Trade and Income Distribution

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Trade and Income Distribution

• Does Trade Hurt Low-Skill Workers in the US?

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Is Trade Responsible?

• Heckscher-Ohlin Trade Hurts Owners of Factor(s)
  with which a Country is Relatively Less Well
  Endowed
• US is Relatively Less Well Endowed with Low Skill
  Labor, So
• H-O Trade Hurts Low Skill Labor

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Real Earnings of Lower Skill Workers Have Declined
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Changes in Family Incomes
http//www.epinet.org/studies/pulling06/pulling_ap
art_2006.pdf
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But

• Relative price of low-skill intensive
  manufactures has not declined (as would be true
  if trade were the cause)
• Industries have not increased their use of
  low-skill labor (as )
• Inequality has not declined in ROW (as )
• See pp. 122-3 in Pugel

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Also.

• The Quantitative Implications of H-O are small.
• That is, when actual numbers are employed to
  calculate the impact of trade, that impact is
  small.

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Example

• Gravity causes objects to go downhill
• I drive my car downhill from Bridger Bowl at 60
  mph
• Does this imply that gravity caused my car to go
  60 mph?
• Or did it have something to do with the engine?

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Krugmans ConundrumThe Economist, April 19, 2008

• Krugman Trade accounts for 15 of the growth in
  the wage gap between skilled and unskilled
  workers since 1979.
• Katz 5
• Lawrence Wages of low skill increased relative
  to those in middle since late 1990s when China
  entered. (Rich incomes rose.)
• Conclusion 0-15 of growth in wage gap is a
  result of expanded trade.

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If not Trade

• What has caused the increase in income
  inequality?
• Also,
• Why have jobs in Goods-producing industries
  declined, while Service-sector jobs have
  increased?

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USA Jobs by Industry Shares
Payroll Jobs, Economic Report of the President,
2006
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US Net Exports
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But

• The Trade Deficit can Explain Only a Small Part
  of the Shift in Employment
• That is, even if exports imports in goods,
  employment in goods producing industries would
  only be slightly higher.

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The Effects of Trade
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The Answer (!) Biased Technical Change

• Rapid Productivity Growth in Goods-Producing
  Industries Shifted Employment from Goods to
  Services

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The Answer (continued)

• Technical Progress has Increased the Demand for
  High-Skill Workers (relative to Low-Skill
  Workers)
• For example, Systems Analysts have become more
  valuable (relative to Secretaries)

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Conclusions

• The decline in relative wages of low-skill
  workers is consistent with H-O, but greater in
  magnitude than H-O predicts.
• Changes in other relative prices are not
  consistent with H-O.
• More likely, Technical Change has
• Shifted employment from goods to services
• Increased the relative demand for high-skill
  workers