Recent Findings on Trade and Inequality

Abstract

The 1990's dealt a blow to traditional Heckscher-Ohlin analysis of the relationship between trade and income inequality, as it became clear that rising inequality in low-income countries and other features of the data were inconsistent with that model.As a result, economists moved away from trade as a plausible explanation for rising income inequality.In recent years, however, a number of new mechanisms have been explored through which trade can affect (and usually increase) income inequality.These include within-industry effects due to heterogeneous firms; effects of offshoring of tasks; effects on incomplete contracting; and effects of labor-market frictions.A number of these mechanisms have received substantial empirical support.

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