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Journal of the Indiana Academy of the Social Sciences

Document Type

Article

Abstract

There is still considerable disagreement among researchers whether trade liberalization can explain the rising wage inequality. The wage inequality between skilled workers and unskilled workers expanded in the U.S. manufacturing industries during 1980 through 2000. Meanwhile, NAFTA (North American Free Trade Agreement) has provided us with the opportunity to observe the effect of significant tariff reduction during the same period. The purpose of this paper is to examine the contribution of the reductions of U.S. import tariffs from NAFTA countries Canada and Mexico to that expanding wage inequality during 1980 through 2000. Based on the essential idea of Stolper and Samuelson (1941) and following the method of Haskel and Slaughter (2003), the relationship between product prices and U.S. tariff rates is estimated first and the effect of tariff-induced product prices on wage changes is then estimated. Based on a newly developed industrial classification code, this paper finds significant evidence that U.S. tariff reductions on both Canadian imports and Mexican imports expanded wage inequality between skilled workers and unskilled workers in U.S. manufacturing industries during the period considered. That is, a 1 percent reduction of U.S. tariffs on imports from Canada resulted in a mandated rise in the wage gap by 0.69 percent. A similar result was obtained for Mexican imports, in which a 1 percent reduction of U.S. tariffs on imports from Mexico resulted in a mandated rise in the wage gap by 0.57 percent. These results indicate that U.S. tariff reduction hurts unskilled workers in manufacturing industries, which does not match the result from Haskel and Slaughter (2003), who found no significant evidence that tariff reductions widened wage inequality in the United States.

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