Basics: Is trade zero-sum between workers in different countries?

Vox.com had a long, interesting interview with Senator Bernie Sanders covering a large number of political and economic issues. In this post, I want to focus on just one issue he raised: Whether rising incomes for Chinese workers have to come at the expense of U.S. workers. Here is what Sanders told Vox's Ezra Klein:

I want to see the people in China live in a democratic society with a higher standard of living. I want to see that, but I don't think that has to take place at the expense of the American worker. I don't think decent-paying jobs in this country have got to be lost as companies shut down here and move to China.

What Sanders doesn't mention is that the market, left to itself, will indeed force a tradeoff between U.S. and Chinese workers. We can see this via the Stolper-Samuelson Theorem, which says that increasing trade will raise the real incomes of a country's abundant factors of production and reduce the real incomes of the scarce factors of production. The reason is that abundant factors of production (relative to the rest of the world, of course) will find new markets abroad as trade increases, while scarce factors of production will face increased import competition. Since China is a labor-abundant country and the United States a labor-scarce one, the theorem implies that real wages will rise in China and fall in the United States as they increase trade (all trade, not just with each other). And this effect can be sped up if U.S. companies close factories in the United States and open them in China, just as we have seen happen.

To disable the tradeoff requires political intervention in the market. If you want to preserve gains from trade that are predicted by the theory of comparative advantage, and you want to not worsen income inequality in the United States, you need to find a way, as Ronald Rogowski pointed out, for  the winners to compensate the losers from trade. This isn't easy: As Rogowski also noted, the winners increase their clout in the political system while the losers see their influence decrease (look at the long-declining influence of unions here). As I've discussed before, the increased mobility of capital exacerbates this problem in the U.S., since capital is much more mobile than workers. And so we have seen a steady decrease in the tax burden paid by corporations and the rich, more trade agreements signed, and a constant drumbeat to cut Social Security (despite the coming retirement crisis) and "phase out" Medicare.

What would compensating the losers from trade look like? Most obviously, and most focused, is trade adjustment assistance, which is often criticized as inadequate. Yet it does not really make sense to compensate only those who lose their jobs directly to foreign competition, because those workers then spill into other sectors of the economy, driving down wages as they go. Thus, we need to go beyond trade adjustment assistance.

To raise wages in the economy more generally, we need broader measures. One would be to raise the minimum wage: It pushes up workers' pay, but it also reduces turnover and training costs for employers, and puts money into the hands of people with a high propensity to consume, creating multiple channels to counteract the seemingly self-evident fact that raising something's price means people will buy less of it.

Another broad-spectrum approach to raising wages is to restore the power of unions. As I have pointed out before, the United States has the fifth-lowest union density in the 34-member Organization for Economic Cooperation and Development (OECD). Senator Sanders, in the interview linked above, notes that the increased power of unions in Nevada's gambling industry has enabled house-cleaning staff in the state's casinos to earn "$35,000 or $40,000 a year and have good health-care benefits." Having a National Labor Relations Board that is not in the pocket of industry is critical for us to see this take place.

Third, less targeted still but having the political benefit of universal coverage, an expansion of the social safety net would make it possible for people to simply refuse to take crappy jobs. Yes, this is about bargaining power! It would also encourage entrepreneurship because failure would not mean the loss of one's health insurance, for example. Medicare for all has long been one of Senator Sanders' standard prescriptions, a program that benefits from having far lower overhead costs (it avoids outrageous executive salaries, the need for profit, and does not have to advertise much) than private insurance. We could do a lot worse than considering it -- and we have.

Finally, to pay for these programs, it's necessary to raise taxes on corporations and rich individuals. Thomas Piketty, in his monumental Capital in the Twenty-First Century, suggests that the top marginal income tax rate should be 82% for individuals in the top 1/2% or top 1% of income. He notes that this will not raise much money, in part because it will reduce various lucrative but economically unproductive financial shenanigans. Instead, he thinks a tax of 50-60% on the top 5% of incomes would produce substantial revenue to create what he calls a "social state" for the 21st century. One could go further, of course, by adding a financial transactions tax (I hope to write about this soon) and shutting down tax havens.

To return to our original question, there is no reason that Chinese workers and U.S. workers can't both prosper from trade. But to make it possible in the United States requires a great deal of rule rewriting that will not be achieved overnight.

Cross-posted at Angry Bear.

The CBO Whiffs on the Minimum Wage

The Congressional Budget Office has just issued a report on the minimum wage that is a real head-scratcher. Analyzing proposals to raise the minimum wage to $9.00 or $10.10 per hour, it concludes in the latter case that there would be 500,000 fewer jobs in the second half of 2016 than there would be under current law (100,000 fewer for $9.00/hr.).

Predictably, conservatives have seized on this number as proof that the minimum wage is a "job killer." Even liberal media, such as Talking Points Memo in this paragraph's link, seem to think that number is a big problem, going on to say, "It's not all bad, though, for one of the centerpieces of Democrats' middle-class agenda ahead of the November congressional elections," as if the CBO report were mostly bad news for Democrats.

There are two problems with these claims. First, the CBO's calculations undervalue the best research on the minimum wage. Second, even in the CBO's estimated world, low wage workers are much better off as a whole than under the current $7.25/hr. minimum wage.

As I've discussed before, a relatively crude cross-national comparison of rich countries' minimum wages and unemployment rates does nothing to suggest any job-killing is going on. But the CBO's estimation procedure has serious flaws. It begins (p. 6) with what it calls "conventional economic analysis," which is already a big mistake. Simple Econ 101 reasoning (when the price of something goes up, the quantity purchased goes down) has had only sketchy empirical support, something that has been especially clear from meta-analysis of minimum wage studies (ungated version of Doucouliagos and Stanley 2009 here).

The CBO, of course, has heard of these studies, but it remains with a non-transparent explanation of how it weighted different studies (p. 22), saying it gave the most weight to contiguous state comparison studies. The only thing is, according to Arindajit Dube, these are the studies least likely to find a negative employment effect. Thus, how CBO ends up with a baseline of job loss remains mystifying.

Okay, so 500,000 fewer jobs isn't entirely plausible then, but what if we accept for the moment that it is? As Jared Bernstein and Dean Baker point out, there are still far more winners (16.5 million direct, another 8 million indirect--the latter being workers just above $10.10 who would probably see raises) than losers (0.5 million among low-wage workers; the rest are people with high incomes) in this scenario. And as Baker emphasizes, "...we are not going to see 500,000 designated losers who are permanently unemployed as a result of this policy." Instead, what will happen is people will work 2% fewer hours at an hourly rate that is 39.3% higher.

The math is simple: 0.98 X 1.393 = 1.365. In other words, low-wage workers will see their income increase, on average 36.5%. And this is the worst-case scenario!

I've said it before, and I'll say it again: the minimum wage is a winner both economically and politically.

Cross-posted at Angry Bear.

Alabama's Airbus Subsidy Eerily Reminiscent of Auto "Transplants"

The July 2 announcement that Airbus would begin assembly of its A-320 airliner in Mobile, Alabama, may be good for Alabama, but whether it's good for the country as a whole is dubious. Indeed, it most reminds me of the subsidized arrival of foreign auto "transplants" that helped undermine Detroit's Big 3 as well as the unionization of the auto industry.


The new $600 million facility is projected to create 1000 jobs. Initial reports put subsidies to the company as $158.5 million from the state and various local governments (thanks to @varnergreg for pointing out this article). Remember, though, that initial reports are more likely to underestimate subsidies than overestimate them, as in the case of Electrolux in Memphis. However, if this is remotely near accurate, Alabama got a much better deal for Airbus than did Washington state for the Boeing 787 Dreamliner, which was 220% of the investment and $1.65 million per job (according to my calculations for Investment Incentives and the Global Competition for Capital), more than 10 times the per job cost in Alabama.

Unfortunately, this development could repeat the example of the subsidization of foreign automakers that hastened the decline of Detroit's Big Three. According to economic geographer James Rubenstein (1992, Table 1.1), from 1979 to 1991 there was a 1 to 1 correspondence in the opening and closing of new automobile and truck assembly plants in the U.S. and Canada: 20 new ones were built, 20 old ones were closed. Every one of the new facilities received subsidies from state and local (or federal and provincial, in Canada) governments. Given that the automobile industry was in a position of overcapacity for much of that period, it is no surprise that new production simply displaced older production.

Will the same thing now happen in the aircraft industry? Globally, Airbus has been putting market share above profits since the early 2000s. With its current move to Alabama, CEO Fabrice Brégier said the company hoped to grow its U.S. market share for single-aisle planes (the A-320 competes mainly with the Boeing 737) from 17% to 50% over the next 20 years. If Airbus is successful, it would be bad for the 80,000+ employees in Boeing's Commercial Airplanes group.

Of course, there is growing global demand for airliners, especially in Asia. But China has already developed its own competitor in the single-aisle market and Airbus is building A-320s in Tianjin, China, making it unclear how much of the global growth can translate into increased U.S. employment.

As was the case with foreign automakers, this is a case where a market-seeking investment was clearly coming to the United States, but the competition for the facility allowed Airbus to extract rents through the site selection process. By repeating this process for projects large and small, state and local governments deprive themselves of as much as $70 billion per year in revenue, enough to hire all state and local employees laid off since the recession began in December 2007. At the same time, over the long haul, the process in the auto industry replaced well-paid unionized workers with less well-paid, non-union workers.  The prospect that this evolution could be repeated in the aircraft industry is a pretty depressing one, when all is said and done.

Cross-posted at Angry Bear.

Why the World Should Care About America's Middle Class

Tim Worstall, in his Forbes blog, attacks my series (here and here) on whether globalization is good for America's middle class. Not on the basis that he disagrees with my conclusion (though he does), but because, he argues, there are much more important facts about globalization than a decline in the economic well-being of the middle class in America and Europe. In particular, he points to the great decline in poverty among developing nations that have embraced globalization:

This growth in incomes, in wealth, has been uneven, this is true. Largely speaking those places which have been taking part in globalisation, Indonesia, China, India, have been getting richer. Those that have not been, Somalia perhaps as an example, have not been.

 Let's leave aside the fact that these successful countries are hardly poster children for the kinds of so-called "free-market" policies that Worstall espouses, a point made particularly well by Dani Rodrik. And in the spirit in which Worstall granted my claims for the sake of argument, let's grant his as well. (But if you want to get down into the weeds on the extent to which poverty reduction claims may be overstated, take a look at Robert Wade's work.)

Here is the crux of Worstall's argument:

So I would actually posit that whether the American, or European, or rich world, middle class benefits from globalisation is actually an incomplete question. Incomplete enough to be the wrong question. Almost to the point that the answer is “who cares?”.

The correct question is what is the distribution of all of the costs and all of the benefits of globalisation? To which my answer would be that a generation, perhaps even two generations, of stagnating lifestyles for the already rich, those middle classes, looks like a reasonable enough cost to pay for the other thing that is happening: the abolition of absolute human poverty in the rest of the world.

First, I think we should certainly care when hundreds of millions of people are suffering unnecessarily. Yes, unnecessarily, because contrary to Worstall's claim, we are not trading off reduced economic well-being for hundreds of millions of middle class people for the lessened poverty of billions of other people. Indeed, the two are happening simultaneously, but as Ronald Rogowki pointed out in Commerce and Coalitions, it is perfectly feasible to have rich country winners compensate rich-country losers and still have all of them be better off from trade. Politically, it is a hard row to how, as Rogowki pointed out: the winners from expanding trade increase their political power as a result of their increased income, making compensatory policies less likely. But ending globalization's harm to the middle class in rich nations does not require us to take anything away from poorer people, not if you accept the theory of comparative advantage and the Stolper-Samuelson Theorem. It does require us to figure out a political solution to the problems faced by the losers, which as we can see in the United States is made more difficult by the decline of unions and by the Citizens United Supreme Court decision.

And second, we should care about the U.S. middle class (and Europe's, for that matter) because how they react to their situation politically will have enormous consequences for the world economy and world politics. If the U.S. comes up with a "Smoot-Hawley" response to its economic problems, that would undo a lot of the gains Worstall sees as flowing from globalization, a point made recently by Dani Rodrik (via Mark Thoma). Even more ominously, in both the U.S. and Europe, we see increasing political polarization and the rise of nationalist political parties and movements, as noted by Paul Krugman. Economic decline is a scary thing, and people's reactions to it can get downright ugly, to put it mildly.

For both of these reasons, then, what happens to the middle class in the U.S. and Europe will have repercussions far beyond those acknowledged by Worstall.

Is Globalization Good for America's Middle Class? Part 2

In Part 1, I examined what economic theory has to say about the winners and losers from trade. The main conclusion is based on the Stolper-Samuelson Theorem: Because the United States is labor scarce in a global perspective, an expansion of trade will reduce the real wages of labor. As we have seen, this theoretical prediction has been borne out as real wages remain below their peak level for the 39th year running.

In this post, I analyze what I consider to be the other main element of globalization, the expansion of the mobility of capital. Just as transportation innovation and cost declines made trade easier, they also make it easier for owners of capital to locate it in a broader range of places than 30 or 40 years ago. Similarly, the decline in communication costs make it easier for owners of capital to coordinate production on a global scale as well as offering additional ways of moving financial capital (think tax havens).

Note that I have said nothing about actual movements of capital. Simply the ability to move capital strengthens capital owners in their negotiations with business and labor, because it makes the threat of moving credible and thereby gives companies greater bargaining power. Kate Bronfenbrenner showed clearly that after the passage of the North American Free Trade Agreement (NAFTA) in 1993, companies more frequently resorted to threats in their bargaining with workers, even to the point of violating the National Labor Relations Act by threatening to move during union organizing drives. In this blog, I have previously discussed the case of Boeing's establishment of a Dreamliner plant in South Carolina and admitting it was due to workers in Washington state exercising their right to strike, a form of retaliation that was a prima facie violation of the Act.

Similarly, we have seen how companies have used the threat of relocation to extract subsidies from state and local governments. Sears, with its $275 million (nominal) retention package from Illinois, is just the most egregious in recent years. That package alone could support 550 state jobs at $50,000 a year for 10 years (assuming no raises, something pretty common for state workers lately though unlikely to last 10 years). And remember, Sears did this in 1989 as well, when it got $178 million not to move out of state.

More generally, who should win and who should lose from the growth of capital mobility? One possibility is that it would simply speed up the effects of trade. If Mexico had needed to wait for the growth of domestic entrepreneurs, it could not have expanded its exports to the U.S. nearly as rapidly as in the actual situation where U.S. companies could provide the money. In that case, we would simply expect the effect of heightened capital mobility to be the same as the Stolper-Samuelson Theorem.

But this would not explain why European labor appears as opposed to globalization as U.S. unions. Western Europe is labor abundant, so we would expect western European worker to benefit from the expansion of trade. Yet one does not have to look hard at all to see that European unions are not in love with globalization. The right answer now might be that those who are mobile win in the global economy, while those who are immobile lose. While capital is mobile geographically, governments are bound to their location. Workers, even where they have significant legal opportunities to move, as in the European Union, are still restricted in their mobility by their language abilities or lack thereof, and by the common desire to live near their families (another way in which corporations are not people, by the way). And it is not as if European capital can only be invested in the EU.

This is consistent with studies of the effect on home country labor of foreign investment (see Richard Caves' Multinational Enterprise and Economic Analysis): reduced employment because exports are replaced with foreign production, some possible increased employment due to supplying goods and services to foreign subsidiaries, but at best the result is a wash and more likely the net effect is negative.

If this is right, U.S. workers may have the worst of both worlds: they are harmed by expanding trade, and they are harmed by being less mobile than capital. While this does not explain the political changes that have happened in the U.S. since 1970 (though it is certainly relevant), it gives us a pretty good handle on the economic market pressures that the middle class needs to address politically. I will have more to say about these issues in future posts.

Is Globalization Good for America's Middle Class? Part 1

In this blog, I have frequently documented economic trends that have been bad for the middle class: Declining real wages, steadily falling bang for the healthcare buck, stagnant educational attainment, the gigantic cost of tax havens, etc. With this post, I want to begin exploring one possible reason for the economic insecurity of the middle class, namely globalization. Today, we will look at who wins and who loses from international trade, one of the key elements of globalization.

In some circles, one is likely to see a variant of the claim that "everybody" is better off because of freer trade. Even according to the most mainstream economic theory, this is simply false. The workhorse theory for determining the distributional effects of trade (i.e., who wins and who loses) is called the Stolper-Samuelson Theorem, first enunciated in an article by Wolfgang Stolper and Paul Samuelson in 1941.

To understand this theory, you need to know that economists think about national economies in terms of the amount of land, labor, and capital they have compared to all other countries in the world. These "factors of production" can be in relatively high supply compared to the rest of the world, in which case they are referred to as "abundant," or in relatively low supply compared to the rest of the world, in which case we call them "scarce."

The theorem can be stated in quite simple terms, but its consequences are not at all simple: As trade expands, owners of abundant factors of production benefit, and owners of scarce factors of production are harmed. Here, "benefit" means their real income increases, while "harmed" means their real income decreases.

Remember, trade can expand for two main reasons. First technological innovations can reduce the cost of transportation, making it first possible, then cheaper, to send goods long distances. For example, political scientist Ronald Rogowski, in his great book Commerce and Coalitions shows how the introduction of the steamboat made it possible to export North American wheat to Western Europe, displacing wheat from Eastern Europe. Second, policy changes like the North American Free Trade Agreement (NAFTA) or the trade agreements embodying the World Trade Organization (WTO) reduce or eliminate costly barriers to trade and lead to its expansion.

The grain example helps show why trade creates winners and losers. The Midwest U.S. and Canadian Prairie provinces are a gigantic breadbasket made possible by low population density, which implies abundant land and scarce labor. Expanding trade gave these farmers new markets and higher incomes. In much more densely populated Europe, the reverse is true: labor is abundant and land is scarce. As a result, expanding trade in grains meant more import competition and lower income for European farmers..

Fast forward to today and we can ask what U.S. factor endowments are currently. As a rich country internationally, the United States is necessarily a capital abundant country. As a comparatively low population density country, it is land abundant but labor scarce. The answer is to our initial question is then quite clear: expanding trade is harmful to U.S. workers because imports of labor-intensive products and services from abroad create competition for American workers, reducing their real wages. As I have discussed before, U.S. real wages have remained below their peak for 39 straight years, just as the Stolper-Samuelson Theorem would predict.

What about all the cheap goods we now buy at Wal-Mart? It doesn't change this story at all, because the lower price of imported goods is already reflected in the inflation rate we use to calculate real wages.

Rogowski's book also argues that we can expect certain pattens of political coalitions to form, with the winners from trade on one side and the losers on the other. NAFTA illustrated this well, with capital and agriculture generally in favor of the agreement (minus a few small specialty agricultural products like oranges), while labor was strongly opposed. And of course, this only helps us understand economic reasons for support or opposition to trade agreements; for non-economic reasons such as the environment, we have to look elsewhere. Although beyond the scope of this post, Rogowski's analysis of the entire world through phases of rising and falling trade (i.e., the Great Depression) lends strong credence to his claims. You should definitely read his book sometime.

Economists are divided over how big this effect is. In the 1990s, when I first started teaching, the most common view of economists was that technological change was the driver increasing the premium for high skilled labor while reducing wages for low-skilled labor. Adrian Wood's 1994 book, North-South Trade, Employment, and Inequality, argued that trade was in fact the main culprit, (a good, ungated analysis is  Richard Freeman's "Are Your Wages Set in Beijing?"). Although this met with a lot of resistance at the time, Wood's view has gained a lot of traction among economists based on developments over the last 15 or so years. Paul Krugman, a particularly noteworthy example due to his Nobel prize, has gone from being a fanatic adherent of free trade to someone who sees trade as a big problem, though even today he is not quite willing to pull the plug on free trade.

One important point Rogowski makes (and Stolper and Samuelson did before him) is that the theory of comparative advantage tells us that the winners from trade gain more than the losers lose, which makes it possible in principle to compensate the losers and have everyone be better off. But he also argued that those who benefit economically from trade will see their political power increase, something that has certainly been borne out in the United States in the more than 20 years since his book was published. This makes it less likely that such compensation will occur, and we certainly haven't seen any policy in the U.S. that comes close to making everyone better off as a result of trade.

One small bit of comfort comes from Paul Krugman's book The Conscience of a Liberal (pp. 262-3). He provides us some reason to think that the Stolper-Samuelson Theorem isn't necessarily destiny, as he shows that the United State and Canada, two countries with the same factor endowments as each other, have distinctive differences in political outcomes, particularly with regard to unionization rates.

Overall, unfortunately, it looks like the answer to today's question is clear: freer trade has harmed, and is harming, the American middle class. But globalization is more than trade, and I will continue to analyze other elements of globalization in my next few posts.

Austerity fail: EU unemployment continues to rise: UPDATED

Eurostat, the European Union's statistical agency, reports that unemployment continues to worsen in the Eurozone, adding further evidence for the failure of the world's biggest experiment in austerity. When we last checked in in March, the January data had just been released. This week's release takes us to the end of March.

Select Unemployment Rates

Date     Eurozone     Spain     Greece     Portugal     Ireland     UK     USA   EU-27

1/2012   10.7%         23.3%    19.9%     14.8%      14.8%    8.3%  8.3%   10.1%
3/2012   10.8%         24.1%    21.7%     15.3%      14.5%    8.2%  8.2%   10.2%

Note: Greece and UK figures are for November 2011 and January 2012, rather than January and March
Source: Eurostat, 2 May 2012

 Overall, Eurozone and EU unemployment continue to worsen, although there were reductions in the UK and Ireland. However, both Britain and Ireland returned to recession, along with Belgium, Greece, Italy, the Netherlands, and Portugal.

While Friday's jobs numbers were disappointing, the U.S. is still moving in the right direction, though hardly fast enough, with positive job growth and a falling unemployment rate at 8.1%.

The good news, for both Europe and the U.S., is that Europeans are beginning to wake up to the failure of austerity. The Dutch government has collapsed over its austerity measures, and it appears that Nicholas Sarkozy will go down to defeat for the same reason. As Krugman counterposes to these results, the Right in this country is keeping up a steady drumbeat for austerity It's important that we beat back such calls, or even millions more people will suffer needlessly when their policies increase unemployment.

UPDATE: And Sarkozy goes down in another defeat for the austerity caucus.

U.S. has 18th best unemployment benefits in OECD; also trails 13 non-OECD countries

Tim Vlandas at EU Welfare States flags some important recent International Monetary Fund data on the generosity of a number of countries' unemployment benefits. The metric used is the gross replacement rate (GRR) the ratio of unemployment benefits to a worker's previous wages. The United States gives, on average, a miserly 27.5% of previous wages in unemployment benefits, behind 17 OECD members, though ahead of 11 others (no data was given for OECD members Iceland, Luxembourg, Mexico, Slovak Republic, and Slovenia). Not only that, the U.S. falls behind 13 non-OECD members, including Algeria, Taiwan, and Ukraine, all of which have at least double the replacement rate of the U.S.

Why is this important? As Vlandas points out,

A high replacement rate...ensures that the negative effects of rising unemployment on aggregate demand are mitigated. It also prevents workers from falling into poverty when they lose their jobs.

 Furthermore, the generosity of unemployment insurance interacts with the state of other employment protections. As regular readers of this blog will recall, the United States has the absolute worst employment protections in the OECD, by a large margin compared to most other members. As commenter Norm Breyfogle rightly noted in response to that post, if your protection from both individual and mass firings are weak, you really need good unemployment insurance. As the data here show, however, U.S. workers are not well-protected with unemployment insurance.

I won't reproduce Vlandas' entire table, but I will highlight the leaders and some other significant countries.

Country          GRR          Overall rank          OECD rank

Netherlands     70%                  1                         1
Switzerland      68.7%               2                         2
Sweden           68.5%               3                         3
Portugal           65%                 4                          4
Spain               63.5%              5                          5
Norway            62.4%              6                          6
Algeria             61.2%              7                         N/A
Taiwan             60%                 8                         N/A
Ukraine            56%                 9                         N/A

All the above countries give at least twice as much as the United States' 27.5%

Canada            45.9%             17                         11
Germany          35.3%             23                         14
Japan               28.9%             30                         17
United States    27.5%             31                        18
United Kingdom 18.9%             46                        27

To compare it in another way, according to an IMF working paper (Figure 1, p. 21), the average GRR for high-income countries in 2005 was about 38%, compared to the United States' 27.5%. U.S. workers get relatively low unemployment benefits compared to other industrialized countries.

Moreover, as I showed in February, the length of unemployment is at its longest since record-keeping started in 1947. The following FRED graph gives both the mean and median length of unemployment, both of which hit double their previous record in the current jobs recession.

Loading ...

Thus, in a country where employment protections are weaker than in any comparable nation, and which  is still just below postwar records for length of unemployment, we face the additional problem of low unemployment benefits, a factor which exerts an additional drag on growth.

The Best Data on Middle Class Decline (Updated)

The flurry of posts earlier this month on middle class decline (me, Lane Kenworthy, Matthew Yglesias, Kevin Drum) made me think some more about what the best way is to show what's happened since the peak of real wages in the early 1970s. While in my opinion there is no perfect measure, there are a lot of choices to be made, and I argue below why real wages for production and non-supervisory workers, with an adjustment for non-wage compensation, is the best single measure.

Choice 1: Household/family vs. individual

While we all live in households or families, over the past 40 years, there has been a decline in persons per household (see Kenworthy) and an increase in incomes per household as women's labor force participation has increased. The decline in persons per household means that a household needs less income than in the past to have a fixed per capita income. The increase in incomes per household has meant that households have had higher real income even as real individual income has fallen, as pointed out by commenter peggy_Boston in the comments thread of Drum's article. To my mind, this is partly causal; that is, because real wages have fallen, families have had to have more incomes in order to maintain their living standards. Indeed, falling real wages have forced families to run up high levels of debt, with non-mortgage debt reaching 1/3 of family income by 2005. Therefore, I think individual data is the right choice here.

Choice 2: Median income vs. production and non-supervisory workers' income

The median (middle value, with an equal number of observations above and below it)  has big advantages over the arithmetic mean in trying to show the typical situation in a distribution of values. It is especially useful for income distributions, where the presence of very high incomes means that the mean is much higher than the median. In fact, the literature on "decoupling" (see Kenworthy above) demonstrates just how much this is the case. But I think that "production and non-supervisory workers" captures our intuition about who is in the middle class even better than the median does. This series, in Table B-47 of the Economic Report of the President, is an average of the earnings of employed persons in private (non-government), non-agricultural jobs. It includes about 80% of the private workforce and 64% of the total non-agricultural workforce. Despite being an average, its exclusion of supervisory workers means that virtually all of the extremely high values that distort the mean of the entire workforce are eliminated. It is, essentially, the mean income of the bottom 80% of private workers. The biggest drawback to this dataset is that it does not include non-supervisory government workers, but I think that is outweighed by its broader coverage of the middle class than the pure median income (or middle quintile, as in Kenworthy's post).

For the counterargument, that changes in composition of production & non-supervisory workers can cause distortions that the median wage is not subject to, see Dean Baker (p. 9).

Choice 3: Weekly vs. hourly

Baker mentions hourly earnings rates in some cases. As I discussed in the comments section of my March 11 post, the decline in hours worked per week (from 36.9 hours in 1972 to 33.6 hours in 2011) suggests to me that we need weekly, not hourly, wages.

Choice 4: Which inflation data to believe?

Shortly after President Clinton's first election, I predicted to my students that, because his message of middle-class stagnation ("It's the economy, stupid") was dependent on how inflation was measured, that conservatives would soon attack the official Bureau of Labor Statistics inflation data. The issue is, if inflation is overstated, then the decline in real wages reported by the BLS could be overstated or even non-existent. Conversely, if BLS data understates inflation, then real wages have fallen even faster than shown in Table B-47.

Unfortunately, I did not publish this prediction, so you'll have to take my word for it that I predicted the attack on inflation data that culminated in the Boskin Commission in 1995. I always took this to be a political attack rather than a scientific one. My attitude has always been that trade theory (i.e., the Stolper-Samuelson Theorem; see Ronald Rogowski's great book Commerce and Coalitions for an explanation of this topic, which I intend to discuss in a later post) predicts that real wages in a relatively labor-scarce country like the United States will fall as trade expands, and the data shows that real wages indeed fell: so what reason do we have to question the data? In the end, though, the Commission concluded that inflation was being overstated by about 1.1 percentage points a year, and the BLS was mandated to adjust its methodology.

Barry Ritholtz takes an even more jaundiced view of the Boskin Commission than I do. Paul Krugman, on the other hand, is not convinced that inflation is now significantly underreported, citing the work of the Billion Prices Project. For the moment, I do not see reason enough to toss out the BLS data, despite the possibility that the Boskin Commission may have introduced distortions into it.

Choice 5: Wages vs. compensation

Martin Feldstein and other economists argue that it is not sufficient to look at wages alone, because the non-wage share of compensation has been growing over the past few decades. As I posted before, total employee compensation includes everyone from the CEO to the janitor, so it overlooks the fact that the top 1% have made almost all the gains from decades of economic growth. Nevertheless, it is clearly true that non-wage compensation has grown faster than wages, as we will see below. In fact, Yglesias suggests that the 2000s actually saw real compensation growth at the median, but it was all in the form of health insurance benefits. Of course, there is some debate over how much value actually comes from extra employer payments for health insurance, as Baker's paper (p. 10) details

A different way to factor in compensation that I had seen before on the Economic Policy Institute's website was explained to me in an email by Jared Bernstein and is documented in the footnote of his blog post here. It takes the ratio of total compensation to total wages, both of which are in National Income and Product Accounts Table 1.12 (you can set it to a wider range of years, as I did). Whereas he applies it to median wages, I apply it to Table B-47 and get the following results:

Year          Weekly Real Earnings     Comp/Wages     Weekly Compensation
                  (1982-84 dollars)                                     (1982-84 dollars)

1972          $341.83                         1.14                   $388.01
1975          $314.75                         1.16                   $366.63
1980          $290.86                         1.20                   $348.93
1985          $285.34                         1.22                   $347.10
1990          $271.12                         1.21                   $328.99
1995          $267.07                         1.22                   $326.23
2000          $284.79                         1.20                   $341.49
2005          $284.99                         1.24                   $352.87
2010          $297.67                         1.24                   $370.28
2011          $294.78                         1.24                   $365.77

Note: Last two columns rounded from spreadsheet calculations

Sources: Economic Report of the President 2012, Table B-47, National Income and Product Accounts, Table 1.12, and author's calculations

 By this measure, compensation in 2011 for most workers was still almost 6% below its 1972 peak. The advantage of this adjustment over Feldstein's procedure is it strips out the wage inequality of the compensation data, although there is still some overstatement based on inequalities in non-wage compensation. Still, I think this gives us our most accurate picture of what's happening to the bottom 80% of workers.

That is not to say that this is a perfect measure even with those caveats. It matters what is happening at the top, too. If high wage earners were seeing their income fall faster than middle-class workers, then inequality would be falling and we would probably object less to what would then look like the much-vaunted "shared sacrifice." But of course, as Kenworthy notes, the share of the top 1% more than doubled from 1979 to 2007, from 8% to 17%. With inequality rising as it is, we now seem to be in danger of a consequent sharp shift of political power to the 1%, as MIT economist Daron Acemoglu told Think Progress' Pat Garofolo.

I look forward to your comments, especially if I've gotten something wrong.


UPDATE: By way of comparison, here is Lane Kenworthy's chart.

 

In it, you can see that by either median family income or 3rd quintile household income, incomes started rising shortly after 1980, whereas in my table compensation-adjusted real wages continued to fall until 1995. You can also see the divergence in median family income and Q3 household income between 2000 and 2007, as noted by Yglesias. Whereas the increase is made up entirely of nonwage compensation in the Q3 household income series, in my table at the individual level we have an increase made up partly of wages and partly of nonwage compensation.

Job Flight from Canada Highlights U.S. Inequality and Low Wages

The fact that middle class living standards have been falling for decades is no secret. One way to put this in sharp relief, however, is through international comparisons. Alexander Eichler at the Huffington Post reports today that Caterpillar Inc. is demanding that its locomotive manufacturing workers in Canada take a 50% pay cut to bring them more in line with what its workers in Illinois make.

How is it that the Canadian Caterpillar workers get more than twice as much in wages and benefits as their Illinois counterparts when income per capita is lower in Canada than in the U.S.? According to the 2009 UN Human Development Report (Table M, p. 195), gross domestic product per capita in the U.S. in 2007 was $45,592 but only $40,329* in Canada. The first part of the answer is inequality. The same table shows that the U.S. has a Gini coefficient (an inequality measure in which 0 equals complete equality, and 100 when one person has all the income) of 40.8, compared with Canada's 32.6. The richest 10% of Americans make 15.9 times as much as the poorest 10%, while the figure in Canada is only 9.4 times as much.

The second part of the answer is unionization and union strength. As I noted in September, the U.S. has the fifth-lowest unionization rate of the 34 industrialized democracies in the Organization for Economic Cooperation and Development. Only 11.4% of the American workforce is organized, compared with 27.5% in Canada.

As Eichler points out, a third reason wages are often higher in Canada is that its unemployment rate is lower than the U.S. rate, 7.5% vs. 8.5%. Higher unemployment means lower bargaining power for workers.

Caterpillar is not an isolated example. As I discussed in September, Electrolux actually moved from the Montreal suburbs to Memphis, saving over $4 per hour by ditching its unionized workforce for right-to-work Tennessee, and getting a free factory in the bargain.

This comparison with Canada helps us see, from another angle, just how much pressure the middle class is under in this country. The fact that Canada is very similar to the U.S. economically suggests that it is not impossible to strengthen the union movement and hence, the middle class, here.


* Technical note: The comparison of GDP per capita is not adjusted for purchasing power parity. Companies have to pay their workers in actual U.S. dollars or Canadian dollars, so the adjustment is not appropriate for this comparison.

The Selling of Trade Agreements from NAFTA to Today

With last week's passage of three trade agreements (Colombia, Panama, and South Korea), and spurred by Suzy Khimm's article on the Korea trade deal, I was reminded of the storm of numbers proponents of NAFTA threw out there in the run-up to its approval.

Gary Hufbauer and Jeffrey Schott, described by the New York Times (2/22/93; no link but available on Lexis-Nexis) as "the two most influential academic experts on the North American Free Trade Agreement," wrote a book entitled NAFTA: An Assessment in 1992, with a second edition in 1993 (all references below are to this edition). They predicted that the U.S. would gain 170,000 jobs by 1995.

This work struck me as flawed for a number of reasons. In the first place, it was odd that two economists would write about the winners and losers from NAFTA without making any reference to the economic theory on the subject, such as the Stolper-Samuelson Theorem (see below). Second, the authors did computer simulations of the effect of the agreement that said in their long-run scenario (Table 2.1, p. 16) that we would gain low-skill jobs and lose high-skill jobs, pretty much the opposite of what you would expect based on economic theory. I questioned what assumptions would be necessary to get that result. Finally, the book assumed that the U.S. would have a merchandise trade surplus with Mexico, "$7 billion to $9 billion annually through the 1990s, and perhaps $9 billion to $12 billion annually in the following decade" (p. 15) They held this view even though the authors showed on on page 4 that the Mexican peso was overvalued. If the value of the peso were to fall, Mexican goods would become cheaper in the U.S., while American products would be more expensive in Mexico, completely upending the likelihood of a U.S. trade surplus. As we know, the peso fell sharply in the December 1994 "tequila crisis," and the U.S. has had a trade deficit with Mexico ever since. See the table for details.

U.S. Goods Trade Balance with Mexico ($billions)

Year                                  Amount

1985                                    -5.5
1986                                    -4.9
1987                                    -5.7
1988                                    -2.6
1989                                    -2.2
1990                                    -1.9
1991                                    +2.1
1992                                    +5.4
1993                                    +1.7
1994                                    +1.3
1995                                   -15.8
1996                                   -17.5
1997                                   -14.5
1998                                   -15.9
1999                                   -22.8
2000                                   -24.6
2001                                   -30.0
2002                                   -37.1
2003                                   -40.6
2004                                   -45.2
2005                                   -49.9
2006                                   -64.5
2007                                   -74.8
2008                                   -64.7
2009                                   -47.8
2010                                   -66.4
Jan-Aug 2011                     -44.8

Source: Census Bureau

So much for that prediction. According to the then-fashionable claim that $1 billion in net trade surpluses created 19,600 jobs, the fact that the trade deficit worsened from $1.9 billion in 1990 to $74.8 billion in 2007 ($72.9 billion deterioration) implies a loss of 1.4 million jobs at its worst point. This number should be taken with a grain of salt, but it is in one sense what we expect. Still, it's only about 1% of the labor force, though we could certainly use the jobs now. But the effect on labor may have been worse, because the expanded option for companies to relocate to Mexico made it possible for them to threaten their workers with job loss and thereby hold down their wages. Kate Bronfenbrenner of Cornell's Institute for Labor Relations found that shutdowns became much more frequent after NAFTA (15% vs. 5% in the late 1980s) during labor organizing and contract campaigns.

At the same time, a contradictory prediction also failed to hold up. Wolfgang Stolper and Paul Samuelson argued that the expansion of trade was good for a country's abundant factors of production (they are land, labor, and capital) because of added markets abroad, but bad for scarce factors of production because of competition from abroad. Here, "bad" means reduction in real (inflation-adjusted) income. The U.S., which is not densely populated by world standards, is thus labor scarce but abundant in land and capital. My expectation was that NAFTA would therefore lead to lower real income for labor. In fact, however, weekly earnings for nonsupervisory workers in the private sector, which fell from a peak of $341.83 (constant 1982-84 dollars) in 1972 to a low of $266.46 in 1992, have risen ever since, despite the NAFTA and WTO agreements, hitting $284.79 in 2000 and $297.31 in 2010, according to the Economic Report of the President 2011, Table B-47. Of course, we are still $44.52 1982-84 dollars below the peak, or about $95.25 per week in 2010 dollars.

While obviously we see plenty of economic misery today, I'm curious why the trend on this measure, which Bill Clinton brilliantly politicized with "It's the Economy, Stupid," has reversed course, and how it relates to other measures of labor income. Perhaps there is a better measure of wages out there, or perhaps inflation is currently underestimated (there was a huge campaign in the mid-1990s claiming it was overestimated; maybe the Bureau of Labor Statistics paid too much attention to critics), which would overstate real income. Let me know what you think in the comments.

As for the three new trade deals, they are being sold with squishy job projections, just like NAFTA was. While Khimm's interviewees are probably right that the deals' effect on labor will be small, I still think we should go with the Stolper-Samuelson expectation that the effect will be negative.

Historical Notes on Class Warfare

"This is not class warfare. It's math," President Obama said on Monday. There is an important element of truth to this but, as Paul Krugman points out, there has been an "actual class war that has taken place over the past 30 years — namely class warfare for the rich against the middle class." He points to four major elements to this: tax cuts for the rich; a decline in the inflation-adjusted minimum wage (which peaked in 1968 at $10.04 in 2010 dollars); union-busting; and the deregulation of financial markets.

In fact, the war on the middle class goes back even further than that, before President Reagan's crushing of the air traffic controllers' strike, even before he came into office. Douglas Fraser, President of the United Auto Workers, identified a "one-sided class war" in 1978, when he resigned from the "Labor-Management Group" that unofficially advised President Carter. I want to quote at length from this letter, because many of the issues he pointed to then are still with us today.

I believe leaders of the business community, with few exceptions, have chosen to wage a one-sided class war today in this country—a war against working people, the unemployed, the poor, the minorities, the very young and the very old, and even many in the middle class of our society. The leaders of industry, commerce and finance in the United States have broken and discarded the fragile, unwritten compact previously existing during a past period of growth and progress....

 The latest breakdown in our relationship is also perhaps the most serious. The fight waged by the business community against that Labor Law Reform bill stands as the most vicious, unfair attack upon the labor movement in more than 30 years. Corporate leaders knew it was not the "power grab by Big Labor" that they portrayed it to be. Instead, it became an extremely moderate, fair piece of legislation that only corporate outlaws would have had need to fear. Labor law reform itself would not have organized a single worker. Rather, it would have begun to limit the ability of certain rogue employers to keep workers from choosing democratically to be represented by unions through employer delay and outright violation of existing labor law....

This is, of course, a good description of the state of labor relations today. At the time, one major example Fraser had in mind was J.P. Stevens, a textile maker and serial National Labor Relations Act violator. The movie "Norma Rae," for which Sallie Field won "Best Actress" in 1979, depicts the struggle against Stevens.

We are presently locked in battle with corporate interests on the Humphrey-Hawkins full employment bill. We were at odds on improvements in the minimum wage, on Social Security financing, and virtually every other piece of legislation presented to the Congress recently....Even the very foundations of America's democratic process are threatened by the new approach of the business elite. No democratic country in the world has lower rates of voter participation than the U.S., except Botswana. Moreover, our voting participation is class-skewed—about 50 percent more of the affluent vote than workers and 90 percent to 300 percent more of the rich vote than the poor, the black, the young and the Hispanic. Yet business groups regularly finance politicians, referenda and legislative battles to continue barriers to citizen participation in elections. In Ohio, for example, many corporations in the Fortune 500 furnished the money to repeal fair and democratic voter registration.

Examples of the latter today are too numerous to mention them all. But we obviously have the Koch brothers financing conservatives all over the country, with restrictions on the right to vote proposed or passed in states like South Carolina, North Carolina, Maine, Wisconsin, and others. Class war from the right is alive and well, but now it challenges science and math as well as labor and the middle class.

Boeing in South Carolina: Huge Subsidies, and a Labor Dispute

Boeing's decision to add an assembly line for its new Dreamliner aircraft in South Carolina has touched off a firestorm of controversy. The first facility, on Boeing's home of Washington state, received the country's largest-ever package of state and local incentives, totaling $160 million a year for 20 years, a nominal value of $3.2 billion that I calculated to have a present value of just shy of $2 billion. The World Trade Organization (WTO) ruled in January that this subsidy violated the terms of the 1994 Agreement on Subsidies and Countervailing Measures, but that decision is now under appeal.

Meanwhile, South Carolina has given Boeing a package thought to be worth over $900 million  to open a new assembly line for the Dreamliner. The European Union will no doubt bring a complaint against this subsidy at the WTO and, in all likelihood, again will win.

The biggest battle over the South Carolina assembly line erupted when Boeing CEO Jim Albaugh said that the decision had been motivated by strikes at its facilities in Washington (http://motherjones.com/kevin-drum/2011/09/quote-day-boeing-vs-nlrb, h/t Matt Yglesias). This was a no-no: the National Labor Relations Act protects workers who exercise their rights to form a union or to strike from retaliation by the company. One obvious reading of Albaugh's statement is that he was admitting that the company broke the law. Therefore, it is not surprising that the National Labor Relations Board (NLRB) filed a complaint against Boeing.

Whether the NLRB will win its case is less certain. How is it “retaliation” if no workers in Washington lose their job and 5,000 more union workers there get jobs? As labor law professor Jeffrey Hirsch explains, it comes down to intent: the NLRB will use the statements of Albaugh and other Boeing officials against them, while Boeing will argue that the decision was not motivated by retaliation, but was purely an economic decision. The first hearing in the case is scheduled for later this month, and then we will see what an administrative law judge rules.

In the meantime, though, Congressional Republicans have been in an uproar, with the House passing a bill yesterday that would prohibit the NLRB from ordering the relocation of workers. While this bill is unlikely to go anywhere in the Senate, it is interesting that Boeing itself has “remained on the sidelines,” as The Hill  put it yesterday.

Whatever the outcome of the labor dispute, it's clear that we have yet another example of a gigantic subsidy for a mobile company that can well afford to make the investment on its own. Regardless of whether the subsidies violate WTO rules (and I think they do), they take money from average taxpayers to give Boeing at a time when many states, including South Carolina, face severe deficits.

Labor Day: Of Nine OECD Members with a Higher Minimum Wage than U.S., Seven Have Lower Unemployment Rates

When Michele Bachmann says she would “consider” lowering the minimum wage, she tapped into the long-standing theme of conservative economists that the minimum wage is a job-killer. The only problem is, careful statistical research has shown that this simply isn't true. In the 1990s, economists David Card and Alan Krueger demolished the methodologies of prior statistical studies showing a negative impact as well as conducting original research comparing low-wage employment within a two-state metropolitan area when one state raised its minimum wage, finding no negative impact. (A useful summary of Card and Krueger's long-run influence on the debate can be found in a post by Arindrajit Dube at Rortybomb [h/t Mark Thoma].)

 

But another way of showing the lack of a negative effect, following my “Labor Day” theme of international comparisons, is to look at the minimum wage and unemployment rates among the industrialized democracies of the Organization for Economic Cooperation and Development (OECD). Only 21 of the OECD's 34 members have economy-wide minimum wage rates, as shown in the table below. This shows the “real” (inflation-adjusted) hourly minimum wage for each of the 21 countries, expressed in 2005 U.S. dollars and adjusted for each country's price level in a measure called “purchasing power parity” or PPP. (Under straight exchange rates, Belgium, France, Ireland, Luxembourg, and the Netherlands all have minimum wages above $10 per hour in 2005 dollars.) The data are for 2008, the most recent year available. Unemployment data are for June 2011, the most recent month available for most of the countries (exceptions are noted in the table).

In this list, the United States comes in with only the 10^th highest minimum wage of the 21 countries. This is true even after the increase to $7.25 in 2009, which comes to $6.26 in 2005 dollars. In addition to the five countries mentioned above, Australia, Canada, New Zealand, and the United Kingdom have a higher minimum wage than the U.S. If the story told by Michele Bachmann and conservative economists were true, we would expect that they would all have higher unemployment rates than the U.S. In fact, however, only France (9.8%) and Ireland (14.3%) are higher, while the other seven have lower unemployment rates, ranging from 1.4 points lower (UK) to 5.1 points lower (Netherlands). We should remember from my last two posts in this series that all of these countries have stronger employment protections than does the United States, and that only France has lower union density.

Real hourly minimum wages

Data extracted on 09 Sep 2011 00:21 UTC (GMT) from OECD.Stat

Frequency		Annual
Series		In US$PPP
Time		2008
Country
Australia		8.59   4.9%
Belgium		8.23   7.4%
Canada		6.43   7.4%
Czech Republic		2.99    6.5%
France		8.79   9.8%
Greece		4.86   15.0% (March 2011)
Hungary		2.61   9.9%
Ireland		7.55   14.3%
Japan		5.22   4.6%
Korea		4.36   3.3%
Luxembourg		8.95   4.3%
Mexico		0.79   5.8%
Netherlands		8.22   4.1%
New Zealand		6.99   6.5% (Q2 2011)
Poland		3.21    9.5%
Portugal		3.31   12.5%
Slovak Republic		..        13.4%
Spain		4.07   21.0%
Turkey		2.96   9.3% (May 2011)
United Kingdom		8.06   7.8% (May 2011)
United States		5.59   9.2%

Notes: Unemployment rate is for June 2011 unless otherwise noted. U.S. minimum wage rose to $6.26 in 2005 dollars with the 2009 increase to $7.25 in nominal dollars. The Slovak Republic's minimum wage was $1.36 in 2006, the most recent year available.

Source: http://stats.oecd.org/Index.aspx

For 2008 real minimum wage in US$ purchasing power parity, click on “Labour,” then “Earnings,” then “Real hourly minimum wages,” then adjust the “Series” to “In US$PPP.”

For June 2011 unemployment rates, click on “Labour,” then “Labour Force Statistics,” then “Labour Statistics (MEI),” then “Labour Force Statistics (MEI),” then “Harmonized Unemployment Rates and Levels (HURs),” then adjust the “Subject” to “Harmonized Unemployment Rate (HUR).”

 

Raising the minimum wage would add to the purchasing power of many people who will spend their money at a time when the economy sorely needs demand, as economist Heidi Shierholz of the Economic Policy Institute points out. Meanwhile, the best research shows that a higher minimum wage does not destroy jobs as economists generally thought before Card and Krueger's work. The data presented here shows that American workers at the bottom of the wage scale earn less than their counterparts in a number of other countries, and overall those countries do not see more unemployment as a result. We should, therefore, resist any calls to lower our minimum wage.

Labor Day: U.S. Has Fifth Lowest Union Density in the OECD

As was reaffirmed by Vice-President Biden on Labor Day, the American middle class was originally built by the labor movement. That unions have been declining in this country for decades is not exactly news. But where does the U.S. stand relative to the other industrialized democracies of the Organization for Economic Cooperation (OECD)? The obvious measure of the strength of the labor movement is the proportion of the workforce that is unionized, usually referred to as union density (although it is well known that the French labor movement is far stronger than its low union density would suggest).

The short answer is that the U.S. ranks 30^th of the 34-member OECD. U.S. union density stood at only 11.4% in 2010, significantly below the OECD average of 18.1% last year. The only OECD countries with a lower proportion of labor organized are Estonia (8.0%), France (7.6% in 2008), South Korea (10.0% in 2009), and Turkey (5.9% in 2009).

Examining some of the data, we see that the U.S. is not alone in seeing a decline in union density:

Country                       Density 1999          Density 2010

G-7

Canada                       28.1%                    27.5%

France                          8.1%                      7.6% (2008)

Germany                     25.3%                    18.6%

Italy                            35.4%                     35.1%

Japan                          22.2%                     18.4%

United Kingdom           30.1%                     26.5%

United States               13.4%                     11.4%

Other Countries

Australia                      24.9%                     18.0%

Finland                        76.3%                     70.0% (highest density in 2010)

Ireland                         39.0%                      30.7% (2009)

Sweden                       80.6%                      68.4% (highest density in 1999)

OECD Average             21.0%                     18.1%

Source: http://stats.oecd.org/Index.aspx, then click on “Labour,” “Trade Union,” and “Trade Union Density.”

The reasons for this general trend are in dispute, though globalization is one likely culprit. I'll have to leave that debate for another time.

For now, I simply want to emphasize how low the American unionization rate is, and how that bodes ill for the middle class. We are, of course, currently seeing an attack on public sector unions in many states, which threatens tens of thousands of middle class jobs and reduced pay and benefits for hundreds of thousands of workers.

To end on a more positive note, it's interesting that Canada, a country like the U.S. in many ways (in particular, economists would describe as both relatively “labor-scarce” by global standards, an issue I will discuss in more detail in future posts), has not seen the same sort of deterioration in union density that the U.S. has. Paul Krugman, in The Conscience of a Liberal, makes a great deal of this comparison to argue that union decline in the U.S. was not inevitable and could be reversed. I hope he's right.