The Rise in Inequality: Technology and Trade, or History and Taxes?

Douglas Campbell,  New Economic School of Moscow

Abstract

Both trade and inequality in the US, Europe, and other major economies have increased markedly since 1980, as the working class in rich countries has experienced relatively slow income growth while the Chinese middle class has prospered. Personal computing was also effectively born at this time, which coincided with large cuts in top marginal tax rates. In this study, we test between these theories – trade, taxes, or technology – using two different methodologies. First, we study the impact of rising trade integration on inequality using disaggregated sectoral data for 359 US manufacturing sectors over the period 1972-2009. We test whether sectors with greater initial exposure to international trade, or faster TFP growth, experienced greater increases in inequality and more severe declines in unit labor costs when US relative prices were high and imports surged relative to exports. Secondly, using aggregate data for 18 countries internationally, we test whether trade shocks and marginal tax rates are generally correlated with rising inequality. We find little role for trade or technology, but we do find that the level of top marginal tax rates appears to impact changes in the top 1% share of income, implying that top income shares are a function of history.