Real Wages Rise Slightly but Remain below Peak for 41st Straight Year

Remember the Economic Report of the President? If you've been reading this blog for at least a year, of course you do. It's where we get our annual data on real wages (and apparently some other stuff, too). The 2014 edition was released on March 10. As you may recall, I made my first post on the declining real wage trend through 2011 and was literally the first person to notice 2012's further slight decline.

The good news is that, in what is now Table B-15 rather than B-47, real wages advanced somewhat in 2013, from $294.31 per week (in 1982-84 dollars) to $295.51, an increase of 0.4%. Woo hoo!

The bad news, of course, is that this is still 13.5% off the peak real weekly wage of $341.73, achieved in 1972. One swallow doesn't make a spring, and all that.

Interestingly, last week Paul Krugman felt compelled to argue that real wages aren't going up all that fast, but so what if they did? He said that basically, this was something primarily only visible in the real hourly (my emphasis) wages of production and non-supervisory workers, which happens to be one of the components of Table B-15. However, he was reporting based on the Bureau of Labor Statistics' monthly reporting of this stat.

As he puts it, the folks he is criticizing are saying that "a dangerous acceleration in the pace of wage increases is already underway. Time to raise interest rates!" His response to them is fine as far as it goes, but he misses that even on the terrain of the supposedly most rapidly increasing measure, there is no there there.

Table A-2. Current and real (constant 1982-1984 dollars) earnings for production and nonsupervisory employees on private nonfarm payrolls, seasonally adjusted(1)

	Feb. 2013	Dec. 2013	Jan. 2014(p)	Feb. 2014(p)
Real average hourly earnings(2)	$8.73	$8.81	$8.83	$8.86
Real average weekly earnings(2)	$294.96	$295.22	$295.69	$295.08
Consumer Price Index for Urban Wage Earners and Clerical Workers	229.180	230.919	231.233	231.344
Average hourly earnings	$20.00	$20.35	$20.41	$20.50
Average weekly hours	33.8	33.5	33.5	33.3
Average weekly earnings	$676.00	$681.73	$683.74	$682.65
OVER-THE-MONTH PERCENT CHANGE
Real average hourly earnings(2)	-0.3	-0.1	0.2	0.3
Real average weekly earnings(2)	0.2	-0.6	0.2	-0.2
Consumer Price Index for Urban Wage Earners and Clerical Workers	0.6	0.3	0.1	0.0
Average hourly earnings	0.3	0.2	0.3	0.4
Average weekly hours	0.6	-0.6	0.0	-0.6
Average weekly earnings	0.8	-0.3	0.3	-0.2
OVER-THE-YEAR PERCENT CHANGE
Real average hourly earnings(2)	0.1	0.8	0.8	1.5
Real average weekly earnings(2)	0.4	0.2	0.4	0.0
Consumer Price Index for Urban Wage Earners and Clerical Workers	1.9	1.5	1.6	0.9
Average hourly earnings	2.0	2.3	2.3	2.5
Average weekly hours	0.3	-0.6	-0.3	-1.5
Average weekly earnings	2.3	1.7	2.0	1.0

Source: Bureau of Labor Statistics (link above), footnotes omitted

First of all, we should remember that a couple months' trend is not really equal to a 41-year trend. That kind of error we'll leave to Reinhart and Rogoff.

Second, we can see the "scary" number: nominal hourly earnings increased from $20.00 in February 2013 to $20.50 in February 2014, or 2.5%.

Third, we know that we actually want to adjust that for inflation; hence we find that real hourly earnings went from $8.73 in February 2013 (1982-84 dollars) to $8.86 in February 2014, or just 1.5%,

Fourth, what Krugman appears to miss is that average weekly hours have fallen substantially since 1972. In fact, as the BLS table shows, they fell by half an hour, from 33.8 to 33.3 hours, from February 2013 to February 2014, or 1.5%.

You can see where this is going now: Real weekly earnings went up by 0. More precisely, 0.04%. And you'll note that the February 2014 figure is lower than the full-year 2013 level. So there is actually no increase to explain in the production/non-supervisory workers series.

But Krugman does hit the nail on the head: "What's so bad about rising wages?" And the answer, of course, is "Absolutely nothing." ("Say it again!")

Cross-posted at Angry Bear.

Trans Pacific Partnership Bad for the Middle Class: Just How Bad is the Question

What you don't know can hurt you. I think that's a clear lesson of some so-called trade agreements the United States has signed over the last 20 years, and illustrated further by the few that have been defeated, most notably the Multilateral Agreement on Investment, negotiated by the Organization for Economic Cooperation and Development from1995 to 1998, but then abandoned in the face of ever growing protests.

Haven't heard of the Trans Pacific Partnership? That's no surprise: while the negotiations are not really being conducted in secret (the Office of the US Trade Representative provides periodic updates here UPDATE 3/3/21: here is a working link for US negotiating goals), the level of disclosure from the USTR office rarely ventures beyond bland statements like this:

On November 12, 2011, the Leaders of the nine Trans-Pacific Partnership Countries - Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam, and the United States - announced the achievement of the broad outlines of an ambitious, 21st-century Trans-Pacific Partnership (TPP) agreement that will enhance trade and investment among the TPP partner countries, promote innovation, economic growth, and development, and support the creation and retention of jobs.

The USTR website continues by claiming that the agreement will be "increasing American exports, supporting American jobs." This is all too similar to the Clinton administration's reporting on NAFTA, which would point out all the gains from increased exports while omitting any mention of increased imports (Journal of Commerce, Nov. 18, 1994, via Nexis, subscription required) which quickly turned a small trade surplus with Mexico into a huge trade deficit.

How do we evaluate the TPP? We have to see it as having at least three major elements: a trade agreement, an investment agreement, and an intellectual property agreement.

From the trade agreement alone, we can conclude that it is a bad deal for the middle class. As I explained last year, the Stolper-Samuelson Theorem in economics tells us that more trade is actually bad for labor in this country, because by global standards, the U.S. is labor-scarce (low population density), meaning that we expect trade to lead to more intense competition in labor-intensive goods, putting downward pressure on wages. Alas, that isn't the end of it.

There is a lot of controversy about the investment side of the agreement. As discussed by my fellow contributor at Angry Bear (I repost many of my posts there), Daniel Becker, the investment chapter was leaked and published by the Citizens Trade Campaign. Before I discuss the TPP investment provisions, a little context on investment agreements first.

According to the United Nations Conference on Trade and Development (UNCTAD),at the end of 2011 there were 3190 international investment agreements, of which 2860 were between two countries, usually known as bilateral investment treaties or BITs. Investment agreements can also be part of larger agreements, such as the investment chapter of NAFTA, the WTO's Agreement on Trade-Related Investment Measures (TRIMS), and various regional trade agreements. Since the TRIMS agreement, in force since 1995, applies to all WTO members, it is a global benchmark; thus, people will refer to agreements with stronger provisions as "TRIMS+."

The purpose of investment agreements is to protect foreign investors, which are by definition multinational corporations (MNCs). At the same time, they place no corresponding duties on investors, only on the host government. Most significantly, these agreements remove dispute settlement from the host country's court system to binding arbitration in an outside body, most commonly the World Bank's International Center for the Settlement of Investment Disputes (ICSID). As with domestic arbitration clauses, this removal from the courts favors the business interests involved. So the investment agreement element of the TPP will tend to be bad for host governments (the U.S. is host to more foreign investment than any other potential TPP country) and by extension the middle class.

But "how bad" is the question. This depends on what restrictions the agreement puts on governments. Originally, MNCs wanted to be protected against having their property nationalized ("expropriated") by the host, but more recent agreements such as NAFTA's investment chapter (Chapter 11; text here) have opened the way to defining "expropriation" in ways that include regulatory actions that may reduce the value of the investment, even if they are non-discriminatory among firms and taken in the public interest. This is why I say above that investment agreements are bad for the middle class, because it normally benefits from public interest regulation.

For these reasons, there is in fact significant pushback regarding the content of investment agreements. Three good sources for this are UNCTAD, the Vale Columbia Center on Sustainable International Investment, and the International Institute for Sustainable Development.

So what's in the TPP investment chapter? As far as I can tell, nothing that isn't already in NAFTA, other U.S. free trade agreements, or a U.S. bilateral investment treaty. The problem is, that's bad enough. Under NAFTA, for example, Metalclad won a dispute against Mexico over a local government's refusal to grant it a permit to open a hazardous waste facility, and was awarded $16.7 million. Ethyl Corporation successfully challenged a Canadian ban on the import of gasoline additive MMT, leading Canada to withdraw the ban and pay the company $13 million in compensation. To have unelected bodies that (in the words of Citizens Trade Campaign) "would not meet standards of transparency, consistency or due process common to TPP countries’ domestic legal systems" overturning democratically adopted laws or regulations is profoundly undemocratic.

At the same time, I think Becker reads a little too much into some of the language. He quotes section 12-6bis (Becker's emphasis):

Notwithstanding Article 12.9.5(b) (Non-Conforming Measures, subsidies and grants carveout), each Party shall accord to investors of another Party, and to covered investments, non-discriminatory treatment with respect to measures it adopts or maintains relating to losses suffered by investments in its territory owing to armed conflict or civil strife.

 He goes on to speculate that this could give rise to compensation claims due to interpreting protests against the Keystone pipeline, or even strikes, as "civil strife." However, the exact same language is in NAFTA's investment chapter, and there have been no such claims in its entire history. Moreover, this is what we would expect since the language only pertains to government behavior ("it adopts"), not private behavior.

So, that's two strikes against the agreement. The third strike is intellectual property, something Matt Yglesias caught over a year ago. As I analyzed then, the TPP "would ban government health services from negotiating prices with pharmaceutical companies." Given that many countries already do this and the U.S. ought to do it to help rein in health costs, if these provisions stay in the final agreement it will be a very bad development.

Hooray for baseball season, but that's three strikes against the TPP. This is a bad deal that will put further downward pressure on real wages which have gone 40 years since reaching their peak, that will undermine governments' ability to regulate, and will strengthen a small group of pharmaceutical, software, entertainment, and publishing companies at the expense of the rest of us.

3/3/21: Thanks to reader Lisa G. for updating a dead link.

Cross-posted at Angry Bear.

Real Wages Decline; Literally No One Notices

Your read it here first: Real wages fell 0.2% in 2012, down from $295.49 (1982-84 dollars) to $294.83 per week, according to the 2013 Economic Report of the President. Thus, a 1.9% increase in nominal wages was  more than wiped out by inflation, marking the 40th consecutive year that real wages have remained below their 1972 peak.

Yet no one in the media noticed, or at least none thought it newsworthy. I searched the web and the subscription-only Nexis news database, and there are literally 0 stories on this. So I meant it when I said you read it here first. In fact, there was little press coverage of the report at all, in sharp contrast to last year.

Below are the gory details. The data source is Appendix Table B-47, "Hours and Earnings in Private Non-Agricultural Industries, 1966-2012." The table has been completely revised since last year's edition of the report. The data is for production and non-supervisory workers in the private sector, about 80% of the private workforce, so we are able to focus on what's happening to average workers rather than those with high incomes.. I use weekly wages rather than hourly because there has been substantial variation (with a long-term decline) in the number of hours worked per week, from 38.5 in 1966 to 33.7 in 2012. The table below takes selected years to reduce its size.

Year     Weekly Earnings (1982-84 dollars)

1972     $341.73 (peak)
1975     $314.77
1980     $290.80
1985     $284.96
1990     $271.10
1992     $266.46 (lowest point; 22% below peak)
1995     $267.17
2000     $285.00
2005     $285.05
2010     $297.79
2011     $295.49
2012     $294.83 (still 14% below peak)

This decline is especially amazing when we consider that private non-farm productivity has doubled in this period:

 

But, if you've been paying attention, you know the drill: higher productivity plus lower wages = greater inequality. The question is, why aren't our media paying attention when real wages fall, yet again?

Cross-posted at Angry Bear.

More New Books Highlight Plight of Middle Class

The situation of the middle class is a hot topic these days, and rightly so. In addition to James Carville and Stan Greenberg's recent book, It's the Middle Class, Stupid, new books are out by Donald Barlett & James Steele, Jeff Faux, and Mike Lofgren.Together, they advance our understanding of middle class issues significantly.

Barlett and Steele have been sounding the alarm about middle class decline since they wrote the first newspaper articles forming the core of 1992's America: What Went Wrong? In The Betrayal of the American Dream, they tell the stories of everyday Americans, many of whom they kept up with after interviewing them for previous books. They date the beginning of the decline of the middle class to the 1970s, which I think is correct since that is when real wages for production and non-supervisory workers began their forty year decline. They emphasize the central role of Congressional and Presidential decision-making that has given us tax rules favoring the 1%, laws allowing private equity and other corporate raiders to raid pension funds and break contracts with unions and retirees, trade agreements, industry deregulation (which they see as highly destabilizing for the middle class), the destruction of retirement via the assault on pensions and their replacement with 401(k)'s, and the devastation of offshoring.

Their proposed solutions include raising taxes on the rich, and to consider instituting a financial transactions tax (also known as a Tobin tax, after its first proponent) or a gross receipts tax, which would be harder to dodge than the corporate income tax. Barlett and Steele argue further that we need to rebuild manufacturing and reduce the trade deficit, with high tariffs if necessary. They propose massive investments in infrastructure and education, including job training. Finally, they argue that the financial fraudsters who caused the 2008 financial crisis need to be prosecuted. Surprisingly, they say little about getting money out of politics, though they do mention it in their prologue as well as the well-funded corporate propaganda machine.

Jeff Faux, founder of the Economic Policy Institute, was fighting trade agreements long before mainstream economists were willing to admit that maybe free trade isn't always good for everybody, especially workers in the United States. His book, The Servant Economy, is a dystopian vision of the future of the middle class if present trends are not reversed. His basic argument is what he calls an "end-of-empire story," that the U.S. can no longer sustain subsidized capitalism, global military dominance, and middle class prosperity. He argues that the country's former economic and military dominance gave it a "cushion" that was able to sustain the middle class, but that the pressures of international trade and global competition have eroded that cushion along with the nation's ability to achieve all three of the goals mentioned above.

For Faux, much of the problem stems from the increasing U.S. trade deficit, which figures in prominently throughout the book. The rise of finance relative to manufacturing is a key problem as well, one which has made the Democratic Party more dependent on Wall Street Money, which led to Clinton ending Glass-Steagall and Obama treating bankers with kid gloves after he came into office. Worse, as we saw in the 2011 debt negotiations and other instances, the President has made it clear that he thinks there needs to be cuts to Social Security.

"Hope is not a strategy," according to Faux, and he devotes an entire chapter to what he calls "the shaky case for optimism." He foresees a "politics of austerity" that will mean cuts to middle class programs, the continuing loss of good jobs to the trade deficit, and slowly declining living standards and economic security for the vast majority of Americans for decades to come.. He calls cuts to Social Security and Medicare "a done deal." To me, perhaps the single most depressing statistic in the book relates to the much hyped "onshoring" phenomenon: GE has moved some production from China to Louisville, but the workers there make $13/hour compared to the $22/hour they formerly made.

What, then, is to be done? In a talk Faux gave at the Economic Policy Institute August 15th, he explained that he didn't see the need to give a laundry list of policy proposals because, first, he had done so in previous books, and second, there was no point in it unless we change government decision-making. Thus, it is essentially a one-point program, a constitutional amendment that ends corporate "personhood" permanently. This would also have the effect of overturning Citizens United. Without that, he argues, there is no hope.

Lofgren's book, The Party Is Over, is a Republican-eye view of what went wrong, beginning with Newt Gingrich's takeover of the Republican Party. While highly critical of the rightward, anti-science turn of his party, he argues that the Democrats are not much better, and have suffered from extremely bad messaging (he says the stimulus act should have been called the "jobs bill," for example). Interestingly, his major recommendation is to cut trillions from defense spending and redirect it to infrastructure. Of course, he wants to get the money out of politics, too, but cutting defense is his most distinctive policy proposal.

Taken together, these books are largely complementary, though each has its own distinct emphasis. Faux's book, in my opinion, is the best of the three, though also the most depressing. His vision of a likely future is far too plausible to take lightly.

Labor Day: U.S. Wages Trail 10 OECD Countries, but with Higher Unemployment than 9 of Them

Contra Eric Cantor, Labor Day celebrates the importance of labor and the labor movement in American history. But the bluster of Cantor, where he celebrates the so-called job creators, does illustrate that organized labor has been in decline in this country for quite some time.

One result of having a weak labor movement is that average wages in the United States have fallen behind those of 10 other industrialized democracies that are members of the Organization for Economic Cooperation and Development (OECD). What is most confounding, for Republicans at least, is that nine of these countries also have lower unemployment, which contradicts their view that high wages (and high minimum wages) harm employment.

The table below below is constructed from data at OECD StatExtracts, showing the average earnings of all wage and salary workers in each country, as well as its most recent unemployment rate (usually July 2012).

Country		2011 Annual Wages		Unemployment Rate Percent
Switzerland		$93,235		4.3
Norway		$81,475		3.1
Australia		$74,512		5.2
Luxembourg		$73,203		5.5
Denmark		$73,032		7.9
Ireland		$66,882		14.9
Netherlands		$57,001		5.3
Belgium		$56,252		7.2
Canada		$56,008		7.3
Sweden		$54,459		7.5
United States		$54,450		8.3
Finland		$53,069		7.6
Austria		$52,404		4.5
Japan		$51,613		4.3
United Kingdom		$50,366		8.0
France		$47,704		10.3
Germany		$46,984		5.5
Italy		$39,112		10.7
Spain		$37,583		25.1
Israel		$35,872		6.5
Slovenia		$30,676		8.1
Korea		$29,053		3.1
Greece		$28,434		23.1
Portugal		$22,559		15.7
Czech Republic		$16,922		6.6
Slovak Republic		$15,513		14.0
Estonia		$14,955		10.1
Hungary		$14,177		10.8
Poland		$13,811		10.0

Source: OECD StatExtracts. For average wages, select data by theme, then labour, then earnings, then average annual wages, and use "2011 USD exchange rates and 2011 constant prices" for each country. For unemployment, select data by theme, then labour, then labour force statistics, then short-term statistics, then short-term labour market statistics, then harmonized unemployment rates.

This table does not make use of purchasing power parity (PPP) conversions to wages (and the U.S. in fact has the highest wages when adjusted for PPP), for a very important reason. Essentially, the PPP calculation adjusts actual exchange rates for differences in the cost of living between countries. In practice, this means downward adjustments for expensive countries like Norway (where I had a personal pan pizza for $25 on my honeymoon six years ago; the New York Times recently published more examples) and upward adjustments for developing countries and even Eastern European countries. As I note in Investment Incentives and the Global Competition for Capital, gross national income per capita for the Czech Republic in 2006 was $12,680 at actual exchange rates, but $21,470 at PPP (page 99).

The reason we should ignore PPP when dealing with wages and jobs is that a company deciding to invest in one place rather than another has to pay the wages using the actual exchange rate and is not affected by PPP. Thus, if there is an effect of wages on employment, that will be a response to what an employer actually has to pay to hire someone, not a hypothetical measure of how well off the worker is in terms of PPP-adjusted dollars. The data here does not show any negative effect of wages on unemployment.

Moreover, I would argue that living in a high-wage, high-cost location has distinct advantages over living in a low-wage, low cost location, even if after adjusting for cost of living (via PPP or within a single country) the lower wage location has "higher" pay. One important reason is that having extra cash gives you extra options. You will have a higher retirement benefit and will keep it if you move to a lower-cost area, whereas the reverse is not possible. You will have better quality services on average, particularly health care. It is far easier for you to vacation in a low-cost location than it will be for someone in a low-cost location to vacation to a high-cost location ($25 personal pan pizzas!). Your high salary will be the benchmark if you take a job in a lower-cost location. If you economize from the standard basket of goods used to measure cost of living, your benefit will be higher in the high-cost area. Of course, a full treatment of this issue requires another post, but the big point is that high wages do not necessarily create unemployment and reducing wages is not the route to middle class prosperity.

Cross-posted with 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 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.