Chinese exports and American inequality

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A new working paper pdf on Christian Broda’s website, joint with John Romalis:

Over the past three decades there has been a spectacular rise in income inequality as measured by
official statistics. In this paper we revisit the distributional consequences of increased imports
from China by looking at the compositional differences in the basket of goods consumed by the
poor and the rich in America. Using household data on non-durable consumption between 1994
and 2005 we document that much of the rise of income inequality has been offset by a relative
decline in the price index of the poor. By relaxing the standard assumptions underlying the
representative agent framework we find that inflation for households in the lowest tenth
percentile of income has been 6 percentage points smaller than inflation for the upper tenth
percentile over this period. The lower inflation at low income levels can be explained by three
factors: 1) The poor consume a higher share of non-durable goods —whose prices have fallen
relative to services over this period; 2) the prices of the set of non-durable goods consumed by
the poor has fallen relative to that of the rich; and 3) a higher proportion of the new goods are
purchased by the poor. We examine the role played by Chinese exports in explaining the lower
inflation of the poor. Since Chinese exports are concentrated in low-quality non-durable products
that are heavily purchased by poorer Americans, we find that about one third of the relative price
drops faced by the poor are associated with rising Chinese imports.

Erm, but that’s “preliminary and incomplete,” so “please don’t circulate” it. (The internet is a funny place.)

[HT: MR]

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