Go to the Globe and Mail homepage

Jump to main navigationJump to main content

The nominal after-tax wage for a building labourer in New York is about $16.60 an hour, compared with 80 cents in Beijing. (Guang Niu/Guang Niu/Getty Images)
The nominal after-tax wage for a building labourer in New York is about $16.60 an hour, compared with 80 cents in Beijing. (Guang Niu/Guang Niu/Getty Images)

The stubborn wage gap between two economic worlds Add to ...

Branko Milanovic has some good news for the squeezed Western middle class – and also some bad news.

Good news first: The past 150 years have been an astonishing economic victory for the workers of the Western world. The bad news is that workers in the developing world have been left out, and their entry into the global economy will have complex and uneven consequences.

More related to this story

Mr. Milanovic’s first conclusion is contrarian, at least in its tone. After all, with U.S. unemployment at more than 9 per cent and Europe struggling to muddle through its most serious economic crisis since the Second World War, workers are feeling anything but triumphant.

But one of the pleasures of his work is a point of view that is both wide and deep. Mr. Milanovic, a World Bank economist who earned his doctorate in his native Yugoslavia, has an international frame of reference. That’s in evidence in “Global Inequality: From Class to Location, From Proletarians to Migrants,” a recent working paper from the World Bank Development Research Group.

He finds that between 1800 and 1849, the wage of an unskilled labourer in India, one of the poorest countries at the time, was 30 per cent that of an equivalent worker in England, one of the richest. In their 1848 Communist Manifesto, Karl Marx and Friedrich Engels predicted that oppression of the proletariat would get worse, creating an international – and internationally exploited – working class.

But Mr. Milanovic shows that over the subsequent 150 years, industrial capitalism hugely enriched the workers in the countries where it flourished – and widened the gap between them and workers in those parts of the world where it did not take hold.

One way to understand what has happened, he says, is to use a measure of global inequality developed by François Bourguignon and Christian Morrisson in a 2002 paper. They calculated the global Gini coefficient, a popular measure of inequality, to have been 53 in 1850, with roughly half due to location – or inequality between countries – and half due to class. By Mr. Milanovic’s calculation, the global Gini coefficient had risen to 65.4 by 2005. The striking change, though, is in its composition: 85 per cent is due to location, and only 15 per cent due to class.

Comparable wages in developed and developing countries are another way to illustrate the gap. He uses the 2009 global prices and earnings report compiled by Swiss bank UBS. This showed that the nominal after-tax wage for a building labourer in New York was $16.60 an hour, compared with 80 cents in Beijing, 60 cents in Nairobi and 50 cents in New Delhi, a gap that is an order of magnitude greater than the one in the 19th century.

Interestingly, while many worry that unskilled workers are the ones getting the rawest deal, the difference in earnings between New York engineers and their developing-world counterparts is less pronounced: Engineers earn $26.50 an hour in New York, $5.80 in Beijing, $4 in Nairobi and $2.90 in New Delhi.

Mr. Milanovic has two important takeaways from all of this. The first is that in the 150 years, “the spectre of Communism” in the Western world “was exorcised” because industrial capitalism did such a good job of enriching the erstwhile proletariat. His second conclusion is that the big cleavage in the world today is not between classes within countries, but between the rich West and the poor developing world. As a result, he predicts “huge migratory pressures because people can increase their incomes several-fold if they migrate.”

I wonder, though, if the disparity he documents is already creating a different shift in the global economy. Thanks to new communications and transportation technologies, and the opening of the world economy, immigration is not the only way to match cheap workers from developing economies with better-paid jobs in the developed world. Another way to do it is to move jobs to where workers live.

Economists are not the only ones who can read the UBS research – business people do, too. And some of them are concluding, as one hedge fund manager said at a recent speech in New York, that “the low-skilled American worker is the most overpaid worker in the world.”

At a time when Western capitalism is huffing and wheezing, Mr. Milanovic’s paper is a vivid reminder of how much it has accomplished. He also highlights the big new challenge – how to bring the rewards of capitalism to workers in the developing world even as the standard of living of their Western counterparts has stalled.

In the know

Most popular videos »

Highlights

More from The Globe and Mail

Most popular