Paul Krugman Says Globalization Leads to Higher Income Inequality After All

This is a big difference from the mantra in the 1990s and early-00s. And he blames China:

At the same time, the rise of China has prevented, for the time being, a development that I and others expected to mitigate the effects of trade on income distribution: up-skilling by the developing country exporters. “As newly industrializing countries grow,” I wrote in 1995, “their comparative advantage may shift away from products of very low skill intensity.” And that’s exactly what happened – for the countries that were the major exporters of manufactured goods to the OECD then. As John Romalis has shown, the exports of the original group of Asian newly-industrialising economies have shifted dramatically away from labour-intensive toward skill-intensive products.

But along has come China, which is far more labour-abundant now than the NIEs were then. A simple indicator is relative wage rates: in 1990, according to the US Bureau of Labor Statistics, the original four Asian NIEs had hourly compensation costs that were 25% of the US level. Now the BLS estimates that China’s labour costs are only 3% of US levels.

In 1995 I also believed that the effects of trade on inequality would eventually hit a limit, because at a certain point advanced economies would run out of labour-intensive industries to lose – more formally, that we’d reach a point of complete specialisation, beyond which further growth in trade would have no further effects on wages. What has happened instead is that the limit keeps being pushed out, as trade creates “new” labour-intensive industries through the fragmentation of production.

Strangely, however, this contradicts some of his earlier premises. Namely, that increased income inequality is almost all concentrated in the top 1% of of Americans, and the further up the ladder you go, the further the gains in income shares are held. So, if China has increased the college wage premium at the expense of lower-skilled workers, we should expect the income gains to be spread more broadly across those in the distribution who have attained higher levels of education. But they haven't been; the gains in wage shares have gone almost entirely to the very top of the income distribution.

The data, especially the Piketty-Saez data that Krugman loves to cite, is more consistent with Rosen's "superstar" theories, or (especially) with the the "income shifting" arguments of Slemrod and others, or with the data that shows that changes in the tax code led wealthy Americans to work more, or that changes in the tax code changed the predominant method of CEO compensation from wages to stock options. If China is truly significant, it's importance is seemingly being crowded out by other factors. Either that, or the Piketty-Saez data isn't providing a true representation of inequality.