How Do Imports from Lower-Income Countries Affect U.S. Wage Inequality? Import Substitution, Skill Premium and Technology Upgrading

Imports from lower-income countries have profoundly impacted the U.S. labor market over recent decades, particularly through the substitution for the demand on less-skilled labor. This study examines how import substitution affects wage inequality, a question that remains untested systematically in previous literature. To address this, we link data from the 2008-2022 foreign trade database, industry production account, and wage survey at the industry-year-state level, and employ a variance function regression. Our findings reveal a positive association between within-industry wage inequality and imports from lower-income countries, mediated by credential-based skill premiums. Such association is also negatively moderated by technology upgrading, suggesting an important contingency: the competitive advantage and skill upgrading induced by technology help industries "escape" the adverse effects of import substitution on wage structure.