Trade‘s Effect on Inequality.

Abstract

Renewed interest in the relationship between trade and income inequality has encouraged the development of new theories. This paper examines whether the predictions of two of these theories along with the much older Stolper-Samuelson theory can be supported by macro data. The results provide no evidence in support of these theories. They instead provide weak evidence that openness decreases income inequality in developed countries while increasing inequality in developing countries. When an instrument is used to correct for possible endogenity, those results disappear. However a Hausman type test shows only an insignificant difference between the OLS and IV results.