Trade Liberalization and Wage Inequality: Evidence from the U.S. States

Abstract

This paper examines the relationship between trade liberalization and wage inequality for 50 U.S. states during the period from 1999 to 2008. The Difference-in-Differences and fixed effects methods are employed to evaluate the effect of trade liberalization on wage inequality in the U.S. states. Empirical results reveal that trade liberalization and de-unionization do increase the wage inequality between skilled and unskilled workers. Evidence shows skill-biased technological change has no significant impact on rising wage inequality. As Difference-in-Differences estimation on time-series cross sectional data involves many years, the conventional standard errors often understate the standard deviation of the estimators. This paper employs the standard bootstrapping procedure and the clustering error procedure to correct the problem, and all sign patterns still hold.