Abstract
This paper investigates the reasons behind this rise in inequality in the United States during the early 80's by evaluating the impact of imports and technological change on the wage bill and employment shares of skilled workers in the USA. Using highly disaggregated data, which allow us to distinguish between imports from high- and low-wage countries at a highly detailed industry level, we find that an increase in US imports from low-wage countries seems to explain part of the rise in US inequality in low-skill-intensive sectors, while technological change (proxied by R&D expenditure) explains the rise in inequality in high-skill-intensive sectors. However, we also find that increased trade with high-wage countries had an indirect effect on inequality in the more high-skill-intensive sectors through its positive impact on investment in R&D. Accordingly, it seems that the technology-based explanation for rising inequality in the USA is actually partly a trade-based explanation via the mechanism of 'defensive innovation'.
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