Stiglitz explains the high level of inequality due to the fact that the top US income earners captured a majority of the income growth, widening the gap between them and the low-income earners. This income can be explained through the Heckscher-Ohlin model. The trade between US and poorer global economies causes more of a specialization in what the US is relatively endowed in, capital or skilled workers. This increases the production in capital-intensive industries and decreases production in labor-intensive industries. This increases demand for capital or skilled worker services while reducing the demand for labor or unskilled workers. Which then reduces wages while raising the returns to capital.
Imports from the poorer countries replace unskilled workers and then they need to accept lower wages to find work in other places. Trade with low wage countries explain the rise in the wages of those with capital or skilled workers depending on which factor you use, but the skilled workers and owners of capital are the ones capturing the majority of the growth, which increase the inequality gap.
This can than be transitioned into the Solow model to explain this growth as the savings rate for the lower income is much lower that those of high income, this is due to the fact that low income earners must spend most of their income on basic needs such as food, housing, health, etc. This happens at the same time, as the high-income earners are able to have a higher savings rate which leads to higher growth under the Solow model.
Many argue that there is a trickle-down effect and that the “pie” is growing so much that their slice is actually larger even though it’s much smaller than the top income earners pie. Growing inequality is not inevitable though as shown in the case of countries with Chile,...