Does Globalization Cause Inequality in Developed Countries in the Long Run? Empirical Evidence from 25 OECD Economies

The debate that rapid globalization over the past decades is a leading cause of increased income inequality within developed economies has been far from conclusive, including Dorn et al. (2018). We depart from existing studies by extending an earlier empirical framework by Gaston and Rajaguru (2009), for a sample of 25 OECD member countries across different geographical regions for the period 1970-2016. We aim to ascertain the long-run relationship between globalization, income inequality, and other key interactive variables in this relationship, such as economic growth, terms of trade, unionization, and minimum wages, following the existing empirical literature. Contrary to the prevailing political narrative, we find that only four countries in our sample suggest the existence of a long-run relationship between globalization and income inequality. Further, our results appear mixed and are not indicative of any uniform trend indicating improved terms of trade, higher minimum wages, or unionization to be equity-enhancing across OECD members. Thus, for policymakers, an emphasis on policies that promote higher educational attainment and upskilling of the workforce is far more critical to reversing the trend of increased inequality in the long run