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International Trade & the Stagnation of Wages of the American Worker
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Attempts to explain the trend of eroding blue-collar wages, & closely examines theories & indicators.... More...
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Paper Abstract:
Attempts to explain the trend of eroding blue-collar wages, & closely examines theories & indicators.
Paper Introduction:
International Trade and the Stagnation of Wages of the
American Worker
Introduction
Current economic conditions for the wage earner in the United States have a familiar historic ring. While the economy in general seems to be expanding, fewer and fewer high paying jobs are available for both the skilled and unskilled worker. These are the same conditions that seem to arise where labor, capital, and free trade intertwine. Explanations for our own domestic ills seems to point towards foreign competition, ever increasing efficiency in industry, and the ebb and flow of goods, capital, and labor around the world. However, it is important to recognize that the problems of the wage earner in the United State
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First is the value added factor, as it applies to domesticmanufacturing. Apparently, American wages are responding tomarket forces, in a correct manner. Production inthe rich country will eventually shift toward skill-intensive sectors andaway from labor-intensive ones. according to Wood, wage flexibility inthe United States permitted relative wages to adjust much more fully todeclining demand for the less skilled than was the case in Europe, whererelative job inflexibility caused joblessness to rise (Burtless, 1995, p.63).Conclusion Krugman and Lawrence have gone a long ways towards proving that thecauses for stagnating wages are domestic. The growth ofproductivity is passed on in lower consumer prices (Krugman & Lawrence,1994, p. In 197 United States residents spent 46 percent of theiroutlays on goods that were manufactured, mined, or grown. In layman's terms, this indicates that more rawmaterials and inputs were being purchased from foreign sources, thandomestic sources. If wages are free torise and fall with changes in demand for different kinds of labor, the realwages of skilled workers will rise, and the wages of unskilled workers willdecline (Krugman & Lawrence, 1994 p. Between 1979 and 1989 the real compensation of white-collar workersrose, whereas that of blue-collar workers fell (Krugman & Lawrence, 1994,p. Krugman and Lawrence champion the ideathat the problems of workers in the United States stem from local andunderstandable sources. Wood, in his book, North-SouthTrade: Employment and Inequality, suggests that along with the increasingneed for highly skilled labor in industrialized countries, and thedecreasing demand for unskilled labor, a kind of defensive technologicalchange takes place, attempting to displace the imported products of poorercountries, with higher levels of unskilled labor (Burtless, 1995, p. In 195 , the value added factor in the manufacturing sectoraccounted for 29.6 percent of GDP and 34.2 percent of employment. (1995, Sept.-Oct.). Europe jobless, America penniless? Goods have become cheaper because productivity inmanufacturing has grown much faster than in services. This also means that domestically, fewer jobs in the sameindustries will be available. Only highly educated individuals seem to have a chance of beingcompensated for their efforts, and the real earnings of blue-collar workerscontinue to erode (Krugman & Lawrence, 1994, p. As if to presage the situation,Kurt Vonnegut, in his 1952 novel, Piano Player, hinted that the effect oftechnology was to eliminate routine jobs, without an equal impact on themore complex ones (Krugman, 1994, p. Above and beyond the idea of goods and services acting as exchangeablecommodities, is the idea that capital itself may play a role in the growthof American wages. Ramey, contends that anexplanation for the continued rise of wage inequity beginning in the early197 s must be sought outside of trade (Burtless, 1995, p. Challange. (1994, Sept.-Oct.) GATT justice: Who gets the gains of trade? Samuelson was able to prove that, as a rule, wages and profitswould be equalized around the world at points somewhere between the ratesthat initially prevailed in the rich and poor countries before tradingbegan (Lea, 1994, pp. 47). Wages for the American worker more than doubled between the end of WWII and 1973. Moreover, skill intensive industriesshowed at best a slight tendency to grow faster than those in which blue-collar employment was high. This "leakage" of GDP is accounted for in other ways. In 1986, persistent deficits reachedan all time high of 3.1 percent of GDP. North-South Trade: Employment and inequity. In 197 , manufactured exportsexceeded imports by .2 percent of GDP. Stoper and Paul A Samuelson. It appears that changes in demand within eachindustrial sector account for differences in wage gains. The other $31 billion represented leakage, goods and services thatmanufacturers would have purchased from other sectors (Krugman & Lawrence,1994, p. percent of value added. The timing of thisincrease seems consistent with the trade explanation, because manufacturingexports from the South to the North rose particularly strongly in thatdecade. 46). In other words, under freetrade, wages could be expected to fall and profits to rise in richcountries, just as would happen if large amounts of capital were shiftedoverseas. International Trade and the Stagnation of Wages of the American WorkerIntroduction Current economic conditions for the wage earner in the United Stateshave a familiar historic ring. The emergence of persistent trade deficits inmanufacturing goods has contributed to the declining share of manufacturingin the U.S. The eventual outcome of comparative advantage, ascarried out by industry and labor in the United States, leads to, asKrugman puts it, "market forces that have powerfully reduced the demand forthe less-skilled or less talented" (Krugman, 1994, pp. 47). In 197 ,the value added factor accounted for 25. By 199 , the manufacturing deficithad fallen to 1.3 percent of GDP (Krugman & Lawrence, 1994, p. Ricardo dubbedthis quality, comparative advantage. Explanations for ourown domestic ills seems to point towards foreign competition, everincreasing efficiency in industry, and the ebb and flow of goods, capital,and labor around the world. The declining share of industrial employmentis largely the result of high productivity growth, at least as comparedwith the service sector. Krugman reminds us that the idea of comparative advantage wasamplified and brought before our attention in 1941, in a classic paper byWolfgang F. 64). Lastly, it is to everyone's benefit toallow free trade of goods between these sites. A paper by George J. That shift, raises the demand for skilledworkers and reduces the need for unskilled workers. Respectively, in 199 , thefigures were 18.4 percent of GDP and 17.4 percent of employment (Krugman &Lawrence, 1994, p. 44). 47). While the economy in general seems to beexpanding, fewer and fewer high paying jobs are available for both theskilled and unskilled worker. 44-45). These are the same conditions that seem toarise where labor, capital, and free trade intertwine. 48). As AdamSmith, in The Wealth of Nations argued that free trade would be mutuallybeneficial to all involved, David Ricardo intimated that some groups ofworkers and businessmen would suffer, as efficiency increasedgeoeconomically speaking, for some and not others (Lea, 1994, pp 11-12). Nevertheless, nearly all industries employed an increasingproportion of white-collar workers. Differentials between highlyskilled and less-skilled workers did increase in the 198 s in many advancedindustrialized countries, and especially in the U.S. 44-49.Lea, L. The result appears to be a lessening of numbers andskilled workers in the U.S., with the price of labor falling on a worldmarket.Economic Theories One point of view, mirrored by Paul R. By 1991, thesepercentages were respectively, 4 .7 and 59.3 percent, as people began tobuy more health care, entertainment, fast food, legal services, and so on(Krugman & Lawrence, 1994, p. Foreign Policy, pp. 14-15). In short, Krugmanand Lawrence ascribe to the idea that wages have stagnated in the U.S.because the rate of productivity growth in the economy as a whole hasslowed (Krugman, 1994, p. Scientific American. From that time to the present, wages have only risen about 6percent. 29). Because the Americaneconomy has been successful selling its manufactured, value-added products,trade imports create a cycle of exporting low paying jobs that requireunskilled labor. Simplyput, the exchange of goods and material between individuals or nations, isbeneficial to everyone. Exports also rose dramatically, from 12.6 to 31. Each dollarof trade deficit reduces the manufacturing sector's contribution to the GDPby 6 cents. 48). pp. 11-15.Bhagwati, J. increases in earnings inequality and joblessness among the lessskilled tended to be larger in those advanced countries where manufacturedimports from the South rose fastest. 62).This bit of insight correlates with Krugman and Lawrence's observation thattechnological change, especially the increased use of computers may be toblame for increased productivity, and thus a flattening out of real wagegains (Krugman & Lawrence, 1994, p. During the last 2 years, the United States has indeed experienced adeterioration in terms of trade. This measurement is arrived at by deducting total sales fromthe cost of raw materials and other inputs that a company buys from otherfirms. 45). The contribution of manufacturing to the GDP is defined by value addedin the sector, that is, by sales minus purchases from other sectors. Challange. The movement of capital from one economy to another economy, interms of investment, would seem to promise higher wages. pp. Trade, jobs and wages. 48). Economist PaulSamuelson found that it would make little difference whether capital werefree to move between rich countries and poor. and Lawrence, R.Z. Services, indirectly,create a drag on the real value of the manufacturing economy. (1994, summer). In same the twenty year span, in seemingcontradiction, imports rose from 11.4 to 38.2 percent of the manufacturingcontribution to GDP. These productsrequire the acquisition of raw products, or low value added products thatforeign markets supply. What seems to be emerging, as an explanation for the stagnation ofAmerican wages, is a combination of factors. Whenimports displace a dollar of domestic manufacturing sales, a substantialfraction of that dollar would have been spent on inputs from the servicesector, which are not intrinsically part of a manufacturers contribution tothe GDP. 45). In simplest terms, Stoper andSamuelson posit that a rich country trading with a poor one will exportskill-intensive goods and import labor-intensive products. Adrian Wood,in his recent work, North-South Trade: Employment and Inequity, contendsthat the elimination of North-South trade barriers and the expansion ofbasic education in developing countries have reduced substantially therelative demand for less-skilled workers in the north. 26-29.Krugman, P. Paul Krugman concurs, in "Europe Jobless, America Penniless?". Explanations for theseenduring conditions run the gamut from foreign competition to lack of freetrade.Economic Indicators In order to understand the parameters of economic reasoning thatattempts to explain the slowed growth of wages in the United States,certain facts must be reviewed. However, it is important to recognize that theproblems of the wage earner in the United States are not new. It seems to make common sense, that the relative amountof capital available in an economy will translate into jobs and higherwages. (1994, Jan.-Feb). In "Trade, Jobs and Wages"several points are made clear. p.21. These inputs represent fewer value added products, andmore raw materials that require a lower degree of technology to produce.The idea, then, is to locally produce more technologically advancedproducts, which require fewer skilled workers, and more attention from theservice sector. ReferencesBurtless, G. had to export 2 percent more to pay for a given quantityof imports in 199 than it did in 197 (Krugman & Lawrence, 1994, p. In 199 , for example, the trade deficit in manufacturing was$73 billion. 47). The figures detailing the trade deficits of exports verses imports inmanufactured goods, as it relates to the decline of manufacturing in theUnited States must also be looked at. The evidence Woodputs forward is strong in only one regard. In trying to put the best face on a complex situation, JugdishBhagwati comments that "if the losers from free trade can be compensated bythe winners," then progress of some sort will at least seem real (1994, p.21). Borjas and Valerie A. This deficit reduced manufacturing value by approximately $42billion. Indicative of internal and external economic forces, patterns ofexpenditure have clearly changed in the United States over the last twentyplus years. 12-13). Although, as Adam Smithwarned, "it may be desirable to introduce freedom of trade by slowgradations" (Lea, 1994, pp. (1994, April). Because these other sectors are increasingly foreign, theconclusion is often drawn that our economy, and wages are suffering at thehands of foreign business. percent in the manufacturingsector and 27.3 in the employment sector. 62-64.Krugman, P. Which way, free trade or protection? 28). In a real sense, understanding why the Americaneconomy has apparently lost vigor means understanding that it is not due toa single event, or series of events, but a cycle. Hesays, "our economies increasingly yield huge rewards to a few, but verylittle to a growing mass of the less skilled or less lucky (1994, p. The United States requiresmore highly skilled workers to produce fewer products. Challange, pp. economy (Krugman & Lawrence, 1994, pp. Furthermore, some manufacturing sites are moreappropriate and amenable for production, than other sites. 26). Some 54 percentof their income was spent on services and construction. The ratio of United States export pricesto import prices fell more than 2 percent between 197 and 199 ; in otherwords, the U.S. Krugman and Robert Z.Lawrence, calls up the declarations of Adam Smith and David Ricardo.
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