The effects of international trade on income inequality in the United States, 1979-1992

Citation data:

Harold L. Hodgkinson Award for Outstanding Dissertation

Publication Year:
1995
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thesis / dissertation description
The primary purpose of this study was to find out if international trade was a cause of the increase in income inequality that occurred in the United States after 1979. The secondary purposes were to test the predictions of international trade theory regarding the effects of trade on income distribution within nations and to see if trade is a cause of diverging productivity growth between economic sectors.The general hypothesis was that international trade affects income inequality through its effects on wage structure and employment structure. With the relationship between income inequality and the labor market variables established by definition, the general hypothesis had to be tested only for possible relationships between the labor market variables and trade variables. Specific hypotheses, based on trade theory, were used to examine such relationships with quantitative data from government sources and statistical methods of data analysis.The results supported the general hypothesis, indicating that international trade contributed to changes in wage structure and employment structure that increased income inequality from 1979 to 1992. The results indicated that trade performance affected the labor market variables through its effects on product demand, rather than through its effects on productivity. The results supported an alternative hypothesis that industry productivity affects trade performance. At the same time, the results indicated that trade raised the average level of productivity for the trading sector, thereby increasing the productivity gap between this sector and the nontrading sector. The results further indicated that technology affected wages through its effect on trade performance. Generally, the results supported the main predictions of international trade theory as well as some modified predictions regarding the effects of trade on income distribution within nations.The policy implication of this study is that as U.S. trade shifts toward developing countries, its effects on income inequality will accelerate, resulting in a more widely polarized society. Instead of trying to prevent these effects by reimposing trade barriers, the government should try to remedy them by supporting a private sector system of retraining and job placement. This system would be financed by a national tax on consumption.