Updated: Sep 23, 2020
Inequality is one of the ugly consequences of unfettered free trade and globalization. To remedy this problem, companies and governments can help to (1) increase innovation, (2) improve education, and (3) redistribute wealth.
Let’s first consider increasing innovation. Falling or slow GDP growth has been a primary cause of stagnant incomes since the 2008 financial crisis. Growth results from companies adopting industry best practices and then moving onto new innovative technologies and practices that set them apart from the other global companies.
What can companies do to surf the tide of globalization? Scholars like James Oldroyd and Shad Morris found that companies that engage with a global market and try to learn from the local operations are more likely to come out on top and become industry leaders. In particular, to be effective global innovators, companies need to do three things:
First, invest in understanding customers and the problems customers experience in their local context.
Second, reach across borders to learn best practices and innovative ideas from people who have dealt with similar problems in a different context.
Third, carefully uncover the underlying principles that make these foreign ideas work, then see if they can be applied and adapted in the local context.
What can governments do to help? Governments can encourage innovation through business incubators, funding plans for start-ups, and by offering special visa programs for immigrants whose businesses create new jobs. Overall, increased innovation has been linked to higher social mobility, which creates a happier and wealthier electorate.
Educate for Employment
Next, let’s talk about education. As you’d expect, higher skilled workers have greater opportunities to raise their incomes than low-skilled workers. But companies and governments can do three things for low-skilled workers to help them transition into higher skilled jobs.
The first is to focus primary, secondary, and university education on skills that will be needed in the future. Too many youth spend their days learning skills that were needed in past decades, and too few are learning skills required by future high-growth jobs. The result of this job-skills gap is that many companies are forced to outsource their production or import better-prepared foreign workers. Frequent curriculum updates will better serve local students and companies.
Second, a rigorous focus on improving the quality of teaching will transform student outcomes whether education is provided free or not. The world’s leaders in primary and secondary education—Canada, Finland, Singapore, and South Korea—focus on quality teaching as the basis for outstanding student achievement. Raising teacher qualifications, adopting international best practices for education, and rewarding the most gifted teachers in the classroom will help.
Third, integrating STEM education (that’s science, technology, engineering, and math) at all levels will equip students to qualify for high-demand jobs. STEM jobs often require a four-year college degree, but educational institutions can work closely with companies to adapt curricula to anticipated employer needs, producing students at all levels with job-ready skills.
Finally, governments and companies need to consider tax adjustments. The most direct way to decrease income inequality is to raise the value of government benefits and payments for the poor. Governments can increase government benefits (like insurance, unemployment benefits, and educational subsidies), or it can decrease taxes for low income individuals—or it can employ a combination of both. In fact, a recent study in Europe found that a redistribution of wealth to the tune of just 1 percent of a country’s GDP could create additional consumer spending of approximately $225 billion by targeting lower-income households, which have a higher propensity to spend their income than wealthier ones.
Some governments have even floated the idea of a guaranteed universal basic income (UBI) for all its citizens. This idea has been supported (and rejected) across the political spectrum. To the left, it represents a universal social safety net. To the right, an alternative to traditional welfare with its high administrative costs. In 2016, Swiss voters rejected a proposal to establish a universal basic income, but currently both Finland and Canada are experimenting with some guaranteed basic income programs. Increasing joblessness may lead to more trials of the UBI.
In summary, globalization is arriving with a destructive sidekick: extreme wealth inequality. Can we have one without the other? Initiatives to address the problem are not straight forward.
Efforts to increase productivity through innovation will increase individual household income but may not necessarily decrease inequality. Targeted education is needed to transition students from low-skill jobs to high-skill jobs. And finally, significant adjustments in tax policies may be needed to shore up the middle class and help relieve unbearable burdens from the poor.
Remember, these efforts are important not only for those suffering in poverty or slipping out of the middle class. All of society has a vested interest in ensuring the negative side-effects of globalization are curtailed so that our cities remain livable, our neighborhoods are safe, and humanity’s most valuable asset–our children–have a dignified future. By addressing these issues now, we may all benefit from increased global prosperity.