Paper published in the 2004 Journal of International Business and Economics THE EFFECT OF GLOBALIZATION ON THE DISTRIBUTION OF PRODUCTIVITY GAINS

The integration of many previously-closed low-income countries into the world economy, starting around 1980, has been referred to as the Third Wave of Globalization. Large low-wage economies that opened to trade such as China, India, and Mexico led to an unprecedented equalization of goods prices between rich and poor countries during this time. The Factor-Price Equalization Theorem, a standard part of modern trade theory, predicts that equalization of goods prices should lead to an equalization of factor prices between high-wage countries such as the United States, and low-wage countries like India and China. Unlike the Second Wave of Globalization, 1945-1980, which was primarily among rich countries with similar factor prices ex ante, the Third Wave of Globalization between rich and poor countries should lead to a much greater adjustment in factor prices. Gains in U.S. real compensation during the Second Wave period were nearly equal to gains in productivity, as compensation of factors moved proportionally to their marginal products. However, in the 1980-2003 period, real compensation in the non-farm business sector grew at only 52 percent of the rate at which labor productivity increased. For the non-financial corporate sector, labor compensation grew at only 36 percent of the growth rate of labor productivity. The purpose of our paper is to explain the breakdown in the relationship between labor productivity and compensation gains in the United States during the Third Wave period, and to consider who may be capturing those gains. We examine the possibilities that the gains may have been captured by capital in the U.S., or my have been transferred abroad to U.S. trading partners by movements in the terms of trade, and to present evidence relating to both. It appears that neither U.S. labor nor U.S. capital are fully capturing those gains and that a portion of U.S. productivity benefits are leaking out of the United States