Impacts of Trade on Wage Inequality in Los Angeles: Analysis Using Matched Employer- Employee Data

PWP-CCPR-2006-042

Abstract

Over the past twenty-five years, earnings inequality has risen dramatically in the US, reversing trends of the preceding half-century. Growing inequality is closely tied to globalization and trade through the arguments of Heckscher-Ohlin. However, with few exceptions, empirical studies fail to show that trade is the primary determinant of shifts in relative wages. We argue that lack of empirical support for the trade-inequality
connection results from the use of poor proxies for worker skill and the failure to control for other worker characteristics and plant characteristics that impact wages. We remedy these problems by developing a matched employee-employer database linking the Decennial Household Census (individual worker records) and the Longitudinal Research Database (individual manufacturing establishment records) for the Los Angeles CMSA in 1990 and 2000. Our results show that trade has a significant impact on wage inequality,
pushing down the wages of the less-skilled while allowing more highly skilled workers to benefit from exports. That impact has increased through the 1990s, swamping the influence of skill-biased technical change in 2000. Further, the negative effect of trade on the wages of the less-skilled has moved up the skill distribution over time. This suggests that over the long-run, increasing levels of education may not insulate more skilled workers within developed economies from the impacts of trade.