US Wage Inequality and Low‐Wage Import Competition

Abstract

AbstractThis paper revisits the link between trade and wage inequality motivated by two changes in the structure of trade. First, trade today is shaped as much by the exchange of components as finished goods. Second, low‐wage country imports into advanced economies like the US have risen dramatically since the early 1990s. We pay special attention to the timing of trade impacts. Consistent with prior work, technological change is confirmed as the key driver of inequality before 1990. After 1990 the growth of wage inequality is primarily a consequence of rising import competition from low‐wage economies. We account for the growing fragmentation of production using a panel model focusing on within rather than between‐industry shifts in inequality. Lags of key variables are used as instruments, and our results appear robust to broad concerns with endogeneity and to different measures of skill‐biased technological change.