Explaining the Unexplained: Residual Wage Inequality, Manufacturing Decline and Low-skilled Immigration

This article investigates whether the increasing ‘residual wage inequality’ trend, which is responsible for most of the wage inequality phenomenon, is related to manufacturing decline and the influx of low-skilled immigrants. The analysis exploits variation across locations in the United States, and shows that a shrinking manufacturing sector increases inequality. This effect strengthens with an influx of low-skilled immigrants. Similar results are found for the increasing return to education and the decline in the employment rate. The evidence suggests that manufacturing decline is producing downward pressure on the relative wages of workers at the low end of the income distribution.