While trade’s impact on the American economy is a frequent topic in Washington, much of the debate centers on the macroeconomic effects of the trade deficit on GDP. However, trade has also had an important microeconomic effect. Growing trade between the United States and developing countries, particularly trade with China, has reduced wages for non-college educated American workers while increasing the wage premium earned by college-educated workers.

In Using standard models to benchmark the costs of globalization for American workers without a college degree, EPI Research and Policy Director Josh Bivens examines this less-discussed but important impact of trade. The paper finds that as labor-intensive industries move to developing nations, demand for labor in the United States decreases, thus reducing wages for non-college educated workers. At the same time, globalization increases demand in the United States for professionals, skilled labor and capital, thereby increasing incomes for college-educated workers and widening the gap between the rich and poor.

The paper finds that in 2011, international trade depressed wages for non-college educated workers by 5.5 percent, costing the average worker $1,800.

As a point of comparison, growing trade with poorer countries has cost the typical worker more than would result from recent proposals to make the Bush-era tax cuts permanent and to finance them with across-the-board cuts to transfer such as Social Security, Medicare, Medicaid, unemployment insurance and food stamps.

“While much of the debate over globalization has focused on the macroeconomic challenges of an overvalued dollar and a persistent U.S. trade deficit, there are other impacts of trade that are worth exploring,” said Bivens. “Even if the value of the dollar reaches a sustainable level and we succeed in reducing or closing the trade deficit, working-class Americans will still face lower wages as a result of globalization. Policymakers should pay close attention to the effect of trade on wages. We need a trade policy that supports American workers.”

Trade’s impact on wages is made worse by an overvalued U.S. dollar, which acts to make imports cheaper and exports more expensive. Moreover, this effect extends beyond workers in tradeable sectors, since foreign competition drives workers out of sectors like manufacturing and into non-tradeable sectors, such as service jobs and construction. Increased competition for these jobs leads to further reductions in wages.