Friday, September 20, 2013

Trade reducing labor share of income: paradigm changing if true!

This will be very important if it turns out to be true:

One thing that they find is that the headline decline in this indicator is actually a bit overstated due to technical issues with the treatment of self-employment income. About a third of the total decline, they think, can be attributed to miscalculation. The blockbuster finding, however, is that the remainder is very heavily concentrated in industries that are newly composed to import competition. In other words, the labor share of national income has fallen because many more industries are exposed to foreign competition in a way that's systematically advantaged the owners of capital.

Now go to a rust belt town with this finding, and people are going to say: "That's news?! What the heck is wrong with you economists?!?!"
The reason that this is so important is that the moral basis for things like free trade agreements is the argument that, in aggregate, everybody is better off.  We feel badly for those people who lose their jobs in the process, but it is in everyone's interest to improve the aggregate standard of living of all Americans.  Now there has always been a bit of a paradox between this position and the success of industrial policy in places like Japan.  I have generally accepted the argument that there might be important differences between a nascent economy and a mature economy.  Maybe protectionist policies are good for improving wages when there is a lot of room for "catch-up growth".

But if the game has been rigged so that free trade reduces the labor share of income then that is a completely different issue.  Wealth in the US is much more skewed than income, so the goal of an ownership society is actually further away than an affluent middle class society would be. 

This also can have knock on effects as well.  So, for example, creation of charter schools to introduce competition might reduce teacher wages while creating a new source of a return on capital via a private school network.  For the same money you get richer capitalists and poorer teachers.  I am not saying that is the goal of the movement, but it is worth thinking for a moment as to why this form of competition is pushed so vigorously. 

Mark, any follow-up thoughts? 

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