Impacts of Trade on Wage Inequality in Los Angeles: Analysis Using Matched Employer–Employee Data

Abstract

Over the last thirty years wage inequality has accelerated markedly in the United States, reversing the trend of the previous half-century. The growth in inequality parallels the rapid rise in U.S. imports, particularly from developing economies. Standard trade theory suggests that the wages of unskilled workers relative to skilled workers will decline in developed economies as a result of greater competition from developing economies that have abundant reserves of unskilled labor; however, repeated empirical studies have not found a strong link between trade and inequality. We argue that this failure results from the use of aggregate data and poor proxies for the skill level of workers. A matched employer–employee database for the Los Angeles consolidated metropolitan statistical area in 1990 and 2000, combining individual returns from the Decennial Household Census and manufacturing plant-level data, shows the relationship between the growth of trade and the relative wages of workers with different levels of education. Wage inequality resulted from trade as well as skill-biased technological change in 1990. In 2000, skill-biased technological change has no significant impact on inequality, and the influence of trade has become much stronger. Over the ten years studied, the impact of trade climbs the education and skill ladder. Trade depressed the relative wages of workers with less than a high school diploma in 1990, but by 2000 trade also significantly reduced the relative wages of high school graduates.