FILE - In this Feb. 15, 2015 file photo, the Space Needle towers in the background beyond a container ship anchored in Elliott Bay near downtown Seattle. The U.S. trade deficit widened in October 2015 as exports of U.S. goods fell to the lowest level in more than four years, a reflection of the impact of a weak global economy and stronger dollar. The Commerce Department says the trade deficit widened 3.4 percent in October to $43.9 billion, compared to a revised $42.5 billion deficit in September. (AP Photo/Elaine Thompson, File)

A new report has linked globalization, executive compensation and income inequality. Elaine Thompson/AP

Globalization's rise in recent decades has widened income inequality in the U.S. while padding executives' pockets, according to a study put out by the National Bureau of Economic Research that directly links globalized commerce with the country's prominent wage gap.

Researchers from the University of Colorado–Boulder and Williams College in Massachusetts surveyed executive compensation at thousands of U.S. companies between 1993 and 2013 and concluded that "recent globalization trends have increased U.S. inequality by disproportionately raising top incomes."

"Globalization and income inequality are currently the two most important economic issues, with dissatisfaction about both of these forces shaping elections throughout the developed world," the researchers said. "The source of globalization's impact on top incomes matters because it influences society's willingness to tolerate inequality."

Extensive research efforts in recent years have looked at executive pay dynamics, income inequality and the effects of globalization, but seldom have the three topics been tackled simultaneously. On the CEO compensation front, the left-leaning Economic Policy Institute in 2015 found executive pay had grown by 997 percent between 1978 and 2014, while the average compensation for a private-sector production and nonsupervisory worker increased by just 10.9 percent.

That trend in higher executive pay appears to have coincided with broader and disproportionate upper-income gains in the U.S. when compared with gains for middle- and lower-income Americans. The Pew Research Center in 2015 calculated that upper-income households saw their pay rise 47 percent between 1970 and 2014. Middle-income households enjoyed a median gain of only 34 percent over that window, while lower-income households posted a softer 28 percent gain.

ADVERTISING

Broadly, global trade dynamics underwent a significant shift during this same time frame – particularly in the 1990s and 2000s, which saw the signing of the North American Free Trade Agreement and China joining the World Trade Organization. Both events have been touted by globalization critics, particularly by President Donald Trump, as key turning points for the U.S. economy.

"More recently there has been a growing consensus that trade, driven in part by the integration of China into the world economy, has played a role in rising income inequality in many high-income countries," the study authors wrote, indicating their research "complements this work." "Rising import competition has adversely affected manufacturing employment, led firms to upgrade their production and caused labor earnings to fall."

Researchers looked specifically at increased executive compensation as a sign of rising inequality. And in their efforts to examine connections between executive pay and globalization, they looked at how top company officials' compensation matched up with industry exports. They found a "significant positive impact."

"Quantitatively, the results indicate that a 10 percent increase in exports leads to a 2 percent increase in the compensation of executives," the researchers wrote.

On the one hand, it makes sense that an executive's compensation would go up as his or her business expands internationally. As the researchers point out, such individuals "need to navigate the logistics of selling to many markets, deal with the complexity of setting up production stages that span numerous countries and deal with bargaining and contractual issues in foreign countries."

"In short, globalization may raise the importance of top ('superstar') talent, with compensation rising accordingly," they wrote.

On the other hand, the researchers identified executives that benefit from globalization for reasons "unrelated to the market talent of the executive." The researchers suggest a more globalized world provides more opportunities for lobbying and tariff discussions – practices that don't generate broader economic wealth but can increase company profitability.

And those opportunities were found to be more prevalent in "poor governance environments" in which executives can do more wheeling and dealing. The authors found executive pay "is rising with exports beyond simply the increase in firm size necessary to accommodate these exports."

"[T]his finding is not simply reflecting the fact that talented, high-ability executives are needed for expanding abroad, and thus the invisible hand of the market ensures that they are more highly compensated," the report said. "Executives do not seem to be simply in the right place at the right time, but rather their rising compensation due to globalization comes about in part through the executive's (visible) hand pursuing non-market reward strategies."

What the research suggests is that executives are seeing pay gains in part because they're expanding into new markets, but in part because they're getting bonuses and perks from their efforts in areas where they have less regulatory oversight or more political leeway.

"Our finding that recent globalization trends have increased U.S. inequality by disproportionately raising top incomes represents an important step forward," the report said. "In recent elections throughout the developed world, anger about globalization is leading to a populist resurgence. To the extent that top income earners disproportionately benefit from globalization through the exploitation of poor governance settings, these attitudes are understandable."

Still, the researchers were quick to note that "these findings should not be interpreted as a rationale for protectionist policies, since globalization has likely generated large increases in the standard of living."

"The key question for policymakers is to devise ways to address the distributional implications of globalization, such as those identified in this paper, without compromising aggregate welfare gains," they said.

Trump Announces Tariff on Canadian Lumber
Trump Announces Tariff on Canadian Lumber
Apr.25 -- Bloomberg’s Jonathan Ferro and David Westin discuss strained trade relations between the U.S. and Canada. They speak on "Bloomberg Daybreak: Americas."
Bloomberg
OFF
ON
Aa
Aa
Aa
Aa

00:0001:38

Tags: exports, international trade, global economy, imports, wealth, economy

Andrew Soergel Economy Reporter

Andrew Soergel is an Economy Reporter at U.S. News. You can connect with him on LinkedIn, follow him on Twitter or email him at asoergel@usnews.com.


Recommended Articles

The 10 Worst Presidents

Andrew Soergel, Jay Tolson | Dec. 31, 2014

Not all U.S. presidents are missed once they leave the White House.

Editorial Cartoons on Donald Trump

Jan. 31, 2017, at 5:16 p.m.

Photos: Obama Behind the Scenes

Sept. 10, 2014

A collection of moments subtle and grand of the 44th president of the United States.

Woman Charged for Pointing Gun at Teen Allegedly Raping Dog

Steven Nelson | May 8, 2017

The local prosecutor's office hasn't decided if it will pursue the felony case.

Yates Repeatedly Warned W.H. About Flynn

Alan Neuhauser | May 8, 2017

Former acting attorney general Sally Yates offered new details about what she told the Trump administration about its former national security adviser and his contacts with Russia.

Who Are the American Citizens Detained in North Korea?

Megan Trimble | May 8, 2017

North Korea has detained and levied harsh sentences at U.S. citizens amid rising tensions.

Spicer: Obama-Flynn ‘Bad Blood’ Behind Warning

Gabrielle Levy | May 8, 2017

The White House is brushing off reports that Trump ignored Obama’s warning not to hire Michael Flynn.

Donald Trump to Nominate 10 New Federal Judges

Joseph P. Williams | May 8, 2017

There are more than 120 vacancies on the federal bench waiting to be filled.

Record Abstention Rate in French Election

Curt Mills | May 8, 2017

Donald Trump and President-elect Macron spoke Monday.

Trump Underscores Commitment to HBCUs Despite Signaling Potential Funding Cuts

Lauren Camera | May 8, 2017

The move comes just days before Education Secretary Betsy DeVos is scheduled to deliver the commencement address at Bethune-Cookman University.

Critics Decry Abbott's Signing of 'Sanctuary Cities' Bill

Alan Neuhauser | May 8, 2017

The Texas governor's move was called 'cowardly' and met with the promise of a legal challenge.

Trump Blames Obama for Flynn, Suggests Yates Be Questioned About Leaks

Gabrielle Levy | May 8, 2017

Former Obama administration officials say Obama personally warned Trump against hiring Flynn.

Appeals Court to Hear Travel Ban Challenge

Alan Neuhauser | May 8, 2017

A full panel of the 4th U.S. Circuit Court of Appeals will hear arguments over the ruling that halted the revised executive order.

Macron Inaugural Set for Sunday

Curt Mills | May 8, 2017

The centrist independent won a decisive, nearly 2-to-1 victory over Marine Le Pen

Yates Expected to Testify on Russia, Flynn Warnings

Alan Neuhauser | May 8, 2017

The Russia investigation returns front-and-center to Capitol Hill on Monday.

Mark Green Out as Army Secretary

Susan Milligan | May 5, 2017

Green's withdrawal marked a rare win for LGBT activists.

Trump Contradicts Spokeswoman, Doubles Down on Australia Health Care Comments

Gabrielle Levy | May 5, 2017

The president tweeted Friday that Australia has better health care than the U.S., echoing comments he made a day earlier that his administration tried to explain away.

5 Things to Know About the Economy

Andrew Soergel | May 5, 2017

U.S. News breaks down the week's most notable economic developments.

School Officials, Counselors Slam '13 Reasons Why' for Glorifying Teen Suicide

Lauren Camera | May 5, 2017

'When you die you do not get to make a movie or talk to people anymore.'

Satanic Temple to Erect First-Ever Public Monument to Veterans

Megan Trimble | May 5, 2017

The monument will be the first satanic monument erected by satanists on public property.

See More