Could inequalities sink globalisation? Is there a risk that a rising gap in income, between those who have gained most from globalisation and those who have gained least, could undermine the implicit social contract on which global prosperity is based? If so, is there anything we can do about it?
This week the International Monetary Fund is publishing its World Economic Outlook, in which it says that the "effective" global labour force has quadrupled in the last 20 years, as China, India and eastern Europe have emerged from isolation to compete directly with workers in the established economies of the West. Most of this increase has been in the unskilled category.
In line with the laws of supply and demand, these new competitors have tended to drive down rates of pay for unskilled work in western countries. But, increasingly, this competition is spreading to include more skilled types of work. More university graduate-level work can now be done in non-western countries.
Technological change has also played a role. For centuries, machines have been replacing physical labour in producing goods and services and advances in technology have speeded that up. Lost jobs have been replaced by new ones but often in places or occupations that do not suit those who have lost out. The new job may be at lower wages, with less security and few benefits.
Those at the bottom of the information technology pyramid may have found that their work is no longer needed but those at the top are seeing their incomes soar to undreamed of heights. Sports stars and celebrities are also able to command vastly increased salaries because new media technologies allow them to reach larger audiences. Chief executives of large companies, who command the largest information concentrations, have seen salaries increase dramatically by comparison with their own employees.
In an interesting speech in Omaha recently, the chairman of the Federal Reserve Bank, Ben Bernanke, analysed the factors that have led to an increase in inequality of incomes in western countries. He said that in 1979 the median weekly wage of someone in the United States with a bachelor's degree was 38 per cent higher than that of a high school graduate. That differential has now doubled. In 1979 a high school graduate earned 19 per cent more than someone who did not finish high school. Now the gap has more than doubled to 42 per cent. Similar forces are at work in Europe.
While nobody nowadays expects incomes to be equal, there is a real issue to be faced about how far the gap in incomes can widen if people are still to feel a sense of solidarity with one another, to feel that they are all part of the same implicit social contract, a contract that is necessary to keep markets free and social relations peaceable.
Objectively everybody is much more prosperous today than 30 years ago. But is that really the point? Some studies have shown that most people measure their sense of well being by comparison with how other people are doing, rather than by comparison with what their parents or grandparents enjoyed or even what they themselves enjoyed a few years previously. There are issues here that go beyond money incomes, issues concerning things like loss of perceived respect, status and dignity, the same type of issues that undermine tolerance and which lead to wars.
The great strength of the US has been what has been rather inadequately described as the "American Dream", the liberating ideal that no matter where one starts hard work will lead to the top. This is a powerful ideal. It is founded on the judgment that there can, will and must be equality of opportunity.
Equality of opportunity is created by universal access to education, by the elimination of closed shops, monopolies, cartels, class privileges and corrupt practices, and by freedom with equality before the law. The US created a society on those principles in the 19th century and has endeavoured to maintain it since. The European Union now endeavours to spread the same principles throughout its entire continent.
But equality of opportunity, once created, is not a static thing. The investments and social structures that created equality of opportunity in the industrial age will not suffice to sustain it in the information age.
Humans will always try to use their freedom to gain artificial advantages for their families and to the extent that they succeed that will work against equality of opportunity. There is a continuing trade-off to be settled between freedom and equality of opportunity, and it is legislatures and governments by their policies on regulation, spending and taxation who make that trade-off.
At some stages in economic development, one may have to tolerate greater levels of in-equality as new technologies are diffused. At other stages, consolidation is necessary in order to preserve the social contract. It is no accident that the second World War, which made a huge call on the sense of solidarity of the whole of society, was followed by a period when great egalitarian efforts were made in all countries to improve the opportunities of those who had least.
Bernanke concluded his speech in Omaha by saying that one should not respond to the present challenge by trying to shut down globalisation or to stop technological change. Instead he said we should: "allow growth enhancing forces to work, but try to cushion the effects of any resulting dislocations. For example policies to facilitate retraining and job search for displaced workers" should be pursued.
He also called for "portability of health and pension benefits between employers". He went on to advocate investment in education and cited a study by the Federal Reserve Bank of Minneapolis, which "documented the high return that early childhood programs can pay in terms of subsequent educational attainment, and in lower rates of social problems such as teenage pregnancy and welfare dependency." Unfortunately, children do not carry the same weight in the political system as adults. The wise investments urged by Bernanke are sometimes not made, and the debate about education is often more focused on the needs of the providers of education than of its consumers.
In any event, early childhood education is not much use to a 40-year old who has lost a job. Such workers are usually in the middle of their working lives and have heavy social/family responsibilities, unlike younger competitors.
Finding a way of maintaining or creating jobs for such displaced older workers should be a top priority of governments; in that respect educational researchers in both the US and Europe can be of great help by assisting workers to acquire new skills. I believe that we all only achieve a tiny fraction of our potential during our lives. Imparting to a displaced older worker the necessary self confidence to find and release more of his or her potential is vital, if our current pros- perity is not to be threatened by rising inequality and loss of self respect among losers in the ever-accelerating global race.
John Bruton is EU representative in Washington. Garret FitzGerald is on leave