Friday, November 16, 2007

The Distributive Consequences of International Trade

. Friday, November 16, 2007

Dani Rodrik points out that trade economists often stress the gains from trade and de-emphasize its domestic distributional consequences. I have always found it puzzling that while political scientists have made the Stolper-Samuelson theorem the workhorse of their models of trade politics, trade economists have tended to downplay the domestic distributional consequences of trade. Rodrik points to recent papers by Josh Biven and Robert Lawrence that simulate the impact of trade between the US and developing countries on the relative wages of low and high skill workers in the US.

The Biven paper in a nutshell:
"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...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-à-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."

The Lawrence paper reaches different conclusions: "while increased trade with developing countries may have played some part in causing greater wage inequality in the 1980s, surprisingly, over the past decade the impact has been too small to show up in aggregate wage data."


The Distributive Consequences of International Trade
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