This paper studies the impact of globalization on U.S. earnings inequality in the context of rapidly growing import competition from China. The increase in U.S. inequality during 2000-2007 has been driven entirely by changes within regions}. While the existing literature has established differences in wage growth across regions as a consequence of import competition, understanding the impact of globalization on rising U.S. inequality requires then focusing on its impact on inequality within regions. Exploiting variation in exposure to this unprecedented trade shock across local labor markets I find that import competition causes an increase in earnings inequality. This impact occurs primarily on the lower tail of the earnings distribution. I decompose the variation in regional inequality into changes occurring within and between industries, occupations, earnings deciles, and skill categories. While the relative share of the impact on between-and within-group inequality varies across these various dimensions, in each case the impact of trade on within-group inequality represents a relevant share of the overall impact.

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Research Paper

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Working Paper 15