Winners and Losers in the Global Economy

During the 1980s, economists began to observe a trend of rising income inequality in the advanced industrial economies. At the same time, the data revealed that these economies were becoming increasingly exposed to imports of manufactured goods from developing countries. The question that follows is whether these outcomes are causally related, as economic theory suggests is possible.The literature under review represents the current thinking on that question. These studies, all by mainstream economists, accept that free trade makes for good policy, since it results in efficiency gains that are enjoyed by consumers. But these scholars also recognize that free trade can alter the returns to the factors of production, creating new patterns of winners and losers.Although this body of literature provides an impressive display of technical skills and formal economic reasoning, and on the whole gives convincing evidence that trade is only one culprit among many in explaining the problems facing blue-collar workers, it still sheds relatively little light on the political economy of the outcome. That is, it tells us little about the role that political, economic, and labor market institutions might play in shaping factor returns. This deeper understanding requires that we take a fresh look at existing institutions and the material interests and ideas underpinning them. Only then will we discover why societies have allowed a certain group of citizens—mainly the least skilled and least educated—to fall by the economic wayside.