Imports and Wage Inequality, Reexamined

Abstract

The pattern of U.S. imports has changed dramatically in recent decades, mainly because of an unprecedented rise in imports from China. This new pattern has coincided with a resurgence of increasing wage inequality between high-skill and low-skill labor which has reignited a long-standing interest in the possibility that imports drive inequality. We investigate this issue using a production theory approach. Unlike competing methodologies, our model accounts not only for the capacity of imports to displace, but to also stimulate, demand for domestic labor. Our results suggest that imports are not the culprit of wage inequality. Importantly, we find that imports from China foster wage-convergence rather than inequality. Our results further suggest that capital accumulation and technical change may well be the main causes of increasing inequality.