Trade and Income Distribution

Overview

For more than a decade, there have been two important trends in the American economy. The first trend has been toward increasing openness of the economy to the international flows of goods, money, people, and ideas. The second has been very slow or even negative growth in real wages and a widening disparity in the distribution of income, particularly between relatively skilled and unskilled workers.

Many observers suspect that these two trends are connected: increasing ...

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Overview

For more than a decade, there have been two important trends in the American economy. The first trend has been toward increasing openness of the economy to the international flows of goods, money, people, and ideas. The second has been very slow or even negative growth in real wages and a widening disparity in the distribution of income, particularly between relatively skilled and unskilled workers.

Many observers suspect that these two trends are connected: increasing competition from foreign producers, particularly in low wage developing countries, may have contributed to stagnation in US real wages and a worsening income distribution. These concerns have led to proposals to slow or even reverse the internationalization of the American economy in order to bolster real wages, preserve jobs, and prevent a worsening income distribution. The issue is hotly debated among analysts and policymakers.

This study first provides a comprehensive analytical survey of the large economic literature that has emerged on this issue in recent years. It then applies general equilibrium models to obtain new estimates of the impact of trade and immigration on wage inequality in the United States and other major countries over the past two decades.

Cline's results for the impact of trade and immigration on the net widening of US wage inequality are larger than in most previous studies.

A striking finding, however, is that wage inequality could have been expected to fall substantially over this period rather than rising, in the absence of other forces, because the international supply of skilled labor has risen sharply relative to that of unskilled labor. After taking account of this equalizing influence of rising skill abundance, Cline's estimates for trade and immigration remain a moderate proportion of the total gross unequalizing effects arising from a constellation of influences including technical change, deunionization, and a falling real minimum wage.

Cline also finds that trade liberalization has tended to raise skilled wages rather than reduce unskilled wages. Moreover, its impact has probably been no larger than falling transport and communication costs. Most importantly for policy, model simulations for the future show more limited trade impact than in the past and little unequalizing impact of further trade liberalization.

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Product Details

  • ISBN-13: 9780881322163
  • Publisher: Peterson Institute for International Economics
  • Publication date: 1/28/1997
  • Edition description: New Edition
  • Edition number: 1
  • Pages: 305
  • Product dimensions: 6.16 (w) x 9.19 (h) x 0.61 (d)

Table of Contents

Preface ix
Acknowledgments xiii
1 Trends in Income Distribution and Wages 1
Long-Term Patterns 1
Family Income, Poverty, and Wealth 4
Wage Distribution 14
Education and Skills 23
Experience and Unexplained Variation 28
Productivity and Wage Levels 29
International Patterns 31
Overview 32
2 A Critical Review of the Literature 35
Stolper-Samuelson and Factor-Price Equalization 35
Development Economists 1 46
Labor Economists 1 49
Labor Economists 2 65
Trade Economists 1 89
Trade Economists 2 110
Development Economists 2 127
Trade Economists 1 Revisited 133
Labor Economists 1 Revisited 136
Overview 139
Appendix 2A 149
3 Experiments with the Krugman Model 151
Introduction 151
The Krugman Model 152
Constant-Elasticity-of-Substitution Reformulation 158
Elasticity of Substitution between Skilled and Unskilled Labor 161
CES Estimates with Limited Substitutability 163
Decadal Outlook with the CES-Krugman Model 165
Appendix 3A 171
4 The Trade and Income Distribution Equilibrium (TIDE) Model 173
Model Structure 173
Factor Data 178
Trade Data 182
Model Calibration 193
Backcast and Counterfactuals 198
TIDE Model Forecasts 223
Model Sensitivity 231
Conclusion 234
Appendix 4A 240
5 Conclusion 253
Overview of the Study 253
An Illustrative Synthesis 263
Absolute versus Relative Wage 269
Policy Implications 272
Appendix A Employment and Wage Growth in Europe and the United States 277
References 285
Index 295
Tables
Table 1.1 Distribution of family money income 5
Table 1.2 Change in real hourly wage by education, 1973-93 23
Table 1.3 Education and income 25
Table 1.4 Enrollment of college-aged population, 1960-92 27
Table 1.5 Educational distribution of the US labor force 28
Table 2.1 Decomposition of estimated sources of relative wage changes, 1979-88 52
Table 2.2 Trends in employment and wages by broad sector and years of education, 1967-86 72
Table 2.3 Alternative estimates of the impact of trade on rising US wage inequality 140
Table 3.1 Experiments with the Krugman model 156
Table 3.2 Trade response to relative wage increase 163
Table 4.1 Country shares in global factor endowments and output, 1973-93 183
Table 4.2 Trends in factor endowments, 1973-93 184
Table 4.3 Actual net trade in manufactures by factor intensity and partner 188
Table 4.4 Revealed comparative advantage by manufactured product group 192
Table 4.5 Factor shadow prices in the TIDE model 200
Table 4.6 Optimal trade matrix in the TIDE-CD model, 1993 204
Table 4.7 Percent deviation of factor prices from baseline: backcast counterfactuals, TIDE Cobb-Douglas model 208
Table 4.8 Factor shadow prices in the TIDE model: forecasts 226
Table 4.9 Percent deviation of factor prices from baseline: forecast scenarios, TIDE Cobb-Douglas model 228
Table 4A.1 Classification of 2-digit SITC codes by major factor input 240
Table 4A.2 Actual exports and imports by product group 241
Table 4A.3 Estimated distances between countries 244
Table 4A.4 Assumed tariff equivalents of total protection 245
Table 4A.5 Technical efficiency coefficients 246
Table 4A.6 Percent deviation of factor prices from baseline: backcast counterfactuals, TIDE-CES model 247
Table 5.1 Illustrative sources of increase in the ratio of skilled to unskilled wages in the United States 264
Figures
Figure 1.1 Median money income and poverty, 1967-93 7
Figure 1.2 Poverty by family status, 1959-93 8
Figure 1.3 Family status, 1959-93 9
Figure 1.4 Actual and hypothetical poverty, 1959-93 10
Figure 1.5 Composition of national income, 1959-94 14
Figure 1.6 90th/10th percentile wage ratios for full-time wage and salary workers, 1969-93 17
Figure 1.7 Skilled/unskilled wage ratio, 1961-93 19
Figure 1.8 Wage inequality, males 16 years and older with positive earnings, 1968-87 21
Figure 1.9a Wage inequality for men, 1973-93 22
Figure 1.9b Wage inequality for women, 1973-93 22
Figure 1.10 Hourly wages by education, 1973-93 29
Figure 1.11 Deindustrialization and developing-country import penetration for OECD countries, 1970-90 33
Figure 2.1 The Lerner-Pearce diagram of the Stolper-Samuelson theorem 39
Figure 2.2 Samuelson's diagram for factor-price equalization 42
Figure 2.3 R&D per worker versus wage differentials for college and high school workers, 1963-88 55
Figure 2.4 Estimated wage change by percentile, 1964-88 58
Figure 2.5 Durable goods trade deficit and the return to skills, 1949-90 80
Figure 2.6 Trade and factor prices 97
Figure 2.7 Locus of minimum costs for inputs produced in the North and South 121
Figure 2.8 Real income in countries 1 and 2 as a function of the efficiency of country 2 in the production of good B 126
Figure 2.9 Interaction of supply and demand for skilled and unskilled labor 146
Figure 3.1 Output and imports of manufactures of industrial countries, 1971-93 166
Figure 3.2 OECD manufactured imports from LDCs 169
Figure A.1 Real wages for the G6 countries, 1970-93 280
Figure A.2 Wages and job creation, 1970-90 281
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