Have Falling Tariffs and Transportation Costs Raised US Wage Inequality?

• DOI: http://doi.org/10.1111/1467-9396.00408
• Author: Jonathan E. Haskel,Matthew J. Slaughter
• Date: 01 September 2003
• Published date: 01 September 2003

Have Falling Tariffs and Transportation Costs

Raised US Wage Inequality?

Jonathan E. Haskel and Matthew J. Slaughter*

Abstract

To gauge the effect of international trade on the rising US skill premium, the paper analyzes the sector

bias of price changes induced by changes in US tariffs and transportation costs. It is found that, in both

the 1970s and 1980s, cuts in tariffs and transportation cost levels were concentrated in unskilled-intensive

sectors.Despite this suggestive evidence, the authors estimate that price changes induced by tariffs or trans-

portation costs mandated a rise in inequality that was mostly statistically insignificant.Thus, they do not find

strong evidence that falling tariffs and transport costs, working through price changes, mandated rises in

inequality.

1. Introduction

A number of studies have tried to estimate the effect of international trade on the US

skill premium by examining whether product prices in unskilled-intensive sectors have

fallen relative to prices in skilled-intensive sectors (see Slaughter, 1999, for a survey).

These studies are based on the intuition of the Stolper–Samuelson theorem, which

links changes in a country’s domestic product prices to changes in its factor prices (see

Deardorff and Hakura, 1994, for a survey).The thrust of the theorem is that the skill

premium tends to rise if price increases are concentrated in skilled-intensive indus-

tries; i.e., if price increases are “sector biased” towards skilled-intensive sectors.

A potential limitation of these “product price” (or “mandated wage”) studies is they

do not estimate what share of domestic-price changes is due to some exogenous aspect

of international trade. Of course, if the United States were a small open economy then

any change in US tradable prices would be caused by changes in world trading con-

ditions. Many price studies have implicitly or explicitly assumed this. It is likely,

however, that US tradable prices depend both on trade-related forces and on dom-

estic forces (e.g., oligopolistic interaction).Hence the sector bias of price changes may

convey no information about the sector bias, and so wage effects, of trade-related

forces.1

This paper attempts to address this limitation by analyzing not the sector bias of

price changes but rather the sector bias of price changes induced by changes in US

tariffs and transportation costs. This allows us to ask a more precisely focused ques-

tion: “Have changes in US tariffs and transportation costs changed the US skill

premium?” This is a narrower question than that of many existing product-price

studies, but by focusing on two plausibly exogenous aspects of international trade it is

arguably better-defined.2

Review of International Economics, 11(4), 630–650, 2003

*Haskel: Department of Economics,Queen Mary, University of London, Mile End Road,London E1 4NS,

UK. Tel: 011-44-207-882-5365. Slaughter: Tuck School of Business, Dartmouth College, 100 Tuck Hall,

Hanover, NH 03755,USA. Tel:(603) 646-2939; E-mail: slaughter@dartmouth.edu. For helpful comments we

thank an anonymous referee.For financial support we thank the UK Economic and Social Research Council,

the Russell Sage Foundation, the National Science Foundation, and the National Bureau of Economic

Research.For research assistance we thank Ylva Heden; for data help we thank Andrew Bernard and Robert

Feenstra.

© Blackwell Publishing Ltd 2003, 9600 Garsington Road,Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA

TARIFFS AND TRANSPORTATION COSTS 631

© Blackwell Publishing Ltd 2003

The details of the study are set out below, but briefly, our empirical work is based

on the production side of Heckscher–Ohlin (HO) theory for a single country.3This

model has motivated most existing product-price studies, for it provides a method for

measuring the factor-price effects of the sector bias of product-price changes.However,

no mandated-wage study has related these product prices to tariffs and transportation

costs. Following Feenstra and Hanson (1999) and Haskel and Slaughter (2001),we first

estimate the relationship between changes in US domestic product prices and changes

in tariffs, transportation costs, and other underlying forces. This allows us to calculate

the portion of product-price changes due to changes in our trade barriers.We then esti-

mate wage changes due to the sector bias of these trade-barrier-induced product-price

changes.4

Our empirical analysis uses detailed industries covering all of US manufacturing

from 1974 through 1988. We find that in both the 1970s and 1980s level cuts in tariffs

and transportation costs were concentrated in the unskilled-intensive sectors. If

passthrough of trade barriers to product prices is uniform across all sectors, then this

suggests that changes in tariffs and transportation costs were mandating a rise in the

US skill premium. But despite this suggestive evidence, the price changes induced by

tariffs or transportation costs mandated a rise in the skill premium that was mostly sta-

tistically insignificant.Thus, we do not find strong evidence that falling tariffs and trans-

port costs, working through price changes, mandated rises in inequality.

In section 2, we set out the mandated-wage methodology. Section 3 describes our

data, and section 4 sets out our results. Section 5 concludes, with a discussion relating

our results to existing product-price studies.

2. Sector Bias and the Mandated-Wage Methodology

The production side of the HO model assumes an economy with sectors of different

factor intensity (at the same relative factor prices) and factors with complete mobility

across sectors. Aggregate demand for skilled workers relative to unskilled workers

(henceforth, aggregate relative labor demand) changes whenever factors flow across

sectors. For example, if factors flow to a skilled-intensive sector then aggregate rela-

tive labor demand rises. These factor flows are endogenously caused by changes in

intersectoral profitability, which in turn are caused by changes in product prices or

technology. Hence factor prices adjust to any shocks to aggregate relative labor

demand to restore, if the economy is competitive, zero profits in all sectors.

This process can be formalized by supposing the economy produces Idifferent trad-

able goods, each of which requires some combination of Jprimary factors and Iinter-

mediate inputs. Assuming zero profits in each sector i,we write

(1)

where is the domestic gross-output price in sector i;wjis the unit cost of the jth

input; aji is the (endogenously determined) employment of input jper unit of output

in sector i;and bii is the amount of intermediate input irequired to produce a unit of

good i.There are Iequations in (1), one for each sector where production occurs. Note

that with intersectoral factor mobility, wages wjin (1) are not indexed by sector i.In

the special case of a small open economy, is also the world price. Totally differen-

tiating (1) with respect to time gives

(2)

DD Dlog log log ,p TFP V w

it it jit jt

jJ

+=

Œ

Â

pi

G

pi

G

pawbpi I

ijijii i

iIjJ

GG

=+ =

ŒŒ

ÂÂ ,,...,1