Contemporary Issues in Economics: Effects of Globalization and Institutions on Income Inequality and Unemployment

This essay analyzes the effects of globalization and institutions on income inequality and unemployment across nations and in the global scenario. It discusses the mixed implications of institutions and international economic phenomena on contemporary capitalistic forms of economies.

Running head: CONTEMPORARY ISSUES IN ECONOMICS
Contemporary Issues in Economics
Name of the Student
Name of the University
Author Note

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Introduction
The global economic scenario has undergone considerable changes and dynamics
over the years, with the integration and inclusiveness of the economies of different countries
with one another. Much of this integration and interdependencies of the economies of
different countries can be attributed to the international phenomena of considerable
importance, which include events like Globalization, Liberalization of the economies of most
of the countries as well as the development of technological and infrastructural aspects,
which have contributed significantly in setting up robust communication and multi-lateral
trade channels among different nations (Hewitt 2012). Over time, with the increase in the
complexity and expanse of economic activities between the nations and with the development
of a Capitalistic trend in these economies, various rules and regulations have been formed by
the governments of the countries to secure the interests of all the groups. International
organizations have also been developed with the objective of facilitating fair trade and
economic transactions across countries (Hirst, Thompson and Bromley 2015).
There however remains significant debate regarding the implications of Globalization
and the establishment of the institutions across countries. While some argue that these events
and the development of the global as well as country specific institutions have strengthened
the economic growth trends, others highlight that the same have led to increment in two of
the most bothering and concerning issues in capitalism- unemployment and income
inequality (Beck 2018). Keeping these views into consideration, the essay tries to analyse and
explain the actual effects of globalization and institutions on income inequality as well as
unemployment across nations as well as in the global scenario.

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Globalization
The term “Globalization”, economically refers to the dissemination and inter-nations
transfer of economic activities, businesses, technologies, capital and human resources. In
short, globalization has four basic aspects, which are as follows:
 Transactions and trade relations
 Movements of capital and investments
 Inflow and outflow of knowledge and technological innovations
 Migration of labours across the world
Effects of Globalization on Unemployment
Globalization is seen to have mixed effects on unemployment scenarios, with
different implications for different countries. Globalization has led to shift in the job patterns,
wage levels as well as immigration of labours, especially from the developing countries to the
developed ones. This has led to creation to employment opportunities to some extent. This is
evident from the growth of the different sectors of and increase in the rate of employment in
countries like India, China and other Asian countries. The level of minimum wages as well as
robust labour contracts, which have not been prevalent in the earlier times has been greatly
facilitated by the phenomenon of Globalization.
However, there has also occurred significant outsourcing from the developed to the
developing economies, which in turn has led to reduction of mid-level employments in the
developed economies (Kaplinsky 2013). The infiltration of foreign multinationals in the
developing countries, owing to globalization, has led to destruction of many small scale
indigenous industries, thereby leading to loss of economic and employment scopes in these
regions. This is clearly evident in case of the African countries as since the advent of

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Globalization, South Africa has lost nearly 150000 jobs in the manufacturing sector, 11000
jobs in the retail sector, 57000 in the agricultural sector and nearly 116000 jobs in the
informal sector (Ukpere 2011).
Effects of Globalization on income inequality
The supporters of Globalization often argue that the increasing scopes of expansion of
businesses and economic activities across different countries, facilitated by globalization, has
led to the creation of considerable productive activities, thereby employing larger share of the
global workforce, which has also led to creation of income (Asteriou, Dimelis and
Moudatsou 2014). However, there are evidences of considerable income inequality in the
global scenario in the current period, which can be attributed to globalization. Since the
advent of globalization and especially after the second world war, the average income of the
developing countries has increased by nearly two times while the life expectancy has
doubled.
The poorest have remained poorest and the rich people has become even richer. This
can be explained by the Capitalistic structure which has been even facilitated by
Globalization, as the same has helped the owners of the productive resources to expand their
activities in different countries, thereby earning economic benefits, which have not percolated
to the poorest sections (Milanovic 2016). Another interesting trend can be seen in this
respect. The primary countries enjoying the fruits of globalization are the developing and
emerging economies like China and India, who has been benefited hugely by the inflow of
investment, technologies as well as outsourced jobs from the highly developed countries
(Krusekronicle.com 2018). This can be seen from the rising incomes in these countries,
probably at the cost of welfare decline of the middle-class citizens of developed world, who
has been losing their job prospects. As can be seen from the empirical evidences that nearly

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80% to 85% of the total world population living in the less developed countries and gets even
less than 20% of the total income earned which indicates towards the increase in the
inequality.
Institutions: National and Global
As has been discussed above, with the increase in the magnitude and complexities of
economic activities of the countries, the governing frameworks of the countries across the
world have also modified considerably. In the contemporary economic scenarios, the
economy of most of the countries show capitalistic trends. This in turn implies that the
businesses and the productive resources in these countries are mostly going under private
ownership rather than remining under the control of the states themselves (Gazier 2013).
The emergence of this new era of capitalism implies that the production activities are
operated and undertaken with the intension of personal profit maximization of the owners of
the productive resources. This in turn leads to implementations of various cost minimizing
processes, which in turn may lead to exploitation of the resources of production, mainly
labour resources. To prevent the same and to ensure that the welfare of the labours is
maximized various labour market institutions are implemented by the government of the
countries (Hancké 2013). There also exist several international organizations which operate
with the intension of maximization of economic welfare and development of the economies
of the member countries. One such organization is the European Union, under which the
member countries operate in same currency and same economic policy zone, in order to
maintain parity and facilitate trade among the countries.
These local as well as international governing organizations use several institutions
for the welfare of the labour population of the countries, which are mainly as follows:
 Minimum wage

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 Unemployment benefit
 Employment securities
 Union coverage
 Centralization of wage bargaining
 Tax wedge
 Active policies in the labour market
While some of these institutions are targeted to reduce the unemployment in the
economies, the others are used to address the problems of income inequalities in the
economies. However, often there arises a trade-off between unemployment and income
inequality in the economies as a result of the impositions of these institutions in order to
reform the labour market discrepancies (Lehmann and Muravyev 2012). These are discussed
as follows:
Effects of Institution on Unemployment
Unemployment is often reduced in the economies by regulating the aggregate demand
and aggregate supply scenarios, especially at the times of recessions or economic stagnations.
This is especially possible in those countries where there remains a floating exchange rate for
the local currency. At times of recession, the institutions often devaluate the currency, which
makes imports costly and forces the customers to buy domestic goods, thereby boosting
productivity and creating employment scopes (Meer and West 2015).
However, the currency unions like that of the EU cannot float the currency freely as
the periods of recession and booms vary across the member countries. This in turn hampers
the prevention of cyclical unemployment in the member countries. This is even more evident
from the empirical evidences present showing the unemployment dynamics in the member
countries of the European Union. The regulations imposed by EU has been seen to increase

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the unemployment rate of the UK, Ireland and some other countries considerably higher than
their predicted rates while some other countries like France and Denmark has been seen to be
benefiting (Lisdatacenter.org 2018).
However, several currency unions like that of the United States of America have various
institutional mechanisms like the social security programs, unemployment benefits and
transfer of money from high prosperous zones to the high unemployment ones, which helps
in boosting employment in the countries (Rumford and Buhari 2012).
Thus, from the above discussion it can be asserted that the presence of various
institutions in the contemporary economic scenarios have mixed implications on the income
inequality and unemployment trends in the global scenarios, with some countries getting
benefitted and others getting negatively affected. However, the presence of such institutions
often leads to a trade off between the unemployment and income inequality scenarios across
different countries.
Institutions and Income Inequality
One of the primary policy frameworks which are most commonly used by the
governing institutions in different countries as well as the international regulatory systems
like the European Union, to address the situations of income inequality present in the
employment sectors of the economies, is the policy of minimum wage.
The imposition of such wage slabs (if greater than the equilibrium wage rates) often
leads to increased economic welfare of some sections of the workers but are often detrimental
to the marginal workers as higher wage rates decreased the demand for labours on part of the
employers and they tend to employ skilled labours only (TheCollegeConservative.com 2018).
This in turn contributes to the problem of unemployment but does not considerably reduce
income inequality as many labours face the threat of loss of entire economic stability.

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The problem becomes even severe in the international unions of countries like that of
the European Union and others. This is because the regulations and wage levels are set
commonly for all the countries but the same may not be have equal implications on all the
economies as different economies have different traits and cost structures. The empirical
evidences of the member countries of the European Union show that there exists significant
inequality in the countries and the inequality has decreased for some countries like Finland,
Belgium, Portugal and Netherlands while it has also increased considerably for some other
countries with years, the countries being Ireland and Spain (Source: Milani 2018)
Conclusion
From the above discussion, it can be asserted that the institutions as well as
international economic phenomena like Globalization and liberalizations have mixed effects
on the contemporary capitalistic forms of economies, especially in terms of implications on
the income inequality and unemployment scenarios. While in some places the regulations and
institutions as well as globalization has led to the growth of employment and income
opportunities, especially in the newly emerging global economies, the same has led to
negative implications on some other countries. The multi-country unions are also seen to
have different mechanisms to address to these problems which has resulted to differences in
the implications of the same on different regions.

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