Studies Reveal Consensus: Trade Flows during “Free Trade” Era Have Exacerbated U.S. Income Inequality

Recent Studies: Trade’s Contribution to Inequality Has Increased amid Status Quo Trade Deals and Is Likely to Increase Further

By Public Citizen’s Global Trade Watch

Studies Reveal Consensus: Trade Flows during “Free Trade” Era Have Exacerbated U.S. Income Inequality

U.S. income inequality has jumped to levels not seen since the pre-depression 1920s, as middleclass wages have stagnated while the incomes of the rich have surged. In 1979, the median weekly wage for U.S. workers in today’s dollars was about $749. In 2014, it had increased just four dollars to $753 per week. Over the same period, U.S. workers’ productivity doubled. Meanwhile, the richest 10 percent in the United States are now taking half of the economic pie, while the top 1 percent is taking more than one fifth. Wealthy individuals’ share of national income was stable for the first several decades after World War II, but started increasing in the early 1980s, and then rose even faster in the era of the North American Free Trade Agreement (NAFTA), the World Trade Organization (WTO) and NAFTA expansion pacts. From 1981 until the establishment of NAFTA and the WTO, the income share of the richest 10 percent increased 1.3 percent each year. In the first six years of NAFTA and the WTO, this inequality increase rate doubled, with the top 10 percent gaining 2.6 percent more of the national income share each year (from 1994 through 2000). Since then, the income disparity has increased even further.

Since 1941 standard economic theory has held that trade liberalization is likely to contribute to greater income inequality in developed countries like the United States. As direct competition with low-wage labor abroad puts downward pressure on middle-class wages, the profits of multinational firms rise, and the income gap between the rich and everyone else widens. NAFTA-style deals only exacerbate this inequality-spurring effect by creating a selective form of “free trade” in goods that non-professional workers produce while extending monopoly protections – the opposite of free trade – for certain multinational firms (e.g. patent protections for pharmaceutical corporations).

In the early 1990s, as U.S. income inequality soared amid the enactment of U.S. “free trade” deals, a spate of economic studies put the theory to the test, aiming to determine the relative contribution of trade flows to the rise in U.S. income inequality. The result was an academic consensus that trade flows had, in fact, contributed to rising U.S. income inequality. The only debate was the extent of trade’s role, with most studies estimating that between 10 and 40 percent of the rise in inequality during the 1980s and early 1990s stemmed from trade flows, as indicated in the table below.