2018 Volume 2018 Issue 38 Pages 41-58
There is a common insistence that widening income disparities in the U. K. and U. S was the main factor for the national referendum of Brexit in June of 2016 and Mr. Trump’s victory in the presidential election in November of 2016. In fact, according to OECD and IMF surveys, the Gini Coefficients of major advanced nations including member states of the EU, one important index to measure disparity, have been rising in the past decades. Can we say that the Single Market program has promoted income inequality in the EU?
Traditional trade theories insist that, thanks to trade liberalization by the Single Market measures in the EU, comparatively high-income countries may specialize in capital/research intensive industries, while relatively low-income countries may specialize in labor-intensive industries, thus exchanging their goods and services. As a result of this reorganization of production processes, high skilled workforces in high-income countries are able to enjoy high incomes, while low-skilled workforce in high-income countries suffer from lower income, as they face competition with imports from low-income countries.
Furthermore, according to new-new trade theories, multinational enterprises which export their goods and services may enjoy more profits than domestic firms which sell their goods and services only in their domestic markets. As a result, wages in multinational firms tend to rise, while those in domestic firms remain unchanged, which promotes income inequality.
Moreover, an imperfect Single Market, caused by incomplete tax harmonization, may increase income disparity, as multinational enterprises may have chances to avoid tax burden by using their pan-European networks while domestic firms have little chances to do so. Thus, people who work for Multinationals are able to enjoy relatively high-wages while people who work for domestic firms cannot.
Widening income inequality may have negative impacts on economic growth, because lower income may reduce education opportunity. Therefore, income redistribution policy may be imperative for the future of the EU.