, is associated with a higher executive-to-worker pay ratio within the firm. It then builds a model with heterogeneous firms, occupational choice, and executive compensation to model analytically and assess quantitatively the impact of globalization on the income gaps between the rich and the poor. The key mechanism is that the “gains from trade” are not distributed evenly within the same firm. The compensation of an executive is positively linked to the size of the firm, while the wage paid to the workers is determined in a country- wide labor market. Any extra profit earned in the foreign markets benefits the executives more than the average worker. Counterfactual exercises suggest that this new channel is quantitatively important for the observed surge in top income shares in the data. Using the changes in the volume of trade and multinational firm sales, the model can explain around 33 percent of the surge in top income shares over the past two decades in the United States.

Keywords: trade; income inequality; occupational choice; CEO compensation (search for similar items in EconPapers)
JEL-codes: E25 F12 F62 J33 (search for similar items in EconPapers)
Pages: 75 pages
Date: 2014-02
New Economics Papers: this item is included in nep-bec, nep-int and nep-lma
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Globalization and top income shares (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:cen:wpaper:14-07

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