How does globalisation increase inequality?
Globalisation—the integration of world markets, the movement of goods, capital, and labor across borders, and the rise of global supply chains—has transformed the world economy. It has lifted hundreds of millions out of poverty, created new consumer goods, and generated unprecedented efficiency gains. Yet it has also contributed to significant inequality, both between countries and within them. Understanding globalisation's relationship to inequality requires examining who benefits (consumers, investors, skilled workers in developed countries) and who bears the costs (industrial workers, rural communities, workers in developing countries competing for low-wage jobs).
Quick definition: Globalisation-driven inequality refers to the uneven distribution of gains from international trade and supply chain integration, where workers in high-wage countries lose to offshoring, while workers in low-wage countries benefit but face intense wage competition.
Key takeaways
- Globalisation has benefited consumers and capital owners through cheaper goods and higher investment returns, but has harmed industrial workers in developed countries.
- Offshoring—moving production to lower-wage countries—has suppressed wages for manufacturing workers in the U.S., Europe, and other developed economies.
- Workers in developing countries have benefited from new jobs but face severe wage competition and weak labor protections.
- Global supply chains create unequal bargaining power, with large firms capturing most profits while workers and suppliers in developing countries capture little.
- The gains from globalisation flow mostly to capital owners and highly skilled workers, while losses concentrate among manufacturing workers and rural communities.
- Automation has exacerbated globalisation's inequality effects by further reducing demand for manufacturing labor.
The promise of globalisation: gains from trade
International trade theory, dating back to David Ricardo's principle of comparative advantage, predicts that all countries benefit from specializing in what they do best. The U.S. specializes in high-skill, capital-intensive industries; Vietnam specializes in labor-intensive manufacturing. Both countries should benefit.
In theory, this is correct. Global trade generates efficiency gains—producing goods where they cost least to make. A widget produced in Vietnam for $2 is cheaper than the same widget produced in the U.S. for $8. Consumers save money. Consumers have more purchasing power. Economies grow.
The U.S. imports widgets from Vietnam. Vietnamese workers gain employment. U.S. workers lose manufacturing jobs but can retrain for higher-skill positions. Aggregate welfare increases. In theory, the efficiency gains are large enough to compensate the losers and still have gains left over for everyone.
The problem: in practice, the gains are not distributed equally, the losers are not compensated, and the transition is painful and incomplete.
Offshoring and manufacturing job loss in developed countries
Starting in the 1980s and accelerating through the 1990s and 2000s, firms in developed countries began moving production to developing countries with lower wages. A clothing manufacturer that paid U.S. workers $15 per hour could produce the same item in Bangladesh for $2 per hour. The firm, consumers, and investors benefited. U.S. workers lost their jobs.
The magnitude is significant. The U.S. lost approximately 5 million manufacturing jobs between 2000 and 2010, primarily due to offshoring and automation. Towns that depended on manufacturing—like those in the Rust Belt (Ohio, Pennsylvania, Michigan, Indiana)—experienced dramatic economic decline. Unemployment spiked. Wages for remaining manufacturing jobs fell. Opioid addiction, alcoholism, and suicide increased in these communities.
China's entry into the World Trade Organization in 2001 accelerated this trend. Chinese manufacturing, with wages roughly one-tenth of U.S. wages, was shockingly competitive. U.S. manufacturers could not compete. Employment in manufacturing-dependent communities collapsed.
The workers displaced by offshoring typically found new jobs that paid 15–20% less than their previous manufacturing positions. A worker making $55,000 per year in a manufacturing plant took a job in retail, food service, or warehousing making $45,000. Some never re-employed. Some left the workforce entirely. The efficiency gains from lower-cost production were real, but the workers who bore the costs were not compensated by consumers or capital owners.
Wage competition and factory conditions in developing countries
While developed-country workers lost from offshoring, did developing-country workers gain?
Partly, yes. Manufacturing jobs in Vietnam, Bangladesh, and China paid more than agricultural work, which was the primary employment alternative. Moving from farming to a factory job represented an improvement. Additionally, hundreds of millions of workers in developing countries entered the global labor force, and many escaped extreme poverty through manufacturing employment.
However, the benefits were constrained by three factors. First, wages in global supply-chain manufacturing are extraordinarily low. A garment worker in Bangladesh makes approximately $3–5 per day. A smartphone manufacturer in China makes approximately $8–12 per day. These wages exceed local agricultural incomes but remain far below what comparable workers in developed countries earned.
Second, working conditions are often dangerous. Factory fires, collapsed buildings, chemical exposure, and 12+ hour days are common. Labor standards are weak and weakly enforced. When labor organizers attempt to unionize, they face retaliation.
Third, when multiple developing countries compete to host manufacturing, they bid down wages and labor standards in a "race to the bottom." Each country undercuts the others to attract investment. Vietnam competes with Bangladesh competes with Mexico competes with Cambodia. The result is that workers in any single country cannot raise wages without losing factories to a lower-wage rival.
Workers in developing countries benefit from globalisation relative to their pre-globalisation state (agricultural poverty), but they do not fully share in the efficiency gains of global trade. Most gains go to capital owners and consumers in developed countries. The wage gap between a garment worker in Bangladesh and a garment worker in the U.S. (or the U.S. consumer buying garments) reflects not just productivity differences but bargaining power differences.
Global supply chains and profit concentration
Modern globalisation is not simply "U.S. firms selling to developing countries." It is complex supply chains where production is fragmented across many countries, and value is captured at the top and bottom of the chain, not in the middle.
Consider a smartphone. It contains chips designed in the U.S. by U.S. engineers (high value). It contains rare materials mined in Africa, often with poor labor practices (low value, extracted by low-wage workers). It is assembled in China (low-wage, outsourced manufacturing). It is sold by U.S. retailers and U.S. tech companies (high value, high profit margin).
The profit distribution is extremely skewed. Apple captures 35–40% of the revenue as profit (the brand, the design, the software). Retail captures 20–25% as gross margin. Manufacturing in China captures 3–5%. Raw materials extraction captures 1–3%.
Workers making $10 per day assemble iPhones sold for $800. The ratio of value capture to labor input is extreme. The vast majority of globalisation's value-creation benefits consumers and capital owners in wealthy countries, not the workers making the products in developing countries.
Additionally, supply-chain dynamics create weak bargaining power for developing-country manufacturers. If one factory can produce a component, there are 50 others that can do it cheaper. A large firm can pit them against each other and drive prices and wages down. A factory owner in Vietnam cannot raise wages without the buyer (Apple, Nike, Walmart) switching to a factory in Bangladesh.
Inequality within developing countries
Globalisation has also increased inequality within developing countries. Cities that host manufacturing—like Shenzhen, Shanghai, Ho Chi Minh City—have boomed. Rural areas have stagnated. Workers in manufacturing hubs have some bargaining power and relatively higher wages. Rural workers in agriculture remain poor.
As countries become more developed and manufacturing wages rise, capital flows to even lower-wage countries (or automation replaces labor). Bangladesh and Vietnam have seen wage increases as manufacturing has shifted to Cambodia and Myanmar. Meanwhile, the early movers (South Korea, Taiwan, Hong Kong) transitioned to higher-skill production and higher wages.
The pattern is: manufacturing creates a temporary wage boost in a developing country. But as wages rise and other countries offer cheaper labor, capital moves on. The country must then develop higher-skill industries (tech, finance, services) to maintain rising wages. Countries that fail to transition remain stuck as low-wage manufacturing hubs.
Automation: the second wave of displacement
If offshoring displaced millions of workers in developed countries, automation threatens to reverse any benefits developing-country workers gained.
Robotics and automation are now cheap enough and capable enough to replace human workers in many manufacturing tasks. A robot that costs $100,000 and operates for 10 years pays for itself if it replaces a worker making $50,000 per year. But it costs far less than $100,000 to replace a worker making $10,000 per year (the salary in many developing countries).
This means that as robots become cheaper, offshoring becomes less attractive. It's cheaper to automate in the U.S. than to offshore to Vietnam if the automation costs $50,000 total but offshoring costs $60,000 in setup and coordination fees. Manufacturing may begin returning to developed countries, but in highly automated form, creating far fewer jobs than the manufacturing plants of the 1970s.
The developing countries that benefited from the offshoring wave—Vietnam, Bangladesh, China, Mexico—face a problem: automation threatens their competitive advantage (low wages). They must move up the value chain to higher-skill production before automation makes them redundant. Countries like Vietnam are trying to develop tech hubs and higher-skill manufacturing. But this is a collective action problem; all low-wage countries cannot simultaneously move to high-skill production.
Who benefits, who loses, from globalisation
The distribution of gains and losses from globalisation is extremely skewed.
Capital owners (investors, shareholders, executives) have benefited enormously. Stock prices have reflected rising corporate profits from cheap overseas production and expanded consumer markets. Returns on capital have been historically strong.
Highly skilled workers in developed countries (engineers, designers, financiers, tech workers) have benefited from globalisation. They work for global firms, earn high salaries, and compete in global labor markets where they are scarce and valuable. Globalization has not threatened their jobs; it has expanded their opportunities and allowed them to capture value from global supply chains.
Consumers in developed countries have benefited from cheaper goods. Clothing, electronics, and manufactured goods cost less because they are produced in low-wage countries. Real living standards have improved.
Manufacturing workers in developing countries have benefited from employment in manufacturing relative to agricultural poverty, but they have not fully captured the efficiency gains of global trade. They earn much less than equivalent workers in developed countries and face weak protections.
Manufacturing workers in developed countries have been severely harmed. Millions lost jobs, faced wage cuts, and saw their communities decline. Retraining programs were inadequate. Geographically, the benefits of globalisation have concentrated in major metros (New York, Los Angeles, San Francisco) while costs have concentrated in small manufacturing towns.
Rural and agricultural workers in developing countries have faced intense competition from global agricultural trade and have seen little benefit.
Real-world examples
The Rust Belt collapse (1990–2010): Manufacturing employment in Ohio, Pennsylvania, Michigan, and Indiana fell by 40–60%. Communities built around steel mills and auto plants experienced unemployment spikes, wage collapse, and opioid epidemics. A steelworker in Pittsburgh, Pennsylvania, who earned $55,000 in 1990 (in today's dollars) could not find comparable employment in 2010. If employed, they earned $40,000 in a service job. The community's tax base collapsed, schools and infrastructure suffered.
Bangladesh garment manufacturing: Workers in Bangladesh garment factories earn $3–5 per day making clothing sold in the U.S. for $50–100. A female factory worker supporting a family on $15 per day (high-wage by Bangladeshi standards) produces value that generates $100 per day for the retailer and manufacturer. The efficiency gain is real, but is captured almost entirely by capital and consumers, not by the worker.
Apple's supply chain: Apple's iPhone has a manufacturing cost of approximately $200 (2023). It is sold for $1,000+. Apple captures 40%+ of revenue as profit. The Taiwanese design and component manufacturing captures 15–20%. The Chinese assembly and component supply captures approximately 5%. Raw material mining in Africa, DRC Congo, and other countries provides minerals but workers earn a fraction of the margin.
Manufacturing in Vietnam: In 2000, Vietnam's manufacturing sector was nascent. By 2015, it employed 10 million workers and had generated significant wage growth and urban development. However, wages remain $8–15 per day in most sectors, a fraction of U.S. equivalents, and workers face weak labor protections. Factory accidents and low safety standards remain common.
Common mistakes
Mistake 1: Assuming offshoring benefits developing countries enough to justify the costs to developed countries. Yes, developing-country workers benefit relative to their pre-globalisation state, but they capture only a small share of the efficiency gains. Consumers and capital owners capture far more. The uncompensated losses to developed-country workers are not justified by the smaller gains to developing-country workers.
Mistake 2: Believing that retraining solves the problem. Retraining programs have generally failed to restore workers to their previous earnings. A 55-year-old steelworker cannot be retrained into a software engineer. Even when retraining is possible, workers often move to lower-wage industries. Retraining addresses skills but not regional unemployment and community decline.
Mistake 3: Assuming free trade always benefits both countries. While trade can benefit both countries in aggregate, it concentrates costs on specific workers and regions while benefits disperse widely. A country can benefit overall while specific groups are harmed, with no mechanism to compensate them.
Mistake 4: Ignoring the role of policy. China's offshoring was not inevitable. It was enabled by trade policies, exchange-rate management, and weak labor standards. If developed countries had imposed stronger labor and environmental standards on imports, or if they had invested in retraining and regional development, outcomes would be different.
Mistake 5: Believing automation will fix developing countries' competitiveness. Automation may eventually reduce the offshore wage advantage, but it will do so by destroying manufacturing jobs in developing countries, not by raising their wages. A country with lower-wage advantages has few advantages in automation.
FAQ
How much of U.S. manufacturing job loss is due to offshoring vs. automation?
Estimates vary, but most researchers suggest approximately 40–60% of U.S. manufacturing job losses since 1980 are due to offshoring, with the remainder due to automation, productivity growth, and changing consumer preferences. Both trends have reduced manufacturing employment dramatically.
Do developing countries gain from offshoring?
Yes, but unevenly. Workers in manufacturing hubs see wage improvements. Rural and agricultural workers see little benefit. The gains are smaller than the gains to consumers and capital owners in developed countries.
Why don't developing countries raise labor standards?
They compete in a "race to the bottom." If Vietnam raises minimum wage, manufacturers move to Cambodia. If Cambodia raises it, they move to Myanmar. Each country fears losing manufacturing investment to lower-wage rivals. Higher wages are possible only when a country moves to higher-skill production.
Is globalisation causing inequality to increase?
It has been a significant driver of inequality within developed countries (increased wages for skilled workers, stagnant wages for manufacturing workers) and has reduced inequality between countries (developing countries catching up to developed countries). The aggregate effect on global inequality is modest.
Could the U.S. reverse offshoring?
Possibly, through trade barriers or labor standards requirements, but this would raise consumer prices and trigger retaliation. It would also not restore manufacturing employment to previous levels if automation continues. The manufacturing economy of 1980 cannot be recreated.
What policy could address globalisation-driven inequality?
Options include stronger labor and environmental standards on imports, retraining and regional development for displaced workers, progressive taxation to fund redistribution, and sectoral support for declining regions. No single policy solves the problem.
Related concepts
- Learn how trade policy affects economic growth in ../chapter-09-international-trade/01-what-is-international-trade
- Understand supply chains and production networks in ../chapter-10-globalisation-supply-chains/01-how-supply-chains-work
- Examine automation's effect on labor markets in ../chapter-05-unemployment/05-automation-and-jobs
- Consider how policy choices shape inequality in ../chapter-14-inequality-and-economy/11-tax-policy-inequality
- Explore the history of trade and protectionism in ../chapter-09-international-trade/02-trade-protectionism-tariffs
Summary
Globalisation has delivered massive efficiency gains, reduced poverty in developing countries, and created unprecedented access to low-cost goods for consumers. However, these gains have been distributed extremely unevenly. Consumers and capital owners in developed countries have captured the largest share. Manufacturing workers in developed countries have borne concentrated costs through job loss, wage suppression, and community decline. Workers in developing countries have benefited relative to their pre-globalisation state but capture only a small share of efficiency gains, facing intense wage competition and weak labor protections. Automation threatens to further concentrate gains among capital owners while eliminating the low-wage competitive advantage that has been developing countries' primary benefit from globalisation. Addressing inequality requires policies that ensure workers share in globalisation's gains and that regions experiencing concentrated costs receive support.