Quantifying the Impact of Trade on Wages: the Role of Nontraded Goods

This paper uses an applied general‐equilbrium model to decompose the effects of changes in trade‐ and technology‐related variables between 1982 and 1996 in the United States on the wages of skilled and unskilled labor. The results indicate that trade‐related variables (tariff cuts, improvement in the terms of trade, and the increase in the trade deficit) had little impact on the widening wage gap. The major factor behind the rise in the skilled wage relative to the unskilled wage was differential rates of growth in skill‐biased technical change across sectors. The paper also highlights the role that nontraded goods play in explaining the wage gap. Finally, the paper presents estimates of how wages would change if the economy moved to autarky. The results show that expanding trade could actually reduce wage inequality, rather than increase it.