The Impact of Trade on US Income Inequality: A Detailed Report

This report analyzes the effects of growing trade with low-wage countries on income inequality in the United States. It examines the trends of income distribution from 1970, highlighting the widening gap between affluent and lower-income Americans. The report discusses the arguments surrounding free trade agreements like NAFTA and their impact on low-skilled workers, wage reduction, and the equalization of tax. It explores economic theories such as the comparative advantage paradigm, Heckscher-Ohlin model, and Stolper-Samuelson model to explain the relationship between trade and wage inequality. The analysis includes data on income changes, compensation of employees, and the influence of factors like education, technology, and deregulation. The report also presents the global perspective of income inequality, with examples from countries like Brazil, Russia, India, China, and South Africa, and it concludes with a call for economic equity and fair employee compensation.

“Some believe that the growing trade with low-wage countries has been the main cause of rising income
inequality in the United States” (Krugman, Obstfeld and Melitz).
Report

From 1970, the income of Americans have been seen at an equalized level, where the
standards for living are seen for the poor and the lower middle class Americans who have been
falling mainly with major affluent Americans working on improvement. The trend is set towards
the inequality which is not confined to US.
With the rising population, there has been a major rise of income inequality on the
growing importance of the trading business. Here, the consideration is about how free trading
business has been able to handle the countries with a lower wage factor in the country. This has
also majorly harmed or threatened the people who are having a low skill-set as they are not able
to contribute much in advancement of the industrial countries. The arguments are used generally
for the North American Free Trade Agreement, where the warning is about that free trading
business that is done with the other countries like Mexico, leads to a major problem of loss in
jobs. This also leads to reduction in wages of the low-skilled workers in U.S., overall. The
equalization of tax is important that comes mainly with protecting Americans who are working
from the Asian and other workers of countries like Latin America. The international trading is
considered to be the engine for a better growth and the development, where the potential of the
growth is for driving the comparative advantage paradigm. According to the principle, the
country needs to specialize in the goods production with lower opportunity cost than the other
country, where the goods are then freely traded among one other.

The figure highlights about the changing rate of income for the Americans which is
mainly in different quantiles for handling the distribution of income. This is when there are
changes in time with pricing level and the sizing of the families. It is seen that in 1969, less time
was taken for supporting the families for maintaining a better living standard.
The insights are about economists with maintaining a higher collective profitability that
focus on competitive advantage in United States. The international trade theory is developed by
Heckscher-Ohlin who focuses on opening of trading offers for new areas to specialize

productively with raising overall average levels of productivity for domestic industries. The
limits for the theory could be to explain patterns for modern manufacturing activities mainly in
between industrialized economies. The wage inequality and the trading has been a deep issue for
the economic discussion. With rising unemployment and wage inequality in OECD countries in
1980, there are international trading which has come with forefront of economic discussions for
the trends of this cause. The model of trading HOS (Heckscher-Ohlin-Samuelson) provides
predictions which concern the links in between the trading and wage systems. Here, the
suggestions are for the prices of domestic unskilled labors which tend to fall mainly due to the
opening of lower wage countries and a higher unskilled force of labor. The other effects are
considered to be including theories for opening the trading and allowing competition to affect the
domestic unskilled market of labor.
The change in income levels are variable which generally leads to a major issue for the
time. Here, there are factors related to working on the family sizes that requires to match with the
bars of income from low-skilled people. The black bars represent the change in income at the
time of 1969-79 where the red bars are between 1979-93. The example could be the unearned
income which is to grow strongly in top part for distribution of income. With the changes in
market price of skills that are determined by market demand, need to focus on education which
affects the wages. The individuals with different education levels earn different wages (Babić,
2007). The HO model is considered better for the world economy as it is based on the
assumptions that the trading countries are seen to be adopting with the same production
technologies.
The earnings inequality are measured with change in composition of American
householders, which could be a major source of growing wage inequality. There are relevant

factors which include the urbanization, higher rates for savings, and the improved access for the
education. The geography is to isolate the determinants of trading with the powerful drivers of
economic success in United States. Smith-Ricardo theory has a limitation that it does not
distinguish among citizens of country where one cannot address distribution of income in a
country (Krugman, 2008). Stolper-Samuelson model is useful that distinguishes in between the
workers and physical owners, financial and the human capital. The theory is dominated through
predicting international trading which would benefit the production factors in the rich countries
and the owners of capital. The workers need to command for the higher wages if they are not
competing against any labor for the poor countries. The elements of the globalization latched on
the new economic theories require to rethink about the traditional case for the free trading. The
Stolper-Samuelson theory have different predictions with free trading that would hurt the lower
skill workers mainly in the rich countries. There is a major overwhelming evidence for the less
skilled workers in developing countries which are at least not relative to the workers with a
higher skill. Following 10 years, the inequality is seen to worsen with developing countries.
In Brazil, 1% of the people are for 25% of the national income.
Russia scored for the increased population from 4 to 20% in 1980 to 2015.
In India, the rise is from 6% to 22% in 2013
In China, the rise is from 6% to 14% in 2015.
In South Africa, there is a rise from 9% to 19% in 2012.
There is a need to view the economic equity with employee compensation that should rise
with the productivity. The employee produces more and needs to be paid accordingly. The
payment lags behind the productivity with income inequality that grows with the labor share of

the output that is falling. The productivity compensation gaps are considered to be a major issue
from the academics and the other policy makers in United States. It is important to understand
the implications of HO model where the difficulty is to reconcile the observed changes that are in
wage, prices and the outputs. The elasticity assumptions are sensitive which are due to near
linearity of production function. The skill intensive industries need to grow more than the other
unskilled intensive industry.

The figure highlights on how the state of labor who are skilled and un-skilled have been
changing with the compensation for the employees in different areas, when compared to US. The
economic deregulation with immigration into United States and declining minimum wages has
contributed to the job woes mainly for the people who are unskilled and semi-skilled. The liberal
trading with new industrialization countries have played a major part of job prospects of
Americas unskilled workers. Among economists, the leading factors for increased wage
inequality is considered to be a major change in production technology. The innovations like
personal computer or new forms of business organizations have favored workers with greater
skill.
References
Babić, A., 2007. International Economics: Theory and Policy/Paul R. Krugman, Maurice
Obstfeld. Boston: Addison-Wesley, 2005. Financijska teorija i praksa, 31(3), pp.313-314.
Krugman, P.R., 2008. International economics: Theory and policy, 8/E. Pearson Education India.