from Renewing America

What the Trade and Minimum Wage Debates Have in Common

April 5, 2016

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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The election-year debates over trade and the minimum wage would appear to have little to do with each other. The growing concern over trade, on the one hand, has focused mostly on the impact of global competition on U.S. manufacturing, sectors in which most employees make far more than the minimum wage. The historic move by California and New York this week to raise their minimum wages to $15, on the other hand, will mostly boost pay for restaurant and retail workers – sectors that do not face international competition.

But the two issues are actually the mirror image of the same problem – weak wage growth that has left far too many Americans struggling, especially those with low levels of education, even as strong job growth has cut unemployment in half since the depth of the Great Recession.

Historically, manufacturing jobs provided lower-skilled Americans with a path to a middle-class paycheck. It also seems likely (though I have not found a good study on the subject) that higher manufacturing wages historically helped to pull up other wages as well. If an auto worker with a high school education could earn $25 or $30 an hour, local restaurants and retail shops would have to offer something more than rock bottom wages to attract and retain workers.

But the number of manufacturing jobs has fallen from a peak of nearly 20 million at the end of the 1970s to fewer than 12 million today. Instead of acting as an engine to pull up other wages, former manufacturing workers have been dumped into the pool to compete for lower-wage jobs in retail or healthcare.

There are at least two alternative ways for the United States to tackle this problem. One – call it the German model – would focus on expanding manufacturing sector employment through increased exports. As Obama administration officials never tire of reminding Congress and the public, jobs in export-oriented manufacturing companies pay more than most other jobs – on average about 20 percent more. In Germany, some 22 percent of the workforce is in manufacturing, and wage growth in Germany has been strong – strong enough indeed that German officials are worried that it will hinder the country’s ability to maintain its strong export performance.

There are several problems with this strategy for the United States. First, the number of jobs is simply too small for manufacturing to resume its historic role as a wage growth leader. Even with the strong recovery from the recession, the number of U.S. manufacturing jobs has grown by just 5 percent since 2010, or about 800,000 jobs, and manufacturing today employs less than nine percent of Americans. Secondly, rising export growth depends on a weaker dollar and stronger growth in the major markets of Europe and Asia, neither of which appears likely in the near-term. U.S. exports last year fell slightly for the first time since the recession. And many of the new manufacturing jobs are not especially good ones by historic standards, in part because companies are holding wages down to compete with overseas rivals; the real median wage in the auto industry, for example, has fallen by more than 20 percent over the past decade. In the auto parts sector, median pay is now just over the $15 per hour that will become the new minimum in New York and California.

A second approach – call it the Australian model – is to legislate a very high minimum wage, which mostly serves to raise wages in the non-competitive sectors of the economy like retail, but likely has some knock-on effects in pushing up wages in internationally competitive sectors like mining and agriculture, making them less competitive. Australia’s minimum wage at more than A$16 per hour – is the highest among OECD countries in terms of purchasing power. That has probably hurt the country’s export competitiveness, but its overall economic performance has still been quite solid. Australia’s unemployment rate is less than six percent, its labor force participation rate is higher than the United States and its share of low-paid workers is much smaller. Whatever the other effects of a minimum wage rise, it has the virtue of increasing the pay packets of many workers, which increases internal demand for consumer goods, so the losses on the export side can be made up at home.

The Australian model has some obvious merits for an economy like the United States. Compared to Europe or even Canada, Australia is a relatively self-sufficient economy. Its merchandise trade-to-GDP ratio is just over 30 percent, compared with 45 percent for France and more than 70 percent for Germany. In this respect, the United States is like Australia, though even more so. The U.S. trade-to-GDP ratio, while much higher than it was a generation ago, is still less than 25 percent. Higher minimum wages in the United States will likely hurt some internationally competitive manufacturing companies, though probably only at the margins since most of their employees earn above the minimum wage already. And the boost for lower wage workers should help increase consumer demand, which would be a good thing for many U.S businesses.

The California and New York experiments will be radical ones, to be sure. The United States has in recent decades had one of the lowest minimum wages in the advanced world, but by the time the new laws are fully implemented over the next seven years, its two largest states will have minimum wages that are some of the highest. There are certain to be significant unforeseen consequences. But given the absence of other alternatives for boosting wages, especially for the poorest U.S. workers, it is a gamble worth taking.

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