Foreign Competition, Market Power and Wage Inequality: Theory and Evidence

In this paper, we present theory and evidence on the link between wage inequality and foreign competition in concentrated industries. We develop a simple model in which the impact of foreign competition on the relative wages of an economy depends on the market structure of the industry penetrated. We show that the more concentrated is the industry, the greater is the impact of trade on general wage inequality. We use the theory to argue why import competition in an industry such as automobiles is much more deleterious to the wages of the less educated than import competition in an industry such as apparel. We then test our hypothesis using a panel data set on relative wages across SMSAs. We reinterpret our model as a model of local economies, and test it using both the cross-sectional and time- series variation across labor markets.