The Relationship Between Wage Inequality and International Trade
Author(s)
Borjas, George J.; Ramey, Valerie A.
Abstract
Wage inequality in the U.S., by virtually any measure, began an unprecedented rise in the late 1970s. The change is primarily due to the deterioration of the real wages of less educated and experienced workers, not to gains by those at higher levels. Many explanations for increasing wage inequality have been proposed, including the shift away from manufacturing toward service industries, the effects of international trade or immigration, the decline in unionization and the fall in the real value of the minimum wage, and a decline in the level of skills supplied by the American educational system. This article presents a version of the argument that trade is a major cause of wage inequality. It demonstrates empirically that the trend in wage inequality parallels the U.S. trade deficit in durable goods, and suggests that in theoretical terms, import competition would be expected to have a particularly strong effect on wages in concentrated industries, such as those found in many branches of durable manufacturing. Finally, it shows that evidence on wage trends in selected industries lends additional support to the theory.
