Trade has reduced the prices, and increased the selection, of goods disproportionately consumed by the poor. Christian Broda and John Romalis find that when the different inflation rates for the poor and the well-to-do are taken into account, apparent rising U.S. income inequality between 1994 and 2005 disappears: Inequality and Prices: Does China Benefit the Poor in America? (working draft dated March 26, 2008). Imports from China have been especially important:
Over the past three decades there has been a spectacular rise in income inequality as measured by
official statistics. In this paper we revisit the distributional consequences of increased imports
from China by looking at the compositional differences in the basket of goods consumed by the
poor and the rich in America. Using household data on non-durable consumption between 1994
and 2005 we document that much of the rise of income inequality has been offset by a relative
decline in the price index of the poor. By relaxing the standard assumptions underlying the
representative agent framework we find that inflation for households in the lowest tenth
percentile of income has been 6 percentage points smaller than inflation for the upper tenth
percentile over this period. The lower inflation at low income levels can be explained by three
factors: 1) The poor consume a higher share of non-durable goods —whose prices have fallen
relative to services over this period; 2) the prices of the set of non-durable goods consumed by
the poor has fallen relative to that of the rich; and 3) a higher proportion of the new goods are
purchased by the poor. We examine the role played by Chinese exports in explaining the lower
inflation of the poor. Since Chinese exports are concentrated in low-quality non-durable products
that are heavily purchased by poorer Americans, we find that about one third of the relative price
drops faced by the poor are associated with rising Chinese imports.
Specifically:
First, ratios of the 90th to 10th percentiles of the US income
distribution have grown by 6 percent from 1994 to 2005, roughly a third of the total rise in
inequality since 1984.1 When income-group specific inflation rates are used to estimate the
change in inequality, 90th/10th ratios have risen only 2 percent in this period. Moreover, if
inflation rates are corrected for new-goods bias using the methodology in Broda and Weinstein
(2007) we find that inequality has been unchanged since 1994. Using the impact of China on US non-durable consumer prices and given that the share of Chinese goods in total US imports have
risen from 6 to 17 percent over the 1994 – 2005 period we estimate that the price effects of the
increased imports from China alone can offset around 30 percent of the rise of conventional
inequality measures over this period.
This is one of several interesting looking papers under discussion at a conference at Princeton this weekend: IES Summer Workshop
Hat tip to Paul Krugman: Wes Clark
Note, July 3: Borda summarized the argument at VoxEU on July 3: China and Wal-Mart: Champions of equality. Mark Thoma looked critiqued it here (Inexpensive, Low-Quality Goods and Inequality, Economist's View, May 20, 2008) and here ("The Free-Trade Paradox," Economist's Voice, May 19).