DESPITE RAPID job creation, low rates of unemployment, and the continued overall strength of the U.S. economy, many American workers continue to do poorly. The long stagnation in the purchasing power of wages for the average worker, coupled with an increasing inequality in wages and income, has taken a significant toll. Although recent data suggest that average wages and inequality have begun to improve, real earnings for many low-wage Americans, particularly those with low skills, are lower now than they were in the late 1970s.
Increased economic integration with the rest of the world--especially with developing countries--is frequently seen as a primary cause of these worrisome labor market developments. Indeed, cross-border flows of goods, services, capital, and people have all increased sharply in the past two decades. Furthermore, the idea that increased competition with low-skilled (and low- wage) workers abroad is to blame for the labor market problems of less skilled workers at home has considerable intuitive appeal. However, similar trends and a plausible story are not enough to establish causality. Other factors have also been at work, and something else, such as technological change, may have been the root cause of difficulties faced by many American workers.
Economists have debated intensively the extent to which adverse U.S. labor market trends can be attributed to trade or, more generally, to globalization. At one level, the debate focuses on somewhat technical issues of methodology--