US Income Inequality and Trade Dynamics

US income inequality has been on the rise, but this increase is not primarily caused by trade with developing countries.

Main Thesis: Trade with developing countries does not account for the major rise in income inequality in the US. Instead, the significant increase in profits and the earnings of the wealthiest Americans has been the driving force behind rising income inequality.

Robert Lawrence:
- Title: Professor of International Trade and Investment at the John F. Kennedy School of Government, Harvard University.
- Senior Fellow at the Peterson Institute for International Economics (PIIE).

In the US, trade with developing countries is often viewed as problematic due to its potential to lower wages for lower-wage workers.
This trade has significantly grown in recent years, largely due to:
- The rise of countries such as China and India as major global competitors.
- The US actively pursuing Free Trade Agreements (FTAs), such as NAFTA with Mexico and others.

1980s Findings: Studies from the 1980s concluded trade accounted for a modest share of the growth in wage inequality.
New arguments suggest that the scale of trade has increased, leading to larger anticipated impacts on income inequality.
- Example: Paul Krugman, in a Vox column, highlighted current expectations of trade's impact on wage inequality.
There are observable globalization forces since the early 1990s, associated with:
- A rise in imports from developing countries.
- A steady decline in the relative prices of manufactured goods from these nations.

Notably, over the last fifteen years, the wages of the least skilled Americans (the lowest 10%) have kept pace with the median wage.
Despite sluggish real wage growth overall, relative wage measures show little evidence of increased inequality across:
- Skill levels
- Education
- Unionization status
- Occupational categories
- Major economic sectors

Trade's Impact on Wage Inequality Is Limited:
- Conventional wisdom posited that trade shocks (or immigration) would increase wage inequality.
- Two potential explanations were offered:
- First Explanation: Most US imports come from sophisticated goods produced by skilled US labor.
  - Thus, while this competition could lead to some wage pressure, it does not necessarily heighten inequality.
- Second Explanation: A substantial portion of imports are no longer produced domestically, leading to:
  - Lower consumer prices without significant downward pressures on US wages or worker dislocations.

The dynamics of globalization may be resulting in decreased income inequality due to more advanced specialization.
Current US trade reflects complex mixtures of these phenomena, making it challenging to draw clear conclusions solely from aggregate data.
Data indicates that manufactured imports—particularly from developing countries—are concentrated in manufacturing sectors with higher than average wages.
Import displacements have not disproportionately affected less skilled workers despite substantial displacement since imports have not resulted in increased wage inequality.

At finer levels of detail, data suggests that goods from developing countries like China often employ relatively less skilled labor.
These goods are qualitatively different from those produced in developed countries such as the US, supporting the notion of advanced specialization in trade.

In summary, while US income inequality has risen in the last decade, it does not suggest that trade with developing countries is the primary cause.
The increase in inequality is characterized more by the significant gains in profits and compensation for the wealthiest individuals in the economy.