Trade Shocks, Taxes, and Inequality

We study the impact of trade shocks on inequality using newly constructed micro and macro data. First, we use the Current Population Survey’s (CPS) Merged Outgoing Rotation Group (MORG) from 1979 to 2010 combined with new annual measures of imported inputs, a proxy for offshoring. We find that in periods when US relative prices are high, and imports surge relative to exports, workers in sectors with greater initial exposure to international trade were more likely to be unemployed a year later, but did not experience significant declines in wages conditional on being employed. Contrary to the usual narrative, we find negative wage effects for higher-wage, but not lower-wage workers, particularly for those who are less-educated. Second, sectors most exposed to trade shocks do not experience relative increases in inequality. Third, using aggregate international data for 31 countries, we find that various trade shocks, such as increases in trade with China, are not generally correlated with changes in the income distribution. Instead, using new historical data, we confirm a close connection between top marginal tax rates and top income shares, and find that the level of top marginal tax rates impacts changes in the top 1% share of income, implying that top income shares are a function of historical marginal tax rates.