Inequality and Industrial Change: A Global View

Citation

Went, R. (2002), "Inequality and Industrial Change: A Global View", International Journal of Manpower, Vol. 23 No. 8, pp. 770-772. https://doi.org/10.1108/ijm.2002.23.8.770.1

Under the influence of new international social movements against (the consequences of) globalization, the question whether income inequality in and among countries is increasing, and if so why, is now widely researched and debated[1]. Unsurprisingly researchers, international institutions such as the World Bank and policymakers often disagree about how inequality should be measured and compared over time, and about the quality and availability of data, which are often problematic. Conclusions about trends in world income distribution are therefore at least partially dependent on the choice of measurements and data[2].

The most widely used measure of inequality is of course the Gini coefficient, which is derived from the Lorenz curve. Alternatively, ratios of the income of the richest decile of the population to that of poorer deciles, or average income of a set of developed countries to that of a set of developing countries, are often used. In this volume however an alternative method is presented, based on the work of Henri Theil. In the four chapters on theory and method that open and close the book the editors introduce Theil’s T measure and explain how to work with it, making use of the statistical techniques of cluster analysis and discriminant function analysis. They argue that Theil’s T not only satisfies the standard conditions for an acceptable measure of inequality such as the principle of transfers, which requires that a transfer from a poorer to a richer person increase the index and vice versa, but also has the additional advantage that it can be used when adequate or reliable data at the individual level are not available. On the basis of industrial classification schemes of governments they compute between‐groups components of Theil’s index, which give lower bound estimates of the inequality of manufacturing earnings. This, they argue, gives “an uncannily good estimate of the movement in the dispersion of earnings through time, so long as classification schemes and employment structures do not change too much. And fortunately, classification schemes generally remain stable over time (thanks to bureaucratic inertia), while changes in the employment structure, which do occur, tend to be sporadic and can also be isolated from data sets”.

Insights that this approach can lead to are then presented in 12 chapters, all (co‐)authored by Galbraith, dealing with different countries around the world. The theme of the book’s second part is inequality, unemployment and industrial change, and it contains four papers. Ferguson and Galbraith examine the US wage structure from 1920 to 1947 and argue, in a reversal of the usual notions of macro‐to‐macro causality, that a small number of macroeconomic variables account for 97 percent of the variance in wage changes across groups. Galbraith and Cantú compute new measures of earnings and wage inequality in US manufacturing from 1920 to 1998, and conclude that manufacturing inequality rose sharply in the 1950s and began declining again in 1994. Calistri and Galbraith present an analysis of the evolution of industrial wages in a cross‐section of countries that are members of the Organization of Economic Cooperation and Development (OECD), and argue that the between‐group variation across time usually reflects the movement of macroeconomic variables, internal as well as external. Conceição, Ferreira and Galbraith argue – I suspect that this will surprise some people – that it is not at all obvious that the USA is less equal than the EU if we calculate measures of inequality not for individual EU‐member states but for the EU as a whole. They argue that the reverse is probably the case, and suggest that the key to reducing unemployment in the EU lies in measures that reduce – and not as is often proposed increase – inequalities in the structure of pay, at the continental level.

The eight papers in the third part of the book have inequality and development as their common theme. Conceição and Galbraith examine the dynamics of inequality across the OECD and find that an augmented Kuznets curve for developed countries, where inequality increases with income growth for the highest‐income countries, is consistent with their data set, thus offering a macroeconomic alternative to the skill‐biased technological change hypothesis which is often presented as an explanation for increasing inequality.

Galbraith and Lu measure the evolution of inequality in the global economy and show that although it remains possible for rich and determined countries to keep control of their wage structure, the predominant recent trend in inequality worldwide has been decisively upwards.

In their paper on economic regionalization, inequality and financial crises, Galbraith and Jiaquing show that crises typically generate increases in inequality, but more so in less developed countries and more so in regions that are more liberal in their policy regimes.

In a short chapter on inequality and state violence, Galbraith and Purcell argue that there is a relationship between various forms of state violence and inequality in manufacturing earnings in countries around the world from 1960 to 1995.

Galbraith and Cantú set out in a chapter on the performance of Latin American regimes from 1970 to 1995 that changes in earnings inequality are a sensitive indicator of slump, repression, political turmoil, civil war, natural disaster, and occasional periods of growth and stability in Latin America.

Calmon, Conceicâo, Galbrith, Cantu´ and Sanchez review the evolution of industrial earnings inequality in Mexico (1968 to 1998) and Brazil (1976 to 1995) and find that both countries show increases in wage dispersion over time, with a strong correlation with the rate of real economic growth.

Galbraith and Kim present an empirical analysis of industrial policies in Korea and show how Korean development has depended both on government and on the market.

Finally, in his concluding reflections on inequality and economic developments, Galbraith argues that a central institutional condition for social and economic development, underlying all other desirable institutional features such as education, life expectancy and democracy, is an acceptably fair and reasonably stable distribution of pay. He argues that “we haven’t even begun to work out the ways and means for establishing stable growth and declining inequality in a liberal world”. And he concludes: “Unless and until this problem is solved, it is reasonable to infer that in the long run the neoliberal world order cannot, will not, and probably should not endure.”

As a whole, I find this is a very useful and stimulating book, which deserves to be widely read. It is well organized, with an index and abstracts at the beginning of every chapter. The chapters on measurements and statistical techniques are useful for those who want to make themselves acquainted with the methods used, but readers who are not that interested in the techniques can easily skip them without losing much, because the other chapters are well written and very accessible. The main limitation of the method used seems to me that it only takes manufacturing earnings into account. Galbraith and Lu mention this as one of two deficiencies of the grouped Theil measure in comparison with the Gini coefficient. They then argue that it is pointless to complain about the lack of measurements for other sectors, particularly in poorer countries, and that changes in inequality within manufacturing are often a good indicator of changes in other sections, but this does not convince me. However, that does not diminish the value of this work. As was already noted in the beginning of this review, no indicator of inequality is uncontested or without problems. New approaches and interpretations that refine the picture, such as those presented here, are therefore more than welcome.

Notes

1. 1.

   1. For opposing views on global inequality see for example Robert Wade, “The rising inequality of world income distribution”, Finance & Development, December 2001, pp. 37‐9, and Xavier Sala‐i‐Martin, “The disturbing ‘rise’ of global income inequality”, NBER, Working Paper 8904.

2. 2.

   2. See for example Sanjay G. Reddy and Thomas W. Pogge, “How not to count the poor”, paper available at www.socialanalysis.org, which is an interesting critique of the estimates of the extent, distribution and trend of global income poverty made by the World Bank.