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Trade, Wages, and Jobs

Sunday, 03 August 2014 11:02

I see that Gary Hufbauer and Cathleen Cimino have responded to my earlier post criticizing their colleague Adam Posen's Financial Times column touting the wonders of trade. They cover a lot of ground in their response, but I will just address two main points:

1) The pattern of trade that we have put in place over the last three decades has been a major factor reducing the wages of most of the work force (the 70 percent that lack college degrees).

2) The large trade deficit that we have at present is costing the country millions of jobs. If we eliminated the deficit, the direct and indirect effect would lead to roughly 6 million additional jobs, enough to bring the economy back to full employment.

On the first point, Hufbauer and Cimino (HC) focus largely on the impact of NAFTA. Certainly the impact of NAFTA would be considerably less than trade more generally since Mexico only accounts for about 8 percent of our imports and only about 60 percent as much as we import from China. In my column I was referring to the impact of trade more generally on wages, following Posen's piece which was a diatribe about progressives and trade.

While HC are dismissive of the idea that trade can have much negative impact on wages, it is not necessary to look far to find evidence of this effect. Lindsey Oldenski's, whose work is cited by both Posen and by HC, recently wrote a paper which has the following in the abstract:

"I fi nd that o ffshoring by U.S. firms has contributed to relative gains for the
most highly skilled works and relative losses for middle skilled workers. An increase
in off shoring in an industry is associated with an increase in the wage gap between
workers at the 75th percentile and workers with median earnings in that industry,
and with a decrease in the gap between workers earning the median wages and those
at the 25th percentile. This pattern can be explained by the tasks performed by
workers. Off shoring is associated with a decrease in wages for occupations that rely
heavily on routine tasks and an increase in wages if the occupation is nonroutine and
communication task intensive."

I referred to work by David Autor, which also finds a substantial negative impact of trade on the wages of less educated workers as well as a recent analysis by Paul Krugman that suggested the expansion of imports from China likely has a large negative impact on the wages of less-educated workers. At this point, the fact that trade has had a negative impact on the wages of a large segment of the U.S. workforce really should not be controversial. The question is the size.

In response to my complaint that existing trade deals have deliberately put manufacturing workers in direct competention with their low-paid counterparts in the developing world, while leaving in place the barriers that protect doctors, lawyers, dentists, and other highly paid professionsals from the same competition, HC comment:

"Neither we nor Posen support the protection of any US profession from competition."

This is an interesting comment. I have looked in vain for any writing by Posen, Hufbauer, and Cimino complaining about such protection. That is striking since the potential for gains from increased trade in highly paid professional services would be enormous. If we could use trade to bring the pay of our doctors in line with the pay they get in other wealthy countries, the savings from this alone would be close to $100 billion a year (roughly 0.6 percent of GDP). Our manufacturing workers get paid considerably less than their counterparts in many west European countries, is there any reason our doctors should get paid twice as much?

Back in 2002 when President Bush put temporary tariffs on imported steel that peaked at 30 percent on some types of steel, Gary Hufbauer was quick to denounce the costs of the policy, even though this policy had far less cost than the protection of doctors alone. Given their opposition to protection of highly paid professionals, why are Hufbauer and his colleagues unable to ever find the time to denounce these protectionist policies that both impede economic growth and increase inequality?

HC's discussion of the trade deficit and its impact on unemployment is at best evasive. They write:

"Yet the CEPR blog embraces this mistaken worldview [that trade deficits cause unemployment] by asserting that the United States has undergone a “massive loss of demand due to the trade deficit,” and that by importing $500 billion a year more than it exports, the United States is “creating demand in Canada, the European Union, Mexico, and elsewhere, rather than in the United States.” The CEPR post concludes that the $500 billion trade deficit, “coupled with a standard multiplier of 1.5, translates into $750 billion of lost annual output (roughly 4.5 percent of GDP). This in turn would come to about 6 million jobs. That is close to enough to get us back to full employment.”

"This assertion puts the blame where it doesn’t belong. As stated above, trade deficits rise at precisely those times of maximum employment in the United States, ....

"Most important, blaming trade deficits overlooks the fundamental economic reality that fiscal and monetary policy is what ensures that the potential gains in output from efficient trade are translated into actual gains in output."


Let's see, HC tell us that "trade deficits rise at precisely those times of maximum employment in the United States." While there is a correlation between growth and a rise in the trade deficits (we buy more imports when the economy is growing), the trade deficit rose to $564 billion in the last quarter. Do Hufbauer and Cimino really want to say this was a time of "maximum employment in the United States?"

Apart from the ad hominem comment about this being a mistaken view, HC give us no reason to question the simple macroeconomics that a trade deficit creates a gap in demand. As we teach in intro econ, aggregate demand is equal to consumption, plus investment, plus government spending, plus exports minus imports [Y=C+I+G+(X-M)] (My original post asked for any theory showing how consumption or investment will be qualitatively larger because we are importing more. None is supplied here.) It's cute that they tells us that:

"fundamental economic reality that fiscal and monetary policy is what ensures that the potential gains in output from efficient trade are translated into actual gains in output."

But the fundamental economic reality that those who pay attention to the unemployment rate know is that we are very far from anything resembling full employment. HC are welcome to complain that the reality doesn't correspond to their worldview, but why should anyone care? Fiscal and monetary policy are not bringing us to full employment, nor is there any remotely plausible scenario in which they will any time in the near future.

In a context where we have an economy operating well below its full employment level of output, the trade deficit is a drain on demand, end of story. Contrary to what HC claim, this is not mistaken, it is simple national income accounting.

I wish them well in their efforts to boost demand with larger budget deficits. This would be good. I also agree that monetary policy could be more aggressive. But we all have to live in the real world and in that world reducing the trade deficit through a lower valued dollar (a view I share with HC's colleagues at PIIE, Joe Gagnon and Fred Bergsten) would be a great way to move toward full employment. 



Comments (8)Add Comment
transmission mechanism
written by jim, August 03, 2014 6:05
how quickly does a higher dollar cause lower jobs and/or lower wages? given the dollar was moving down the first 6 months of the year which corresponded with the first 6 month streak of 200k job gains since 1997, should we expect slower job growth/wage increases going forward given the dollar's significant rise in july? would that happen in 3 months, 6 months? it has certainly caused industrials to drop precipitously along with stocks with high foreign exposure, which were the worst performing factor in the month of july.
Trade? Or Class?
written by Ellis, August 04, 2014 12:11
What Dean Baker doesn't want to admit is that production is increasing. That's a fact. We are producing twice as much as we were 30 years ago, when supposedly we were a more industrial economy -- the Golden Age!
No, China is not taking "our" jobs. Nor Mexico. In fact, workers are losing jobs there too.
Jobs are being ground up by big business, the corporations, the banks, the industrialists. They are gaining more profits by impoverishing the working class.

Stop pretending that there is a magic trade formula that can blunt class warfare.
written by JSeydl, August 04, 2014 7:16
I would also add the comment that even if the trade deficit has been peaking at a time of full employment, that tells us nothing about the sustainability of the full employment. In fact, each of the peaks in the trade deficit and the correpsonding levels of full employment over the past two cycles were soon followed by collapses of bubbles that did enormous damage to the economy. This is the secular stagnation story: that we need bubbles to generate enough demand to employ all available employable resources in the economy. Insofar as the trade deficit is contributing to secular stagnation by acting as a drag on demand, it makes no sense to celebrate it just because it is correlated to peaks in the employment rate. As we like to say in statistics 101, correlation is not causation.
A Shallow Argument
written by Dave, August 04, 2014 1:35
Most of the discussions in the U.S. on trade agreements consider only the effects on the people in the U.S. as if the rest of the world isn't as important.
Mathematics don't capture the problems
written by Dave, August 04, 2014 8:41
Many of the problems associated with trading labor with low-wage countries are not immediately obvious by looking at wages.

This is where economists often go off track. They assume that the entire labor industry health or lack thereof can be measured by wages. This might work if the people were robots and wages were oil or electricity to keep them going, while their owners were humans.

But human-on-human interactions contain a power factor that wages cannot explain. Not only that, but participation in our society, including the judicial system, is heavily biassed towards money. Therefore, a relatively small drop in wages might cause a lot of harm that isn't seen in the numbers.

Because of the power differentials, trade is largely the cause of the inequality we see today. It exacerbates the inequality of capital vs. labor both economically and politically.

Trade with low-wage countries has been a capital owner's dream and a workers nightmare.

But I'm sure the capital owners do it out of charity for other countries, not for the gains they receive. Yep, they're the good guys! The workers they hurt? Just whiners! Trash to be thrown away when it wears out.
Looks like an interesting paper
written by Dave, August 04, 2014 11:59
The paper by Krugman looks very interesting. I'll read it tomorrow and give comments.

This is Dave #2 above (8:41), not Dave #1.

I see at the end they were contemplating the effects of trade on inequality. I shall work my thoughts above into my thoughts on the paper...

Thanks for the post.
We have no idea, do we?
written by Dave, August 05, 2014 4:42
After reading PK's paper, it seems he is admitting that we have no idea what is happening in the trade of complex manufactured goods and even less than no idea what is happening with the trade of services.

Except that we do know qualitatively what is happening, and that might be good enough. We cannot pretend to have responsible trade policies based upon data if we can't quantify the effects. So clearly we can't at the present time assume that we should base trade policy upon data alone.

Until the kinds of detailed data become available, and our models become complex enough to make sense of it, it seems pretty clear that the first, best step is to force balance of trade by country to some degree. The US needs to force a balance.

Start with a brute force threat, and then work towards more detailed agreements. If the detailed agreements fail to materialize, the brute force, less efficient solution should prevail to prevent unmanageable and difficult to understand macroeconomic problems.

Beyond that, we had better get busy trying to produce much better data, because the problems from basing trade policy on old, or aggregate data, combined with profits is a disaster for the average US worker.

US worker unhappiness is a global security problem insofar as it destabilizes the political structure of the most powerful military state in existence.

To the conservatives: no, you can't fix this by telling workers to stop whining! It won't work. The workers are unhappy for good reasons. They just haven't been able to organize and form a consistent set of demands that would help everyone. Because of the lack of organization, political instability is created.
Professor of Economics, retired, Western Illinois University
written by Richard Hattwick, August 05, 2014 6:14
To me, one of the highlights of this particular blob is your (continued) introduction of the y=C+I+G+(X-M) frame for analyzing the issue. It would clearly be a breakthrough if fellow economists and public intellectuals would start analyzing with this common language. Just imagine the difference it would make if advocates of any and all trade agreements would feel compelled to present their case by comparing estimates of both increased exports AND increased imports and then place the result in the Y=C+I+G+(X-M) frame. Imagine how embarrassing it would be for and economist or government official were to argue for a trade agreement by presenting ONLY the export forecast and then be reminded that he/she neglected the import forecast. We need more of that kind of shaming of advocates who engage in economic illiterate arguments. Unlike the press you keep exposing, you continue to do an excellent job of exposing them. Keep it up.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.