International Trade and Wage Inequality in the United States: Some New Results

Abstract

This paper shows that theory and evidence are more supportive of the link between increasing trade with developing countries and increasing U.S. wage inequality than recent criticisms have led many to believe. Much of the current debate focuses on the idea that relative goods prices must change for relative wages to change. The paper first demonstrates several additional channels through which an expansion of North-South trade causes a fall in the relative wage of unskilled workers in the North, even when there are no changes in relative output prices. It then explores the wage implications of a counterfactual in which U.S. trade with developing countries in 1990 remains the same as that in 1978. Changes in trade with developing countries are shown to have widened wages between low-skilled and high-skilled workers by 3.4 to 5.4 percent. Finally, it investigates changing relative prices and finds strong evidence that, in fact, from 1978 to 1995, value added and output prices in unskilled-intensive manufacturing sectors fell considerably relative to prices in skill-intensive manufacturing sectors.

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