Trade and Wages: Insights from the Crystal Ball

Abstract

This study uses both a net factor content analysis and a small simulation model to explore the impact on the U.S. labor market of a fivefold increase in imports of manufactured goods from developing countries. The simulation, which is parameterized by the US economy in 1990, involves a balanced trade expansion which displaces almost half of US manufacturing workers who are reemployed in the remaining manufacturing and non-trade sectors. The results show that relative wages of workers with a high school education or less would be depressed, while those with some college education would rise. However, despite the magnitude of the shock, the effects are surprisingly small. Once account is taken of productivity increases, labor force growth and export sector wage premiums, given unitary elasticities of demand and of substitution between workers with different levels of education, relative wages of workers with some college education rise by 3.5 percent, while the real wages of workers with a high school education or less decline by 1.3 percent. The impact of a variety of parameter assumptions is also explored.