Globalization, American Wages, and Inequality

A strange argument has begun making the rounds in the globalization debate, one that asserts there is a puzzle

in American politics: economics teaches that globalization leads to national gains, yet popular opinion is am

bivalent at best about it. This puzzle even comes with a plausible-sounding explanation: globalization’s benefits are huge but diffuse (consisting of lower prices for imported goods), while its costs are small but concentrated (workers displaced by imports); hence, the gains are hard to see but the losses are all too visible.

The alleged puzzle and the fashionable-again explanation forwarded to resolve it should sound strange to

economists, as they are clearly at odds with what the most conventional theory teaches about the likely results of the rich U.S. economy integrating with a poorer global economy. While this integration is indeed “win-win” in between countries, it is pitilessly “win-lose” in terms of individual outcomes within countries. That is, the U.S. and its poorer trading partners

both end up with higher national incomes due to trade, but at the same time, this trade makes many (and possibly most) workers in the U.S. worse-off. This sad result is known to trade economists as the “curse of Stolper-Samuelson,” named after the theory that predicts it.

This paper revisits the insights of Stolper-Samuelson and estimates the impact on American wages of trade flows between the rich U.S. economy and a poorer global economy. Estimates are derived using a relatively simple model

originally deployed by Krugman (1995) in the “trade and wages” debate that flared up in the early 1990s. Despite a rather conservative methodology, this paper finds that:

• Trade with poorer nations had by 1995 led to a rise in relative earnings of skills vis-Ð" -vis labor of just under 5%,

relative to baseline of no trade with poor nations. This is an amount roughly equal to 12.5% of the dramatic increase in earnings inequality that happened between 1980 and 1995.

• By 2006, trade flows between the U.S. and its poorer trading partners increased relative earnings inequality by just under 7% relative to a no - trade baseline.