Benefits of Trade for the Poor in the U.S.

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).

Comments

[Luis Enrique]

Ben, I have made this point on other blogs, so sorry for being repetitious* ... but don't the relative price movements described by Broda and Romalis also tell us that the consumption bundle of the rich and got much less affordable for the poor? That is, if the poor wanted to purchase some of the rich people's lifestyle, and were perhaps contemplating saving up or working harder, they've got to make much greater sacrifices. If some of the items in the rich person's conumption bundle are a good education, good healthcare, and a home in a safe neighbourhood, this is a double edged sword: does the fact that the poor can now afford more cheap food, electrical gadgets and clothing compensate for the lifestyle of the wealthy having moved further out of reach?

* and nobody seemed very interested then, which might just go to show I am mistaken or the argument is uninteresting.