Trade Imbalances and Wage Inequality

Abstract

We argue that the large and growing North-South trade imbalances arisen over the last three decades may have exacerbated wage inequality worldwide. In particular, we show that in a standard Heckscher-Ohlin setup with a continuum of goods, a Southern trade surplus is associated with higher skill premia in both the North and the South. Conversely, a Northern trade surplus leads to lower skill premia worldwide. To test these predictions, we extend the methodology proposed by Zhu and Trefler (2005) by computing how a change in trade surpluses/deficits impacts on each country's average skill-intensity of manufacturing exports. Using a large panel of more than 100 countries observed for more than 30 years, we find strong and robust evidence that an increase in the trade surplus by a skill-poor (skill-rich) country is associated with an increase (reduction) in the skill-intensity of exports. Our results also suggest that the impact of trade imbalances on the skill composition of exports is quantitatively larger than that of other likely determinants emphasized by the trade literature, such as trade liberalization, endowment changes, outsourcing or Southern catch-up. (with Paolo Epifani, Bocconi University)