Tuesday, November 11, 2008

Krugman's conundrum

From the Economist comes an interesting piece that examines Paul Krugman's research paper for the Brookings Institution that examines the link between trade and wage inequality. Here's a sample:

“THIS paper is the manifestation of a guilty conscience.” With those words, Paul Krugman began the recent presentation of his new study of trade and wages at the Brookings Institution. Mr Krugman, a leading trade economist (as well as aNew York Times columnist), had concluded in a 1995 Brookings paper that trade with poor countries played only a small role in America's rising wage inequality, explaining perhaps one-tenth of the widening income gap between skilled and unskilled workers during the 1980s. Together with several studies in the mid-1990s that had similar findings, Mr Krugman's paper convinced economists that trade was a bit-part player in causing inequality. Other factors, particularly technological innovation that favoured those with skills, were much more important.

At some level that was a surprise. In theory, although trade brings gains to the economy as a whole, it can have substantial effects on the distribution of income. When a country with relatively more high-skilled workers (such as America) trades with poorer countries that have relatively more low-skilled workers, America's low skilled will lose out. But when the effect appeared modest, economists heaved a sigh of relief and moved on.

In recent years, however, the issue has returned. Opinion polls suggest that Americans have become increasingly convinced that globalisation harms ordinary workers. As a commentator, Mr Krugman has become more sceptical. “It's no longer safe to assert that trade's impact on the income distribution in wealthy countries is fairly minor,” he wrote on the VoxEU blog last year. “There's a good case that it is big and getting bigger.” He offered two reasons why. First, more of America's trade is with poor countries, such as China. Second, the growing fragmentation of production means more tasks have become tradable, increasing the universe of labour-intensive jobs in which Chinese workers compete with Americans. His new paper set out to substantiate these assertions.

That proved hard. Certainly, America's trade patterns have changed. Poor countries' share of commerce in manufactured goods has doubled. In contrast to the 1980s, the average wage of America's top-ten trading partners has fallen since 1990. All of which, you might think, would increase the impact of trade on wage inequality.

Read more here.

1 comment:

walla said...

The perspective of his article seems to omit two dimensions. One, the US economy remains bigger than that of the whole of Asia, including Japan. And two, China's total exports to the US hardly makes a dent in value on the US GDP.

Which leaves one to ask:
If globalisation subset outsourcing is about using the very method used by Henry Ford of USA, namely the cheapest way to make a thing to sell for the highest profit, then perhaps the problem is not about the Chinese, Indian, Mexican, Brazilian or Russian displacing American workers, but perhaps it is about American industries being too costly, such as we see for the highly unionised big-three american automobile industry.

The developed countries have a cost ceiling challenge. Even if they cut the sales, admin etc costs, a survey has shown that if it is done beyond 13 percent of their gross contribution to expenditure, the additional cost cuttings will initiate countdown to cannibalizing returns from sales.

Since the advanced economies want their cake and eat it, they should invest in ways to restructure their own industries so that displaced workers will be able to fit into new job specs, and new ones will be aligned away from noncompetitive posts. If they can do that, they should also share their methods because the problem they are facing will be the same problem those who are blamed for their present probkem will be facing from their downline out-sources later.

sleepy and hot afternoon, shootin' for some breeze again.

;P

(where's everyone? sigh)