Trade’s impact on American workers was a topic of heated debate during the recent presidential election. Most of the discussion focused on the implications of the overvalued dollar, which makes imports cheaper and exports more expensive—thereby contributing to the large trade deficits the U.S. economy has consistently generated in the last 15 years. Over the last decade, this overvalued dollar has been driven primarily by countries—particularly China—that, as a matter of intentional policy, manage the value of their currency for competitive gain.
This is indeed an important issue and has serious implications for macroeconomic outcomes such as growth in gross domestic product (GDP) and employment. However, besides this currently more pressing macroeconomic challenge to the U.S. economy posed by globalization, there is also a longer-run microeconomic challenge to wage growth of most American workers posed by the integration of a rich U.S. and much poorer global economy. This paper examines the microeconomic effects of growing trade flows with less developed countries and presents evidence that this sort of trade—dominated by China over the last decade—has been a significant drag on the wage growth of most American workers.
This paper begins by explaining how trade between the United States and poorer economies tends to reduce the wages of most American workers. It then documents the expansion of this trade in recent decades and uses a model developed by Krugman (1995) and updated by Bivens (2008) and Mishel et al. (2012) to determine how this trade has expanded wage inequality. Next, the paper estimates how these growing wage gaps have affected the earnings of non-college-educated U.S. workers. Finally, because trade’s impacts on wages are often minimized in policy debates, it compares the wage losses stemming from trade with other economic benchmarks that are characterized as significant in Beltway policy debates.
The main findings of this paper are: