Title: Globalisation, EU enlargement and income distribution

Authors: Fritz Breuss

Addresses: Research Institute for European Affairs and Department of Economics, Vienna University of Economics and Business Administration, Augasse 2-6, A-1090 Vienna, Austria; Austrian Institute of Economic Research (WIFO), P.O. Box 91, A-1103 Vienna, Austria

Abstract: Advanced industrial countries have been exhibiting a steady decline of the labour income shares in the last two decades. We explain this phenomenon by resorting to the old Stolper-Samuelson theorem. The conclusions concerning the impact of free trade on the income distribution are unambiguous in a Heckscher-Ohlin world with two countries, two goods and two factors of production (capital and labour). In contrast, the consequences of FDI from the capital abundant country (EU) to the labour abundant CEEC are ambiguous. Both scenarios are investigated theoretically, simulated with a hypothetical two country CGE model, including the EU and the CEEC and then tested empirically. Accordingly, globalisation has contributed to a decline in the labour income shares in the EU and an increase in the CEEC. Additionally, those EU countries which are engaged more in trade with the CEEC (|mini-globalisation| in Europe) can expect a sharper decline in the wage share.

Keywords: globalisation; EU enlargement; income distribution; European Union; free trade; FDI; foreign direct investment; CEEC; simulation; modelling; labour income shares; Central and Eastern European countries.

DOI: 10.1504/IJPP.2010.031204

International Journal of Public Policy, 2010 Vol.6 No.1/2, pp.16 - 34

Published online: 25 Jan 2010 *

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