The Embedded Economy and National Income Inequality

The ubiquitous growth of national income inequality in developed and less-developed countries has raised major concerns amongst academics, policy-makers, and the general public.   In response to this trend, researchers have offered a multitude of explanations for the persistence and growth in national income inequality, which has lead to substantial disagreement over the proximate and fundamental mechanisms of economic inequality.  Drawing on insights for world-systems, world polity, and institutional theories of inequality, I develop and empirically evaluate an integrative theory of inequality.  According to this perspective, the emergence global production networks indirectly affects income inequality by reshaping national labor laws and practices.  This study evaluates this proposition using multi-level structural equation modeling and unbalanced panel data on 70 developed and less-developed countries over the 1985-2002 period.  According to preliminary results, economic globalization exerts both direct and indirect effects on income inequality. In developed countries, global economic integration indirectly affects income inequality by inducing processes de-industrialization and labor market flexibility.  In less-developed countries, investment-based global economic integration indirectly reduces inequality by promoting the development of collective labor laws and practices while trade-based integration indirectly increases inequality by hindering the development of these laws. Overall, the study suggests that researchers need to account for the interaction of economic globalization and labor market institutions to explain the recent growth in national income inequality.