International Trade and Income Inequality at the Industry Level

This research uses a fixed effects (group and time) model to estimate the effects and channels of international trade on income inequality at the industry level in a sample of 12 countries, 21 industries over the 1990-2005 time period. Income inequality is measured by the Gini index, Atkinson index, Theil index and Mean Log Deviation, which are constructed based on the Luxembourg Income Study dataset by Wang et al. (2014). Furthermore, the trade variable is given by the sum of imports and exports over the gross output of the related industry. This research cannot find results when estimating the effects and channels of international trade on income inequality for all industries and all countries. However, this research finds an effect of international trade on income inequality in three industries, which are the manufacturing paper, minerals and metals industries. International trade decreases the income inequality in the manufacturing paper industry, through exports, which could be explained by the new trade models. However, international trade increases income inequality in the minerals and metals industries, through imports, as argued by Donald Trump. This research interprets these results by showing that there are different effects of international trade on income inequality per industry, in direction, magnitude and channel. Therefore, this research signifies the importance for analyzing the effect of international trade on income inequality at the industry level, to help understand the effect of international trade on income inequality in general.