Trade and Wages, Reconsidered

Standard economic analysis predicts that increased U.S. trade with unskilled labor–abundant countries should reduce the relative wages of U.S. unskilled labor, but empirical studies in the 1990s found only a modest effect. Has the situation changed in this decade, given the surge in imports from very low wage countries? In fact, most of this increase has been in skill-intensive goods such as computers, so that one would expect little additional impact on U.S. relative wages. However, developing countries appear to be specializing in unskilled labor–intensive niches within these industries. If so, the effect on wage inequality could still be significant. The paper develops a model and a numerical example showing that when developing countries can take over the unskilled labor–intensive portions of vertically specialized industries, the consequences can closely resemble the textbook effect. But determining the actual impact will require more finely disaggregated factor content data than are currently available.