11 February 2008
Trade Has Little Bearing on U.S. Income Inequality, February 11, 2008
(Corporate profits, share held by highest earners main sources of gap)
Washington -- Imports and outsourcing of jobs affect the income gap among U.S. earners only minimally, according to a new study.
The study, titled “Blue Collar Blues” and published by the Peterson Institute for International Economics, says the recent increase in U.S. income inequality has little to do with globalization, which is perceived by some Americans as harming unskilled workers.
In the study, income inequality is defined as the difference between real, or inflation-adjusted, blue-collar wages and business-sector output per hour. In 2000-2006, it has roughly increased by 30 percent.
But because a large part of the gap can be explained by technical factors, real income inequality makes up about 30 percent of it.
In the same period, trade with developing countries had an impact on income inequality that was too small to register, the study says.
Polls show increased anxiety about trade among American workers, and trade has appeared as one of the significant 2008 campaign issues.
Democratic presidential candidate Senator Hillary Clinton has proposed a temporary moratorium on future trade agreements and called for “smart trade” that encompasses labor and environmental standards. On the Republican side, former governor Mike Huckabee called for “fair trade.” However, Senator Barack Obama, an Illinois Democrat, has put more emphasis on opportunities created by trade and Senator John McCain, an Arizona Republican, has said free trade should guide the U.S. economy. (See presidential candidates’ views on this and other issues.)
Some lawmakers and presidential candidates blame sluggish wage increases and rising income inequality on imports from low-wage countries and off-shoring of U.S. jobs overseas.
But the study’s author, Robert Lawrence, says there is little evidence to support these views.
Import competition may cause displacement and could put downward pressure on wages in general, he says, but it does not increase wage inequality.
The main sources of inequality have been the rising share of national income held by a group he calls “superrich” -- corporate heads, sports stars and popular entertainers -- and the increasing share of corporate profits in national income. He said those corporate profits may be a cyclical phenomenon.
These two factors are mostly domestic and have little relation to the manufacturing sector that is viewed as harmed most by trade, he says. The growth in corporate profits has been concentrated in the financial, not manufacturing, sector.
Lawrence acknowledges that isolating trade’s contribution to its impact on growing income inequality and worker dislocation in the United States is difficult because trade is one of many sources of structural change in the U.S. economy. There are also technological changes, financial deregulation, corporate governance reforms and other influences.
He suggests that policymakers deal directly with inequality and dislocation through a more progressive tax system and structural adjustment programs rather than trying to isolate and limit the pressures of globalization.
