Trade Liberalization and its Impact on the Relative Wages and Employment of Unskilled Workers in the United States

It is commonly believed that an increase in international trade reduces the wages of unskilled workers relative to the wages of skilled workers in the United States. However, current evidence on the impact of international trade on the relative wages and employment of unskilled workers is mixed at best. This study derives more comprehensive empirical equations for the relative wage and employment of unskilled workers and further examines the relationship using time-series data for the period 1980-2005. Trade liberalization is measured by imports, exports, foreign direct investment, and immigration. The explanatory variables of both equations thus consist of these variables plus labor productivity. Labor productivity is included mainly to serve as a control variable. The empirical results suggest that an increase in exports significantly increases the relative wage of unskilled workers, whereas increases in foreign direct investment abroad and immigration both significantly reduce the relative wage of unskilled workers. The results also suggest that increases in exports and productivity both have significant positive influence on employment of unskilled workers while increases in foreign direct investment abroad and immigration have significant negative influence on employment of unskilled workers. Imports, however, do not have statistically significant negative effect on the relative wage or employment of unskilled workers