Oh Dear, Oh Dear.

Someone\’s been letting the lefties into the trade debate again.

Sadly, both for American workers and the quality of the trade debate, the textbook has other chapters. One of them explains the Stolper-Samuelson Theorem (SST), which points out that when the US exports insurance services and aircraft while importing apparel and electronics, we are implicitly selling capital – physical and human – for labour. This exchange bids up capital\’s price (profits and high-end salaries) and bids down wages for the broad working and middle-class, leading to rising inequality and downward wage pressure for many Americans.

Note that this is not just a story about laid-off factory workers, who obviously suffer the toughest losses. Rather, all workers in the US economy who resemble import-displaced workers in terms of education, skills, and credentials are affected. Landscapers won\’t lose their jobs to imports, but their wages are lowered through competition with those import-displaced factory workers.

Indeed.

In the early 1990s a flurry of studies, driven by the Nafta debate over US trade with Mexico, examined the links between trade, wages, and inequality. Updating a standard method from that earlier debate with 2006 data shows that trade has increased wages for those with a 4-year university degree by around three per cent and lowered wages for all other workers by about four per cent.

Consider a household of two median wages earners working a combined 3,600 hours per year (the average for married couples). A four per cent wage cut for this household would cost the couple $1,800 in annual pay. And this loss is net of any gains from trade: it fully accounts for the lower priced imports and new opportunities in export industries.

Ah, and there we see the twist in the tale. It is not true to say that this median wage earning household has seen its income fall by $1,800. It is true to say that (assuming you believe the analysis, which we will for the moment) their income is $1,800 lower than it would have been without the globalisation. But it hasn\’t actually fallen, it simply hasn\’t risen as much as it might have done.

So the average American worker is not in fact geting poorer. They\’re just not getting rich as fast as they might do.

To work out whether this is a good thing or not we then need to look at who is getting rich more quickly as a result of the globalisation. That would be those hundreds of millions of South and East Asians who have, in the past generation, risen up out of $1 a day poverty into a safe and secure lifestyle.

Now traditionally lefties would look at this result and pronounce it good. The rich (and by any global standard the median US household is stinkingly rich) are getting richer more slowly than the poor, who are leaving their absolute poverty behind them.

Somewhat sad to see someone like Jared Bernstein abandoning such a moral calculus and start to think only about those already rich, the Americans.

2 comments on “Oh Dear, Oh Dear.

  1. There’s a bit missing from that equation. Even if household is $1,800 nominally worse off, how much money have they saved by being able to buy cheaper goods from China? So are they actually materially worse off, is the question.

  2. But it hasn’t actually fallen, it simply hasn’t risen as much as it might have done.

    Sophistry, Tim.

    If my wage now is $45,000, but without NAFTA I would now be earning $46,800, then NAFTA has indeed harmed me to the tune of $1800 a year. The fact that 5 years ago I only made $40,000 so “I’m better off anyway” is irrelevant.

    Mark:

    “And this loss is net of any gains from trade: it fully accounts for the lower priced imports and new opportunities in export industries.”

    So it’s not missing. (Assuming you take their figures at face value, of course.)

    A rational leftie response to this data (globalisation is a 3% gain for the well-paid, a 4% loss for the “ordinary worker” and an unspecified but decent gain for the foreign poor) would be to support globalisation whilst raising the higher marginal rates of income tax 2-3% and cutting the lower bands by 4%.

    That would keep the overall economic and foreign development benefits whilst maintaining the status quo rather than stretching the difference between the rich and poor, no?

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