The neural mechanisms that underlie perceptual and cognitive deficits in schizophrenia remain largely unknown. The gamma-aminobutyric acid (GABA) hypothesis proposes that reduced GABA concentration and neurotransmission in the brain result in cognitive impairments in schizophrenia. However, few in vivo studies have directly examined this hypothesis in individuals with schizophrenia. We employed magnetic resonance spectroscopy (MRS) to measure visual cortical GABA levels in subjects with schizophrenia and demographically matched healthy control subjects and found that the schizophrenia group had an approximately 10% reduction in visual cortical GABA concentration relative to the control group. We further tested the GABA hypothesis by correlating visual cortical GABA levels with orientation-specific surround suppression, a behavioral measure of visual inhibition thought to be dependent on GABAergic synaptic transmission. Subjects performed a contrast decrement detection task within a vertically-oriented annulus grating. For some trials, the grating was surrounded by either a parallel vertical grating or an orthogonal horizontal grating. Thresholds for contrast decrement detection were largest for the parallel surround condition, and the ratio of thresholds in the parallel and orthogonal surround conditions indexes the component of surround suppression that is selective for stimulus orientation. Previous work from our group has shown that subjects with schizophrenia exhibit reduced orientation-specific surround suppression of contrast decrement detection (Yoon et al., 2009). For subjects with both MRS and behavioral data, we found a highly significant positive correlation between visual cortical GABA levels and magnitude of orientation-specific surround suppression. Concentrations of GABA in visual cortex were not correlated with contrast decrement detection thresholds for stimuli that did not contain a surround. These findings suggest that a deficit in neocortical GABA in the brains of subjects with schizophrenia results in impaired cortical inhibition and that GABAergic synaptic transmission in visual cortex plays a critical role in orientation-specific surround suppression.