Trade and inequality — two reasons not to blame trade

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Robert Z. Lawrence says that trade and inequality aren’t linked à la the conventional wisdom:

Not only have imports from developing countries increased dramatically, but the relative prices of manufactured goods from these countries have declined steadily since the early 90s. Yet the big surprise is that over the past fifteen years wages of the least skilled Americans – the lowest 10 percent – have kept pace with the median. Moreover, since 1999, while real wage growth in general has been sluggish, most US relative wage and compensation measures indicate little evidence of increased inequality…

At relatively high levels of aggregation the data indicate that manufactured imports overall, and even those from developing countries such as China, are concentrated in US manufacturing sectors which pay significantly higher than average US wages. This means that import displacement does not fall disproportionately on less skilled workers…

At more disaggregated levels, however, the data suggests that goods imported from developing countries such as China are associated with relatively less skilled labor inputs and – judging by their unit values – qualitatively different from those produced by developed countries such as the US. This provides support for the view that much of this trade reflects more complete specialisation and as such does not result in either wage inequality or downward pressure on wages generally.

It will take more research to quantify the relative magnitudes of these two effects. Nonetheless, it does appear that over the past decade, US income inequality has continued to grow but not in a way that suggests trade with developing countries is the major reason. It’s not the least skilled who have fallen behind but profits and the wages of the very richest Americans that have raced ahead.

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