Have Falling Tariffs and Transportation Costs Raised U.S. Wage Inequality?

A number of studies have tried to gauge the effect of international trade on the rising U.S. skill premium by examining whether product prices in unskill-intensive sectors have fallen relative to prices in skill-intensive sectors. However, these studies do not estimate what share of domestic product-price changes is due to trade barriers. This paper attempts to address this issue by analyzing not the sector bias of price changes but rather the sector bias of price changes induced by changes in U.S. tariffs and transportation costs. We find that in both the 1970s and 1980s, level cuts in tariffs and transportation costs levels were concentrated in the unskill-intensive sectors. If pass-through of trade barriers to product prices is uniform across all sectors, then this suggests falls in tariffs and transportation costs were mandating a rise in the U.S. skill premium. But despite this suggestive evidence, we estimate that the price changes induced by tariffs or transportation costs mandated a rise in the skill premium that was mostly statistically insignificant. Thus, we do not find strong evidence that falling tariffs and transport costs, working through price changes, mandated rises in inequality.