Adverse Trade Shocks and Inequality in American Manufacturing†

Both trade and inequality in the US and other major economies have increased markedly since 1980, as the working class in rich countries has experienced relatively slow income growth while the Chinese middle class has prospered. In this study, we test the impact of rising trade integration on inequality using disaggregated sectoral data for 359 US manufacturing sectors over the period 1972-2009. We test whether sectors with greater initial exposure to international trade experienced greater increases in inequality and more severe declines in unit labor costs when US relative prices were high and imports surged relative to exports. We also test whether sectors with more initial exposure to Chinese import competion experienced rising inequality once the flood of imports came from China. Surprisingly, we find no evidence that these adverse trade shocks had any differential impact on measured inequality or on labor’s share of income in more exposed manufacturing sectors over this period. We also document facts inconsistent with the thesis that skill-biased technological change was the cause of the rise in inequality in the manufacturing sector since the 1980s