Sunday, April 20, 2008

An update on debate over trade and wage inequality

Economist analyzes Paul Krugman's recent paper on trade and wage inequality:

Krugamn, "It's no longer safe to assert that trade's impact on the income distribution in wealthy countries is fairly minor...There's a good case that it is big and getting bigger." ....two reasons why. First, more of America's trade is with poor countries, such as China. Second, the growing fragmentation of production means more tasks have become tradable, increasing the universe of labour-intensive jobs in which Chinese workers compete with Americans.


It is possible that globalisation is becoming a bigger cause of American wage inequality. But contrary to the tone of the political debate, and the thrust of Mr Krugman's commentary, the evidence is inconclusive. "How can we quantify the actual effect of rising trade on wages?" Mr Krugman asked at the end of his paper. "The answer, given the current state of the data, is that we can't."