U.S. wage inequality and low-wage import competition

Abstract

This article examines the impact of import competition from low-wage countries (LWCs) on wages and wage inequality in the U.S. over the period 1972-2006. During the 1990s, studies appeared to settle this issue, finding that technology, not trade, accounted for the bulk of rising inequality. This paper revisits the link between trade and wages, motivated by two changes in the structure of trade. First, trade today is shaped as much by the exchange of components and tasks as finished goods. Second, import volumes from LWCs into advanced economies like the U.S. have risen dramatically since the early 1990s. The paper pays special attention to the timing of trade impacts. Consistent with prior work, it shows that technological change is the primary driver of inequality before 1990. However, after 1990 wage inequality growth is chiefly a function of rising import competition from low-wage economies. To account for the growing fragmentation of production within economic sectors, we explore trade impacts using a panel model where the focus in on within- rather than between-industry shifts in inequality. Lags of key variables are used as instruments, and our results appear robust to broad concerns with endogeneity and to different measures of skill-biased technological change

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