The Rising Tide: A New Look at Trade, Jobs, and Wages

In the Council on Foreign Relations 2011 Independent Task Force on U.S. Trade and Investment Policy, we noted that many economists had begun to worry that growing U.S. trade with developing countries like China and India was holding down wage earnings among lower-skilled Americans. We quoted Paul Krugman, who had explored the issue thoroughly in the 1990s and was rethinking his earlier conclusion that the impact of trade had been small: “It’s no longer safe to assert that trade’s impact on the income distribution in wealthy countries is fairly minor,” Krugman wrote. “There’s a good case that it’s big and getting bigger.” But we noted that, unlike the 1990s, economists had not thoroughly examined the more recent evidence.

Until now. The Peterson Institute for International Economics released this week a new book by Harvard’s Robert Lawrence and South African economist Lawrence Edwards that impressively fills the gap. And its conclusion is that trade’s impact on wages and jobs in the United States is still “fairly minor,” and surprisingly that the impact may actually be somewhat less than it was in the 1980s and 1990s. The book is called Rising Tide: Is Growth in Emerging Economies Good for the United States?, and it is required reading for anyone interested in the impacts of globalization on the United States.

I approached the book skeptical about its conclusion, largely because of the sharp decline in manufacturing output and employment in the United States during the 2000s, even prior to the 2008 financial crisis and the deep recession that followed. Manufacturing (along with agriculture) is the most trade-exposed sector of the economy, and the loss of nearly 6 million manufacturing jobs during the 2000s coincided quite directly with the rising share of U.S. manufactured imports coming from lower-wage developing countries. And unlike in previous decades, when overall employment in manufacturing had been stable even as its share of total employment was declining, U.S. manufacturing output barely rose (and may even have declined slightly) during the 2000s.

That led to a logical conclusion. As Robert Atkinson of the Information Technology and Innovation Foundation put it recently: “There’s a critical difference between gradual decline in manufacturing jobs in the 1980s and 1990s and catastrophic loss in the 2000s. The real reason the U.S. lost 5.7 million manufacturing jobs in the last decade was due to the decline in manufacturing output, which in turn was caused by U.S. manufacturing losing out in global competition.” He estimates that 60 percent of U.S. manufacturing jobs losses in the 2000s were due to “competitiveness challenges.”

Lawrence and Edwards have a very different explanation, and one I find persuasive – though it deserves much more study, and I will be interested to see how other economists respond. The big story of the 2000s, they argue, was weak overall job growth and anemic demand, particularly for manufactured goods as Americans spent an ever higher share of their income on services of one sort or another. Indeed, the rate of decline in manufacturing jobs as a share of overall employment was almost exactly the same in the 2000s as in previous decades; what changed was that there was no overall job growth in the U.S. economy, unlike the strong job growth of the 1980s and 1990s. Trade, they argue, was not a significant factor. Indeed, one of the fascinating insights in the book is that, because the United States no longer produces many low-wage manufactured goods (think textiles and apparel), the U.S. labor market is actually becoming more closed. Even with the increase in tradable services, they write, “a smaller share of Americans in 2010 worked in industries that are exposed to international competition than in 1990.”

The story on wages is more complicated, but their conclusion is roughly the same. Given growing specialization in international trade, most of what the United States imports from developing countries does not compete directly with U.S. production. The result is less direct pressure on the wages of lower-skilled U.S. workers today than in the 1980s and 1990s. The income inequality data seem to bear this out. Prior to the 2000s, it was possible to point to a general widening between skilled (college-educated) and less-skilled (high-school or less) workers that could be explained in part by trade and perhaps immigration, but in recent years the story has been wage stagnation across the spectrum except for those at the very top of the food chain (doctors, lawyers, PhDs, MBAs etc.). Trade competition does little to explain that story.

Certainly they acknowledge that in certain industries, occupations and regions, trade has resulted in U.S. job losses and downward wage pressures. Roland Stephens’s Renewing America study of North Carolina is a good example. But the impacts on the broader economy are small, and appear to be diminishing rather than increasing.

There is far more in this book that is worth close attention, in part because its policy implications are significant. To take just one example, Congress is again flirting with legislation to pressure China to increase the value of its currency, the renminbi, which would make imports from China more costly and U.S. exports cheaper. Lawrence and Edwards suggest this is the wrong target; we should be more worried about devaluation by trading partners that produce similar goods (Japan, the European Union, Canada) than by China. More broadly, their analysis reinforces the need to focus on export markets, particularly in developing countries, for U.S. goods and services, since that is where most of the growth will be. The U.S. market for manufactured goods, in particular, is not likely to grow strongly. Finally, the analysis argues for an overhaul of programs to assist displaced workers. The focus on “trade adjustment assistance” is misguided because most of those in need of unemployment and healthcare benefits and job retraining are not the casualties of trade competition.

The most controversial thing about the book may be its title. For most Americans, of course, the last decade has been anything but a rising tide. If this analysis is right, trade has not been holding them down. But the challenge of boosting jobs and wages for more Americans remains.