Both the Financial Times (Krishna Guha) and the Wall Street Journal (Greg Ip) ran articles summarizing the papers presented at Jackson Hole. I liked Guha’s summary more than Ip’s summary, largely because Ip's summary seems to put too much emphasis on the positive. Ip writes:
Globalization, the conventional wisdom goes, has downsides: It hurts the wages of the lesser skilled. It leads to large and possibly dangerous trade imbalances. It can threaten economic stability through financial-market volatility … But academics, investment bankers and government officials at the Federal Reserve's annual symposium here heard a much more upbeat vision of a globally integrated world.
I’ll set Rajan, Prasad and Subramanian’s paper on foreign capital and economic growth aside for now. It argues capital inflows help growth in rich countries and hurt in poor countries, so the flow of capital from poor to rich may not be such a bad thing. Instead, I will consider some of the issues raised in Gene Grossman and Esteban Rossi-Hansberg’s paper arguing that the offshoring of many of the tasks associated with the production of goods and services hasn't been a bad thing for unskilled American workers …
I have only skimmed the Grossman paper. But it hardly paints a wonderful picture of that state of working America. Real wages of the least skilled manufacturing workers increased by 3.7% since 1997, while total factor productivity is up by 11.8%. Real wage growth for low skilled blue-collar manufacturing workers has been flat 1998 (Figure 5, p. 24) -- most of the 3.7% growth came in 1997. Real wage growth for average blue-collar workers has been flat since 2002 (Figure 6, p. 25).
Why aren’t wages rising in line with total factor productivity? Because the price of the goods produced by low-skilled workers is falling. Grossman and his co-author’s don’t claim that things are good, only that without the higher productivity from offshoring, things would be worse:
“Real wage growth for low-skilled workers in the US has been far from exceptional (and some might say “far from acceptable”), the experience has not been as bad as one might have expected based on the sharp improvement in the United States terms of trade.”
Not as bad as might be expected isn’t exactly an upbeat account, at least in my book -- even if cheap imported goods are good for those in sectors insulated from global competition.
Consequently, it isn’t hard to figure out why many aren’t thrilled with the Walmart economy, where efficient big-box retailers distribute (mostly) Chinese goods at very low prices, allowing Americans to do more productive things with their time than make things.
Mallaby’s defense of Walmart (and critique of Democrats criticizing Walmart) seems to me to pose a similar problem: if Walmart’s cheap goods are so good for the living standards of American workers, why are median real wages -- in all sectors, not just sectors exposed to global competition -- going up so slowly?
It is certainly true, as Mallaby notes, that Walmart’s efficient distribution of imported goods has lowered the retail price of many manufactured goods. Auto workers in the Mid-west may not have a job anymore, but the dollars they get from borrowing against their accumulated home equity go further than ever before.
Ok, that remark is a bit over the top. But I think it goes to the issue – if nominal wages were constant and prices were falling, the Walmart economy would be consistent with higher real wages across the board. Workers released from manufacturing would find other jobs – in construction, perhaps, or in the services sector. The composition of the economy would change. I would still worry about taking on external debt to support a boom in investment in non-tradables. But living standards for the median worker would be rising as the changing composition of the economy increased its overall productivity.
That obviously hasn’t happened. At least not recently. Cheap Chinese assembly, global supply chains and efficient big box retailing haven’t been associated with much of a rise in the real purchasing power of the median worker. Indeed Leonhardt and Greenhouse note in New York Times that real compensation (counting benefits as well as wages) fell over the past year.
Looking only at the falling (until recently) price of Chinese assembly looks only at half the ledger. China’s export and investment led boom has also put pressure on commodity prices. Cheap Chinese financing may have put upward pressure on housing prices, and eventually on rents. On balance, prices are going up rather than down. For the median worker, prices have been rising faster than wages.
Mark Thoma is right. Dissatisfaction with the Walmart economy reflects concerns that the gains from globalization haven’t been widely shared. The US is more productive, but the gains of that increase in productivity have been captured by the few, not the many …
Guha does a better job capturing this debate than Ip, in part by picking up on those parts of Grossman’s argument that Ip didn’t emphasize …
“Even in Jackson Hole, a favoured retreat of America’s super-rich where the likes of Dick Cheney, US vice-president, and actor Harrison Ford own lodges, it was impossible to ignore popular anxiety that the effective doubling of the world’s labour force would lead to downward pressure on low-skilled wages in the west. “Economists have to confront these fears not in a way that dismisses them but in a way that addresses them,” Doug Irwin, a professor at Dartmouth, told the symposium.
Gene Grossman, a professor at Princeton, offered the central bankers a new way of thinking about the problem, which paints offshoring in a more positive light. He argued that we should think about trade not as an exchange of goods but an “exchange of tasks”. If some tasks that used to be performed onshore are offshored to lower-cost locations, the result will be an increase in the productivity and wages of workers who perform related tasks that cannot easily be offshored.
Analysis of the US from 1997 to 2004 suggests this positive productivity effect could outweigh the negative labour supply effect on wages in sectors where there had been a lot of offshoring. But it still does not appear large enough to offset the broader negative effect on low-skilled wages arising from the ongoing fall in the relative price of labour-intensive goods.
Another way lower skilled workers could avoid wage depression, policymakers noted, is to shift from tradable to non-tradable sectors.”
US workers certainly have shifted into the non-tradable sector. But that hasn't been enough to keep median wage growth in line with productivity growth.
Walmart isn’t responsible for the recent slump in real median wages, but it is a powerful symbol of the new new economy, and the impact of a host of changes – including increased global competition -- on the US labor market.
That isn’t my specialty, to put it mildly. But I was a bit surprised that DeLong left global economic forces off his list of potential causes of the recent increases in wage inequality.
It may be right to leave globalization off the list. The correlation between the increased global integration of the US economy and real wage stagnation is not perfect. The late 1990s were a period of dollar strength, rapidly growing imports, rapid productivity growth and strong real wage growth. Galbraith (via DeLong) injects an import caveat – the stock market surge meant that wealth inequality was still rising. But real wages still rose across the board.
Something changed after the tech boom ended.
And it isn’t just the US either. Profits are up and wages down relative to GDP in both Europe and the United States.
China's integration into global markets certainly has dramatically increased the global supply of low-skilled labor (what Roach causes the new global labor arbitrage). Part of the issue is Chinese wages are well below those in the US, and other inc. I also think part of the issue is that China has resisted pressure for the RMB to appreciate, pressure that would bring Chinese wages more closely in line not with US wages but with wages in other low-income countries. The gap between China’s nominal exchange rate and its PPP exchange rate is unusually large, even relative to other low-income countries. To me, the issue isn’t just globalization, but the particular form of globalization that we now have.
Most econometric studies do not find that trade is a major reason why median real wage growth in the US stagnated after 1973, let alone a major cause of the current slump in median real wages. The reason: trade is small relative to US GDP. And with imports from China only 2% of US GDP, the same logic indicates that China cannot be a major reason for the most recent stagnation of real US wages, or for low US prices (See Steve Kamin’s paper).
I am a bit suspicious of these studies all around. They seem to consistently end up downplaying the impact of global economic forces, even as such global forces exert a more and more obvious impact on goods and financial markets. China’s exports to the world will increase from $300b in 2002 to around $900b this year -- a huge surge. China’s current account surplus will be the global counterpart to about a quarter of the US current account deficit. Resource exporters growing fat selling to China account for another big chunk of the global current account surplus.
China is clearly having a far bigger impact on the world economy, and the US economy, than they once did.
At the same time, China’s impact on the US economy is complex. Chinese competition is pushing down prices of manufactured goods – and wages in the manufacturing sector. It consequently has contributed, I would guess, to the diminished bargaining power of unions in some sectors of the US economy. Chinese financing has pushed down interest rates. That pushed up housing prices – and demand for construction workers (at least until recently). Chinese demand is pushing up prices for many commodities. Sorting it all out isn’t easy.