Trade and US Wage Inequalities

Between 1979 and 1993, average real wages declined by more than 20 percent for U.S. high school graduates but rose by 11 percent for college graduates. This resulted in a large increase in real wage inequalities between skilled and unskilled workers in the U.S. Then, is international trade responsible for this increased wage inequalities between skilled and unskilled workers in the U.S. as well as in Western Europe?

Some economists argue that the growth of manufactured exports from newly industrializing economies (NIEs) was the major cause of the increase of the wage inequalities in the U.S. and unemployment in Western Europe in the past.

However, other economists point out that nonpetroleum imports from low-wage countries take only less than 3 percent of the GDP of industrial countries and therefore, it could not possibly have been the major cause of the large drop of real wages of unskilled workers in the U.S. and the large increase in unemployment in Western Europe during the period.

According to them, international trade did contribute to the unskilled workers¡¯ problems in industrial countries, but it only played a minor role in the increase in real wage inequalities between skilled and unskilled workers in the U.S.

Moreover, most of the increase of real wage inequalities between unskilled and skilled workers in the U.S. was probably due to technological shifts, such as the automation and computerization of many jobs, which sharply reduced the demand for unskilled workers both in the U.S. and Europe.

In a nutshell, it can be concluded based on the weight of evidence that international trade may have hastened the introduction of labor-saving innovations. However, it probably had only a small direct impact on low wages of unskilled labor in industrial nations in the past.