Trade and inequality in Europe and the US

Many economies in Western Europe have experienced a sizeable increase in income inequality since the 1980s, and inequality has grown even more rapidly in the United States. Whereas educated workers in skilled occupations benefited from rising salaries, wages have stagnated for many less educated workers in unskilled occupations. The rising inequality in advanced economies coincided with a period of globalisation that was characterised by rapid growth in international merchandise trade. Basic economic models predict that trade could contribute to greater inequality in skill-abundant advanced economies, as globalisation leads such countries to specialise in skill-intensive industrial sectors, which raises labour demand for skilled workers but reduces demand for unskilled ones. Yet despite this theoretical link between trade and inequality, empirical analyses long concluded that increased trade was not a major cause of increasing inequality in advanced economies. However, this perspective on trade and inequality has evolved during the decade of the 2010s, as a growing body of empirical research found sizeable impacts of trade shocks on labour markets and inequality. During the same period, international trade has become a more contentious subject in political debate, and a many-decades-old trend towards greater trade liberalisation has been broken by new tariffs that resulted in a ‘trade war’ between the US and China.