Comparative Analysis of Industrial Pay Inequality

This paper analyzes the trend of growing industrial pay inequality with respect to the increasing openness of the economy. It compares the economies of Nepal and the USA and their experience with payment inequality in relation to the increase in merchandised trade.

Running head: COMPARATIVE ANALYSIS OF INDUSTRIAL PAY INEQUALITY
Comparative Analysis of Industrial Pay Inequality
Name of the Student
Name of the University
Author Note

1COMPARATIVE ANALYSIS OF INDUSTRIAL PAY INEQUALITY
Answer to question 1: Graphical representation of openness and Industrial pay inequality
The objective of the paper is to analyze the trend of growing industrial pay inequality
with respect to the increasing openness of the economy. Openness is the result of trade
liberalization policies of the countries. In this context, the economy of Nepal and the USA are
worth to be discussed as the economy of Nepal is developing, whether, it is developed in the
USA. Both these two economies have experienced a significant changes in payment inequality in
relation to the increase in merchandised trade.
Nepal - Data Base
Year GDP per capita (USD) Trade (% of GDP) Inequality (%)
1985 317.8 23.4 4.5
1986 324.9 21.1 4.8
1987 323.2 24.4 8.8
1988 340.5 25 8.3
1989 347 21 8
1990 354.3 24.1 11.6
1991 367.1 25.3 7.1
1992 372 33.7 7.1
1993 375.9 34.8 5
1994 396.1 37.3 3
1995 399.7 38.1 3.5
1996 411.2 39.4 3.4
1997 422.5 42.7 4.8
1998 426.3 35.4 5.5
1999 436.6 40.2 6.8
2000 455.3 43.3 10.5
2001 469.3 36.8 11.7
2002 462.5 32.8 11.4
2003 474 38.2 9.5
2004 490 37.3 7.8
2005 506.2 38.7 7.7
Table 1: Data on openness (Trade % of GDP), GDP per capita and industrial inequality
Source: (The World Bank, 2019)

2COMPARATIVE ANALYSIS OF INDUSTRIAL PAY INEQUALITY
20.5 25.5 30.5 35.5 40.5 45.5
2.5
3.5
4.5
5.5
6.5
7.5
8.5
9.5
10.5
11.5
12.5
Nepal
Trade (% GDP)
Industrila Inequality (%)
Figure 1: Relationship between openness and industrial income inequality
Created by the author
USA – Data Base
Year GDP per capita Trade (% of GDP) Inequality (%)
1985 32119 13 2.67
1986 32925 13 2.66
1987 33761 14 2.56
1988 34853 15 2.59
1989 35794 15 2.56
1990 36059 15 2.59
1991 35542 15 2.62

3COMPARATIVE ANALYSIS OF INDUSTRIAL PAY INEQUALITY
1992 36287 15 2.51
1993 36798 16 2.52
1994 38814 16 2.64
1995 38369 18 2.66
1996 39356 18 2.66
1997 40614 19 2.42
1998 419434 18 3.30
1999 43435 18 3.24
2000 44727 20 3.36
2001 44729 18 3.24
2002 45087 17 3.37
2003 45981 18 3.54
2004 47288 19 2.18
2005 48500 20 2.26
Table 2: Data on openness (Trade % of GDP), GDP per capita and industrial inequality
Source: (World Bank, 2019)

4COMPARATIVE ANALYSIS OF INDUSTRIAL PAY INEQUALITY
12 13 14 15 16 17 18 19 20 21
0
0.5
1
1.5
2
2.5
3
3.5
4
USA
Trade (% of GDP)
Industrial Inequlity (in %)
Figure 2: Relationship between openness and industrial pay inequality
Created by the author
Answer to question 2: Correlation between openness and Industrial pay inequality
Nepal delivered ambiguous outcome: The findings of the paper suggest that there exists
ambiguous relationship between the trade liberalization and industrial pay inequality. Refereeing
to Nepal, the merchandised trade contributed around 21% to 44% into the country’s GDP. As per
the study the payment disparity got declined during the initial year of the 1990s. Though this
improvement did not persist. The industrial payment disparity was again as aggravated during
the 2000s as it was around 1985. This resulted in the positive association between the income
dispersion and the growing liberalization business structure (Paudel and Burke 2015). The
correlation between the industrial payment disparity and trade growth was recorded an
insignificant positive value during 1985 to 2005. The correlation value asserts the nature of
association between two variables. This sort of association signified that the trade liberalization
had an unfavorable impact on the industrial payment. In the context of the Nepal economy, the

5COMPARATIVE ANALYSIS OF INDUSTRIAL PAY INEQUALITY
small and medium trading sector experienced a dwindling situation due to extreme competition
in the international market. Lack of capital and resources were the major constraints on their
ways to earn. The major portion of the trade contribution to the country’s GDP was done by the
large manufacturers. Therefore, revenue yield from merchandise economy was transferred to the
wealthier section.
The USA delivered insignificant positive outcome: Likewise, the USA also recorded a positive
association between the industrial payment disparity and post trade reform period. Initiation of
the trade liberalization policy, leveraged the international business, however, this brought a lot of
challenges to the economy. As per the findings, the trade was considered as an engine of the
GDP growth in the USA. The growing GDP per capita was positively associated with the
country’s trade growth (Baldwin and Robert-Nicoud 2014). However, the income inequality was
unable to get declined. The initiation of the capital-intensive technology resulted in the
intensification of the income disparity along with poor employment growth.
Answer to question 3: Application of Stolper – Samuelson (S-S) theorem
According to the S-S theorem, the factors of income give a notable impact on the
economy during the course of transformation from autarky to open trade. In terms of the
economic law, each and every industry are able to earn equal profit under perfect competitive
market. This situation tends to zero profit condition in the industry. However, this economic
situation cannot be prevailed if the nation participates in the free trade activity. The openness of
the economy will enhance the price of the factors which are intensively used in the
manufacturing industry. Trade liberalization hikes the international as well as domestic demand
of a product. This, in turn, causes the price of the products to rise. The price of the raw materials
associated intensively with this particular product also gets increased. In contrast, the price of

6COMPARATIVE ANALYSIS OF INDUSTRIAL PAY INEQUALITY
other factors got declined. For example, both our concerned nations introduced capital-intensive
technology as they were technologically advanced. The production of capital-intensive
technology-based products got encouraged compared to labor-intensive technology-based
products. Therefore, workers of the small and medium manufacturing industries faced severe
wage deterioration. The wage of labors related to technology-based industry got a remarkable
hike. This enlarged the inequality gap of the earnings. As per the researchers, the income
inequality starts to decline when growth in GDP per capita gets improved (Herzer, Hühne and
Nunnenkamp 2014). However, both countries addressed a remarkable industrial pay disparity
within the country. Owing to trade liberalization policy the countries were able to meet the
growth trajectory, except sustainable growth in the earnings. The data reveals that, earnings
related to the trade industry was enhanced in comparison with the other industry. Each of these
two countries registered a positive growth rate in the per capita GDP. Instead of that, these
countries were unable to yield impressive outcome in the field of the income distribution. The
large industry owners obtained notable revenue owing to the free trade policy (Kim 2017). These
giant organizations were capable to implement the advanced manufacturing equipment in order
to meet the international demand. These business units were reported to have strong financial
strength which in turn encouraged them to take the risks associated with the new technology.
Nepal and the USA economies are different in nature. The USA is equipped with
advanced technology and sufficient capital resources, however, Nepal has a lack of capital
resources. In this context, the comparison between these two economies is worth to be mentioned
(Markusen 2013). Both these two countries were encountered with a substantial rise in payment
inequality in relation to the growth in merchandised trade. This incidence raised the question
about the viability of the use of GDP per capita as a growth indicator. The GDP per capita is

7COMPARATIVE ANALYSIS OF INDUSTRIAL PAY INEQUALITY
considered as a vital measurement of the economic growth. Contextually, this economic
incidence completely justifies the S-S theorem. The growing industrial income inequality is the
result of the extensive use of capital-intensive technology in the trade industry (Oldenski 2014).
In a nutshell, price of the other factors of production, such that, wage in the labor-intensive
manufacturing sector got declined.
References
Baldwin, R. and Robert-Nicoud, F., 2014. Trade-in-goods and trade-in-tasks: An integrating
framework. Journal of international Economics, 92(1), pp.51-62.
Faculty.washington.edu (2019). [online] Available at:
faculty.washington.edu/karyiu/confer/beijing06/papers/chakraborty-barua.pdf [Accessed 11 Sep.
2019].
GDP per capita (constant 2010 US$) | Data. (2019). Data.worldbank.org. Retrieved 11
September 2019, from https://data.worldbank.org/indicator/NY.GDP.PCAP.KD?
end=2013&locations=US&start=1982
Herzer, D., Hühne, P. and Nunnenkamp, P., 2014. FDI and Income Inequality—Evidence from L
atin A merican Economies. Review of Development Economics, 18(4), pp.778-793.
Kim, I.S., 2017. Political cleavages within industry: firm-level lobbying for trade
liberalization. American Political Science Review, 111(1), pp.1-20.
Markusen, J.R., 2013. Putting per-capita income back into trade theory. Journal of International
Economics, 90(2), pp.255-265.
Oldenski, L., 2014. Offshoring and the polarization of the US labor market. ILR
Review, 67(3_suppl), pp.734-761.

8COMPARATIVE ANALYSIS OF INDUSTRIAL PAY INEQUALITY
Paudel, R.C. and Burke, P.J., 2015. Exchange rate policy and export performance in a landlocked
developing country: The case of Nepal. Journal of Asian Economics, 38, pp.55-63.