World trade and global wage inequality

Large trade surpluses in developing countries lead to higher wage inequality in both poor and rich countries, which suggests that the way to alleviate global wage inequality is to target trade imbalances. These are the central findings of research by Rosario Crinò and Paolo Epifani, published in the May 2014 issue of the Economic Journal.

The value of world trade

Their analysis of international trade predicts that an increase in the trade surpluses of developing countries leads to higher skill premia both at home and in developed countries. This is because the rise in developing country exports is shared among a few industries and so most of the increased wages in that country go to a relatively small part of the population. At the same time, the developed countries ‘deindustrialise’, leading to lost wages, particularly for unskilled workers.

These two factors lead to rising inequality in both sets of countries. The researchers find evidence in support of their theory by looking at data on exports and jobs for 113 countries between 1977 and 2007. They conclude:

‘Our theory and evidence suggest that a rebalancing of the world economy would reduce inequality in both the South and the North.’