Working Paper: NBER ID: w16425
Authors: Ann Harrison; John McLaren; Margaret S. McMillan
Abstract: The 1990's dealt a blow to traditional Heckscher-Ohlin analysis of the relationship between trade and income inequality, as it became clear that rising inequality in low- income countries and other features of the data were inconsistent with that model. As a result, economists moved away from trade as a plausible explanation for rising income inequality. In recent years, however, a number of new mechanisms have been explored through which trade can affect (and usually increase) income inequality. These include within-industry effects due to heterogeneous firms; effects of offshoring of tasks; effects on incomplete contracting; and effects of labor-market frictions. A number of these mechanisms have received substantial empirical support.
Keywords: Trade; Inequality; Globalization; Heterogeneous Firms; Offshoring
JEL Codes: F16; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade reforms (F13) | rising inequality in low-income countries (F63) |
| trade (F19) | income inequality (D31) |
| trade (F19) | income inequality in developed countries (D31) |
| trade (F19) | income inequality in developing countries (F63) |
| offshoring (F23) | higher demand for skilled labor (J24) |
| higher demand for skilled labor (J24) | increased inequality (F61) |
| labor market frictions (J29) | income inequality (D31) |
| incomplete contracts (D86) | wage distributions (J31) |
| wage distributions (J31) | income inequality (D31) |
| trade (F19) | factor returns (G12) |