Trade, Wages, and the Conventional Wisdom (or lack thereof)

March 5th, 2014 at 10:27 pm

There are many ways in which DC talks past the rest of the nation, and one of them is on the impact of global trade on the economic lives of our citizens.  If you go around the country and talk to people about the economic struggles they face, many will identify global competition as a key explanatory factor.  A prominent national politician once told me that when he’s on the stump, the word he hears most from people about what’s hurting their livelihoods is “China.”

But among economists and policy makers, it’s pretty widely held that those people just have it wrong.  They don’t understand a) the large extent to which they benefit from trade, and b) the tiny extent to which they’re hurt by it.  The conventional wisdom thus goes something like this:

Why are so many people and their political representatives so down on global trade?  Because the benefits are diffuse and the costs are concentrated.  Everyone benefits from a larger supply of less expensive goods, which they pretty much take for granted: you don’t hear WalMart shoppers complaining about “the China price.”  But when the factory closes and moves abroad, even if it just displaces a few workers, the whole community sees it, feels it, and remembers it.

I was reminded of this take upon reading this WaPo piece the other day, which mapped (literally—there’s a really interesting map in the piece) this CW onto the current politics of the trade debate, noting how the Obama administration’s trade agenda is being derailed by this dynamic.

On the whole, trade is likely to benefit the country, said Hanson…a professor of economics at the University of California, San Diego. “There are a whole bunch of middle income folks who aren’t exposed.  They are in parts of the country that benefit from trade liberalization,” he said. “They’ll get cheaper physical goods and there’s the increase in economic activity in their regions. If you own a coffee shop in Seattle, you’re delighted to see expanded trade in Asia.”

Hanson makes the point that there are so few Americans working in manufacturing today that the number of Americans affected by the trade deals would not be so substantial. “I think today, given the size of the manufacturing sector, for the median person I would expect that you’d see mildly positive net benefits,” he said. “That answer might have been different 30 years ago when manufacturing was a bigger part of the U.S. labor force.”

So, there’s an answer for why Obama supports the trade deals: They’re going to help Americans overall. And the traditional manufacturing jobs that will suffer — there aren’t that many of them around anymore anyway.

The problem with all this is that it’s almost surely wrong.  There are at least two deep flaws in the logic.

First, as economist Josh Bivens points out in an important paper on the impact of trade of broad swaths of the workforce, workers displaced by global competition don’t disappear.  They move from jobs in the tradable to the non-tradable sector:

…the wage effects of global integration reach beyond those workers exposed directly to foreign competition. As imports displace non-college-educated workers from tradable sectors (such as manufacturing), these laid-off workers need to accept lower wages to obtain work in other sectors (such as landscaping or construction). Further, the competition provided by these workers helps to lower the wages of similar workers already employed in these sectors. In short, while it is impossible to replace a waitress (a job in the non-tradable restaurant sector) with imports, her wages are harmed by having to compete with apparel workers who have lost jobs due to increased trade flows.

Second, as Bivens and others point out, the wage levels of the countries with whom we trade is a key determinant of the impact of trade on American workers.  He emphasizes the impact of our increasing share of trade with low-wage countries, as that shift has had far reaching wage effects here.  For example, he reports that “…growing trade with less-developed countries lowered wages in 2011 by 5.5 percent—or by roughly $1,800—for a full-time, full-year worker earning the average wage for workers without a four-year college degree. One-third of this total effect is due to growing trade with just China.”

Let’s be very clear about this: Bivens is not talking about only those specific workers who’ve lost their jobs due to trade.  He’s talking about the two-thirds of the workforce that lacks a college degree.

Third, there’s another trade factor that reverberates well beyond those directly hit by trade competition: the persistent trade deficits that for decades now have played a large, demand-zapping role in our job market, as Dean Baker and I stress here.   Our analysis finds that we’ve been alternating between investment bubbles and deficit spending to offset the loss of incomes and jobs drained out of the economy by trade deficits that have been a fixture of our national accounts since the mid-1970s (a new paper by Rob Scott gets into the job impact of these imbalances).  And this too has of course hurt working people from all walks of life, including those employed in the non-tradable sector.

None of this is to negate point “a” way up above: of course trade also makes all of us better off as consumers and that’s a huge boon.  It also, by the way, gives workers in emerging economies essential opportunities to improve their living standards.  But far too often, elite analysis of trade thinks of people exclusively as consumers getting a better deal on price when many are also workers getting a worse deal on wages.  And that latter part is a lot more common than the conventional wisdom suggests.

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10 comments in reply to "Trade, Wages, and the Conventional Wisdom (or lack thereof)"

  1. Stephen Weinberg says:

    It’s rather difficult to separate wages from prices like this, because real wages are wages divided by prices (that is, how much can I buy with my paycheck?). If I actually lose my job because of trade, I’m clearly worse off unless and until
    I get a new job (and the anxiety and displacement get added in to that harm). If I get a lower paying job or my wages are reduced from what they would have been, then I may or may not be worse off, depending on whether my wage effect is greater than my price effect.
    There are countless products that lower and middle class Americans consume that would be much more expensive without trade. If we moved to a closed economy, some (plausibly many) people would get higher real wages, but a great
    many people would experience a fall in their real wages. (The historical practice of “factory stores”‘that workers would have to shop in illustrates the importance of thinking about wages and prices simultaneously; one way for firms to cut pay was to raise prices. I’m thinking particularly of the factory store model in which workers are paid in chits only redeemable at the store.)

    I assume that Bernstein isn’t disputing the general economic insight that the nation’s overall wealth increases from trade, but rather is claiming that the distributional consequences are much too large to just hand wave away or ignore.

  2. Steve Roth says:

    IOW: Presumably the price effect of free trade is more distribution-neutral — everybody shares the advantage of low prices — while the wage effect is not — it results in greater concentrations of income and wealth.

    If that concentration is itself destructive of prosperity, strangling growth — as suggested most recently by the following IMF paper — then we have a second-order effect counteracting the “manifest benefits” of the first-order effect.

    “The average redistribution, and the associated reduction in inequality, is thus associated
    with higher and more durable growth.”

  3. save_the_rustbelt says:

    The extent to which both political parties have thrown blue collar workers overboard with trade deals and worshipping financial markets would be stunning if I didn’t see the damage every day.

    But wait, the “average worker” is better off, right? The statistics say so! The economists know it! The Very Serious People believe it!

    But, but, but….. they get to buy cheap Chinese stuff at Wal-Mart. That surely makes up for not having a job.

    (Almost immediately after being sworn in Jack Lew, of Wall Street origins, jumped a plane to China to pledge his fealty to the Chinese leaders – gag.)

  4. smith says:

    Here is my angry letter to the Times and, guess what, I can’t afford to have it published in my name right now (yes there would be repercussions, I have no doubt).
    The Times writes:
    “Software developers do not evoke great sympathy. Their median pay was $93,350 a year in 2012, according to government data; they are hardly oppressed workers struggling to put food on the table and pay the rent.”

    From 2003 to 2011, those in computer occupations experienced real wage growth of only 1/3 percent per year, but this led all other occupational groups for college graduates. Previously when had job opportunities pushed wages up, the labor market reacted. During the tech boom, the number of computer science majors swelled by 50%. Then following the tech bust of 2000, the number dropped back down to it’s pre boom levels, with a four year lag as those in the pipeline graduated.

    Here is why this matters, to everyone, not just the 3% of the workforce in computers. Suppressing the wages in one industry suppresses wages everywhere. It relieves pressure on other types of businesses to attract workers with competitive wages. Our labor market is so fluid that most jobs are filled by people previously from another field or industry. In addition, wage signals greatly influence the training and careers that people initially pursue.

    You may not think developers evoke sympathy for their high pay, though often working a million hours to finish or fix some portion of critical code, while increasing the nation’s productivity (excepting the high speed trading developers). But self interest should make you angry that your wages are being affected by the 1%’s war against the 99%, including an upper tier of high skills workers. Allowing tech wages to climb will lift everyone’s income.

    Below are the links

    Page 48 and page 49, Tables 9 and 10
    Conclusion page 31 “Finally, more than half of job openings in all industries and occupations are filled with persons who previously did not work in the same industry or occupation.”

    “Computer and Mathematical Occupations (of which over 90% are Computer) represent 7.5% of all projected openings, 130,000/year of 1,700,000/year high skill jobs, ( high skills are 1/3 of all jobs, 3/4 of which require at least an associates degree, thus 1/4 of all jobs, figures from and Table 7, second from bottom)

    “Real wages of college graduates fell for every key occupational group from 2003 to 2011, except for computer and mathematical science. …the occupation with the best real wage growth – computer and mathematical science – had growth of 3.2 percent over those nine years, an increase of about a third of 1 percent a year.”
    Page 303, The State of Working America 12th Edition

    “Computer and information science” closely followed demand of tech boom and bust as seen in this table, 4 years of college creates 4 year lag peak following bust.

    • smith says:

      I should have made the connection to the blog post more clear with this quote/paraphrase. I’m “not talking about only those specific workers who’ve lost” wage increases “due to” collusion. I’m “talking about the one-third of the workforce that” has a “college degree.” Tech workers are the highly paid college educated equivalent of manufacturing workers competing with the non-college educated workforce.

  5. Tcat says:

    Your article raises a few related questions. Do the free trade pacts the US has signed beginning with NAFTA accelerate this trend or do they just redistribute the winnings among the winners?

    I would think that increase in the total immigration pool that is part of the Senates bill will have the same effect on labor markets. Undermining the real value of your labor. Moreover, the impact extends to the upper end of the labor market, (docs, engineers, computer programers etc). Conventional Wisdom extolls the growth in the economy that you get with more people engaged in more activity… never discussing the per capita impact.

    Which country has a set of policies that mitigate the effect of trade and immigration on the group of citizens most effected. Clearly the American mindset is predisposed to focusing on capitol and not labor concerns while bashing the under educated individual to just work harder.

  6. lark says:

    Ah, finally. Years later, after the damage has been done, much of it irreversible, a well connected economist begins to take honest stock.
    It’s so appalling, the way your profession has a played a harmful role. “First, do no harm.” Oopsie! It makes me understand the Maoist impulse towards reeducation camps. If any group of people ever needed such a thing, it is “free” market, “free” trade economists.
    If I could have a nickel for every argument offered that these policies are great because they alleviate Chinese poverty… You should try this: get out of the bubble, visit the Great American Industrial Wasteland.

  7. Virgil Bierschwale says:

    All of this ignores what really is happening in this game of musical countries.

    As our wages go from 50,000 and above to 10,000 and below, we not only cannot consume anything, but our retailers slowly but surely begin to miss their earnings numbers more and more.

    And over time we will see the value of our houses go from above 150,000 to below 50,000.

    Why do I say this?
    I worked in the software industry and technology arena from the late 70’s till 2010 and I saw my wages hit a high of $113,000 in 2002 and a low of $8,001 in 2012.

    So I became a realtor only to watch real estate going the same way that our software jobs did.

    I bring all of this up because a consumer can’t buy a pieced of used toilet paper without a income that exceeds what it costs to live in their community, and this doesn’t matter if it is in America, Europe, or even China

  8. Rugosa says:

    “And the traditional manufacturing jobs that will suffer — there aren’t that many of them around anymore anyway”

    So, one trade agreement, NAFTA, sent the jobs overseas, and now another trade agreement is OK because we don’t have the jobs “anymore anyway”. Way to go, economists. Oh, and that cheap stuff from China? Most of it is poorly made crap that we only buy because we can’t afford decent stuff.

  9. Larry Signor says:

    International trade conveys the majority of its gains to national plutocrats that manage the respective countries economies. The average Chinese or American citizen sees very little positive impact of trans-national trade. Currency manipulation sees to that. Whatever the benefits to America, we trade away those benefits through technology transfers (legitimately or illegitimately), lower wages and a less stable economy. We hitched our wagon to a lame horse and shoeing him isn’t going to help. The great recession and Russia in Crimea should alert us all to the perils of trans-national trade.