The relative impact of different forces of globalization on wage inequality: A fresh look at the EU experience

Stefan Jestl, Sandra Leitner and Sebastian Leitner

Review of International Economics, 2022, vol. 30, issue 4, 1003-1037

Abstract: This paper analyzes in a joint approach the contributions of immigration, trade, and foreign direct investment (FDI) to wage inequality of native workers in a sample of old and new EU Member States between 2008 and 2013. Methodologically, we use the two‐step regression‐based Shapley value decomposition approach to filter out their relative importance in each of the countries analyzed. We find that globalization has very mixed effects and generally contributes little to wage inequality. Regarding their relative contributions, immigration and FDI are key contributors to wage inequality in old EU Member States while trade is the key source of wage inequality in new EU Member States. For immigration, the associated increase in wage inequality is strongest and most consistent among Southern EU Member States. We also show that immigration, trade, and FDI have different effects across the wage distribution that are however strongest at its center, which points to the relatively strong wage polarization effect of globalization. For trade and FDI, we also find sporadic inequality‐reducing effects that are strongest at the top of the wage distribution.

Date: 2022
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