Economist's View: Globalization, Wages, and Jumping J-Curves

リンク: Economist's View: Globalization, Wages, and Jumping J-Curves.

Jagdish Bhagwati of Columbia University defends globalization in this commentary from the Financial Times:

Technology, not globalisation, drives wages down, by Jagdish Bhagwati, Commentary, Financial Times [open link]: We have recently witnessed a flurry of comment in the US on the long-running stagnation of wages. Many believe that the future livelihood of the “middle class” is also at risk.

Lou Dobbs ..., the ... Economic Policy Institute and nearly all the Democrats newly elected to Congress believe that globalisation has much to do with the economic distress of the working and middle classes. Therefore they ... want to lean on the door – even to close it – on trade with poor countries and occasionally on unskilled immigration from them.

Proponents of globalisation ... find themselves in a politically implausible position: they typically ... accept this “distributional” critique of globalisation – yet nonetheless propose that those adversely affected should accept globalisation but be aided...

As it happens, globalisation’s supporters are on firmer ground than they fear. Examine the common arguments linking globalisation to the distributional distress and little survives.

First, all empirical studies, including those done by some of today’s top trade economists (such as Paul Krugman ... and Robert Feenstra ...), show that the adverse effect of trade on wages is not substantial. ...

Second, the same goes for ... studies by the best labour economists regarding the ... influx of unskilled illegal immigrants into the US. The latest study by George Borjas and Larry Katz ... also shows a virtually negligible impact on workers’ wages, once necessary adjustments are made.

Can it be that globalisation has reduced the bargaining ability of workers and thus put a downward pressure on wages? I strongly doubt this. First, the argument is not relevant when employers and workers are in a competitive market and workers must be paid the going wage. As it happens, fewer than 10 per cent of workers in the private sector in the US are now unionised.

Second, if it is claimed that acceleration in globalisation has decimated union membership, that is dubious. The decline in unionisation has been going on for longer than the past two decades of globalisation ...

Has the outflow of direct foreign investment ... contributed to a decline in wages? As I look at the data, the US has received about as much equity investment as it has lost over the past two decades. One cannot just look at one side of the ledger.

The culprit is not globalisation but labour-saving technical change that puts pressure on the wages of the unskilled. Technical change prompts continual economies in the use of unskilled labour. Much empirical argumentation and evidence exists on this. ...

Such technical change is quickly spreading through the system. This naturally creates, in the short-run, pressure on the jobs and wages of the workers being displaced.

But we know from past experience that we usually get a J-curve where, as increased productivity takes hold, it will ... lead to higher wages. So why has there been no such significant effect in the statistics on wages for almost two decades?

I suspect that the answer lies in the intensity of displacement of unskilled labour by information technology-based change and in the fact that this process is continuous now – unlike discrete changes caused by past inventions such as the steam engine. Before the workers get on to the rising part of the J-curve, they run into yet more such technical change, so that the working class gets to go from one declining segment of the J-curve to another.

The pressure on wages becomes relentless, lasting over longer periods than in earlier experience with unskilled labour-saving technical change. But this technical change, which proceeds like a tsunami, has nothing to do with globalisation.

Posted by Mark Thoma on January 4, 2007 at 12:15 AM in Economics, Income Distribution, International Trade, Technology | Permalink

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Comments

The author has a good point about unionization. Why so few members in unions? Why no recognition that unions are the best means to obtain higher wages and control the wages of the "executive" class?

Posted by: evagrius | Jan 3, 2007 7:29:46 PM

Compensation disparities are not limited to skilled vs unskilled (which seems to be the focus of this analysis.)

Posted by: eightnine2718281828mu5 | Jan 3, 2007 9:13:04 PM

On unions, employers will spend vast amounts of money and violate the law every which way to avoid unionization.

With the Bush administration packing the NLRB it gets tougher to organize.

On the overall article, this only proves to me that sitting in a faculty office reading does not connect one to reality, just to statistics.

Posted by: save_the_rustbelt | Jan 3, 2007 9:13:12 PM

Where I live, many of the working class have been convinced that the unions will tell them where and where not to work, will live off of exorbitant union dues, etc. One such, a young man with a wife and three children under 5, stoutly refuses to join a union for just these reasons. His income isn't up to supporting them, he's always scrambling from one paycheck to the next, yet he is convinced that the union is the enemy of the common man. Who put this idea in his head, I have no idea.

Noni

Posted by: Noni Mausa | Jan 3, 2007 9:15:49 PM

From the guy's web page:

"Professor Bhagwati has served as Economic Policy Advisor to the Director-General, GATT (1991-1993), as Special Adviser to the UN on Globalization (2001) and as an External Adviser to the WTO. He also recently served as a member of UN Secretary General Kofi Annan's Advisory Group on the NEPAD process in Africa, and was a member of the Eminent Persons Group, chaired by President Cardoso, on the Future on UNCTAD.

Professor Bhagwati has published more than three hundred articles and fifty volumes. He is regarded as one of the foremost international trade theorists of his generation. Uniquely, as many as six festschrift conferences have been organized by students and fellow economists to celebrate his scholarly and policy achievements over his lifetime, the latest three on his 70th birthday (please click here for more information).

Five volumes of his collected scientific essays have been published by MIT Press to date. His early books, India: Planning for Industrialization (with Padma Desai, 1970) and India (with T.N. Srinivasan, 1975) are acknowledged to have provided the intellectual case for the economic reforms now underway in India. His recent book, India in Transition: Freeing the Economy , was published in 1993 by Clarendon Press, Oxford. Among his books are: The Economics of Underdeveloped Countries (Weidenfeld & Nicolson, 1966) and Protectionism (MIT Press, 1988), both international bestsellers. His latest books are Free Trade Today (Princeton, 2002) and In Defense of Globalization (Oxford, 2004), both published to worldwide acclaim. His books have been translated into 16 languages. "

He wrote a book called "in Defense of Globalization" and served on committees that made it happen.

It must be painful for the Cosmopolitan Global Elite to have to defend themselves to wayfarers. Hopefully with more objective articles like the one above--that clearly identify its sources of information, the "Non-Competitive Class" will learn that this is good for them---after all, Globalization is a "Net Benefit."

Posted by: Ninjaplease | Jan 3, 2007 10:14:07 PM

You didn't know who Jagdish Bhagwati is before reading that?

Posted by: DRR | Jan 4, 2007 5:56:21 AM

"...But this technical change, which proceeds like a tsunami, has nothing to do with globalisation...."

For a smart guy that is a whopper of a gross generalization, in addition to the fact that he is just plain wrong.

More factory closings in teh local newspapers today - jobs going overseas.

Posted by: save_the_rustbelt | Jan 4, 2007 5:56:46 AM

One day when cheap overseas labor isn't so cheap anymore, or when we lower our standard of living to match that of overseas workers, we may be able to begin to compete globally.

Then globalization will be good, no worries.

Posted by: callahan | Jan 4, 2007 8:55:16 AM

"an it be that globalisation has reduced the bargaining ability of workers and thus put a downward pressure on wages? I strongly doubt this."

Right, look, the more educated we become the cheaper cheap foreign labor becomes in comparison. Just look as the entry level jobs that were supposed to move now move up the food chain to include R&D.

Another guy in an ivory, that until professors start getting outsourced overseas, he will sing the same sorry song.

Posted by: me | Jan 4, 2007 9:40:49 AM

To say that "empirical studies ... show that the adverse effect of trade on wages is not substantial" is a bit fuzzy. The studies I have looked at say that the effect is both statistically significant and quantitatively non-negligible. The studies do suggest that other factors have been more important in holding wages down.

Posted by: Alan | Jan 4, 2007 10:00:52 AM

Why don't we quote Stephen Roach on the subject:
1/3/06
"...the ever-powerful global labor arbitrage continued to exert downward pressure on both job creation and real wages in most major economies of the developed world -- sufficient to push the labor compensation share of national income down to a record low of 53.7% in the major industrial countries in 2006. This raises serious questions about the so-called “win-win” results of globalization."
And how would Adam Smith have seen it:
"The pressure on wages becomes relentless, lasting over longer periods than in earlier experience with unskilled labour-saving technical change." Nothing ever changes except the names of the apologists.
While I don't believe that Roach has a soft place in his heart for the AFL-CIO, just that his place is secure enough that he can take a reasonably objective view without his buds shaving his handicap.

Posted by: c roast | Jan 4, 2007 10:37:26 AM

This is so poor that it strains one’s imagination. Now we have two labor demand curves, the theoretical one and the real one. If so one dares to suggest that immigration is depressing wages, by increasing supply, we have the theoretical labor demand curve “proving” that this is not true.

However, when technological change (real or imagined) increases the labor supply, wages go down. Sure they do. A convenient demand curve for every occasion.

Of course, David Card does the same thing arguing that wages don’t impact labor demand (via a higher minimum wage) and that immigration doesn’t depress wages. Vertical and horizontal demand curves whenever we need them.

However, maybe Bhagwati is correct. Perhaps technological change is the culprit. Shouldn’t we then drastically reduce immigration (and remove illegals) to avoid making the situation worse? No, of course not, because the theoretical labor demand curve isn’t affected by immigration.

It is worth noting that Bhgwati has in the past claimed that the labor demand curve is flat. Specifically he has asserted that immigrant labor can replace machines with no decline in wages. Of course, this is rather unlikely…. However, the real point is that a flat demand curve also means that each immigrant is receiving his/her entire marginal product.

This makes the economics of unskilled immigration even worse because of the very large negative externalities (taxes, schools, housing, crime, gridlock, etc.) they generate.

Posted by: Peter Schaeffer | Jan 4, 2007 12:16:08 PM

Is Peter Shaeffer an anagram of Steve Sailer?

Posted by: DRR | Jan 4, 2007 12:20:40 PM

Jagdish Bhagwati needs a new pair of glasses.

Posted by: ken melvin | Jan 4, 2007 12:44:07 PM

Jadesh might be correct about the impact of labor saving technology on wages of unskilled workers, but I'm a little surprised that his (noble) defense of free trade comes across as a bit on the Luddite side of things.

Posted by: pgl | Jan 4, 2007 12:48:03 PM

I have no statistics just a story...

I was at a business meeting recently and we were discussing the cost of putting a hole in a part in the molding phase or doing a post molding machine op to drill it in. The manager running the meeting said - "It doesn't matter, its going to be done in China."

This guy had run a couple different companies in China and knew. So I asked him "How much does it cost to drill a hole in China?" (I was told once by another man, a Chinese born US citizen running a trading company that it costs about 1/10th of a penny to drill a hole in a part - so wanted to see what his reply would be).

His answer stunned me... "About $50-$60 a month and you get all the holes a man can drill for twelve hours a day, six days a week... you do the math. That's why we won't be doing any of that kind of stuff here. Let's move on."

Now I figured a guy could do between 6-10 holes a minute - load, drill, unload... in a week lasting (60x12x6) = 4320 minutes... or 43,200 to 25,920 holes a week. At between $50 and $60 a week, that comes out to between 0.116 to 0.231 pennies per hole. Pretty much right on.

Multiply that simple example across all sorts of direct & indirect operations done in a business... wow.

And Professor Bhagwati is going to tell us 'technology' is the primary driver displacing low to medium skill jobs in America?

And even if that were true, where does he think the desperate push on the part of US firms to adopt technology as a 'salvation', comes from? Think they aren't grasping at straws to find an answer to 1/10th of a penny holes?

Posted by: dryfly | Jan 4, 2007 1:09:48 PM

Why does Walmart, Home Depot, Levi Strauss and others lobby for amnesty for illegal immigrants? High Technology or cheap labor?

Posted by: callahan | Jan 4, 2007 1:24:06 PM

What would technology have to do with immigration?

Posted by: DRR | Jan 4, 2007 2:02:15 PM

DRR,

No. His name has two Ss. My name has two Fs and a C. Since Steve Sailer is a far better writer (and movie critic) than I am, I will take your suggestion as a compliment.

Posted by: Peter Schaeffer | Jan 4, 2007 2:32:30 PM

Another explanation for falling wages would be the incompatibility of political economies.

Free trade leads to price-factor equalization. In the world of the classical economist this wouldn't be a problem since lower wages would be compensated by lower prices and cheaper capital.

The problem for wages arises in the real world where one political economy allows for the free association of labor while another doesn't--particularly a work force as large as China's.

The power relation between employer and employee is weakened in this volatile mix of free trade and political economies. This mix results in greater downward pressure on wages in both high wage and low wage countries.

Posted by: wjd123 | Jan 4, 2007 8:47:19 PM