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US Trade and Wages: The Misleading Implications of Conventional Trade Theory

  • Lawrence Edwards
  • Robert Lawrence

Conventional trade theory, which combines the Heckscher-Ohlin theory and the Stolper- Samuelson theorem, implies that expanded trade between developed and developing countries will increase wage equality in the former. This theory is widely applied. It serves as the basis for estimating the impact of trade on wages using two-sector simulation models and the net factor content of trade. It leads naturally to the presumption that the rapid growth and declining relative prices of US manufactured imports from developing countries since the 1990s have been a powerful source of increased US wage inequality. In this study we present evidence that suggests the presumption is not warranted. We highlight the sensitivity of conventional theory to the assumption of incomplete specialization and find evidence that is not consistent with it. Since 1987, although US domestic relative effective prices in industries with relatively high shares of manufactured goods imports from developing countries have declined, effective unskilled-worker weighted prices have actually risen relative to skilled- worker-weighted prices. If anything this suggests pressures for increased wage equality. Also in apparent contradiction to theory, the (six-digit NAICS) US manufacturing industries with high shares of manufactured imports from developing countries are actually more skill-intensive than the industries with high shares of imports from developed countries. Finally, applying a two-stage regression procedure, we find that developing country import price changes have not mandated increased US wage equality. While these results conflict with standard theory, they are easily explained if the US and developing countries have specialized in products and tasks that are imperfect substitutes. If this is the case, the impact of increased trade with developing countries on US wage inequality is far more muted than standard theory suggests. Also methodologies such as the net factor content of trade using US production coefficients and simulation models assuming perfect substitution between imports and domestic products could be highly misleading.

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Paper provided by Economic Research Southern Africa in its series Working Papers with number 180.

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Length: 28 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:rza:wpaper:180
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  1. Robert C. Feenstra & Gordon H. Hanson, 1999. "The Impact Of Outsourcing And High-Technology Capital On Wages: Estimates For The United States, 1979-1990," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 907-940, August.
  2. Jonathan E. Haskel & Matthew J. Slaughter, 2000. "Have Falling Tariffs and Transportation Costs Raised U.S. Wage Inequality?," NBER Working Papers 7539, National Bureau of Economic Research, Inc.
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  12. Claudia Goldin & Lawrence F. Katz, 2007. "Long-Run Changes in the Wage Structure: Narrowing, Widening, Polarizing," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(2), pages 135-168.
  13. William R. Cline, 1997. "Trade and Income Distribution," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 58, May.
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  17. Jeffrey D. Sachs & Howard J. Shatz, 1994. "Trade and Jobs in Manufacturing," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1), pages 1-84.
  18. Lawrence Edwards & Robert Z. Lawrence, 2013. "Rising Tide: Is Growth in Emerging Economies Good for the United States?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 5003, May.
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