Here I Take a Minority Position on the Prediction of Stolper-Samuelson

(Don Boudreaux)

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Here’s a letter to the Wall Street Journal:

Reviewing Roger Backhouse’s biography of the economist Paul Samuelson, Eric Maskin writes that “The Stolper-Samuelson Theorem implies that international trade causes inequality between high-skilled and less-skilled workers to grow in rich countries.  The theorem was derived in 1941 but clearly remains relevant in today’s America of rising inequality” (“An Einstein of the Dismal Science,” May 20).

Not quite.

When applied to labor, the Stolper-Samuelson Theorem predicts that the workers whose wages fall as a result of freer trade are (in econ jargon) the relatively more scarce factor of production – which, in America, is less-skilled workers – and that the workers whose wages rise are the relatively more abundant factor of production.  In plain language, while the workers in America whose wages are reduced by freer trade are indeed the lowest paid, they also are a minority of workers.  Freer trade raises the wages of those workers whose skill-levels are most abundant.  Because the workers in America whose skill-levels are most abundant are those whose incomes are in or near the middle of the income distribution for workers, Stolper-Samuelson predicts that the wages in America that will disproportionately rise when trade becomes freer are chiefly those earned by middle-income workers.

Yet it is difficult to see how a change in the wages distribution with a disproportionate amount of the gains going to middle-income workers increases income inequality.  Therefore, to the extent that the Stolper-Samuelson Theorem applies in reality, it tells us that whatever increase in income inequality has occurred over the past several decades is likely not due to the effect that freer trade has on the distribution of workers’ wages.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

Note that in this letter I do not argue that income inequality has not increased in the United States.  Instead, I argue that whatever increase in income inequality there might have been in the U.S. is not as straightforwardly explained by – or even consistent with – the Stopler-Samuelson Theorem as many people today (such as Eric Maskin) presume.