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DeLong has often argued to the..., 2004-03-12 17:24:39 | Main | the "productivity miracle" is..., 2004-03-14 19:17:11

trade and income distribution:

my weekend joy reading has largely consisted of econ texts (Adam Smith on trade, if I remember correctly page 301 in the paperback edition of WoN, fun like pie in the face, but, I suppose, somewhat outdated in the sense that it's only applicable to nations with something to develop). Please bear with the psuedo-intellectual and/or autodidact ranting, depending on whether we believe that I've learned anything or whether there's anything to learn in reading econ texts. Anyway, while fiddling on my guitar and picking at the predictions of neoclassical trade theory on google, in reference to something in one of the books scattered across my room, some mortar for a debate that at times closely resembles a discussion on epistemology with any number of brick walls:

There is in fact a respectable basis in economic theory for the proposition that free trade will undermine real wages of those toward the bottom of the distribution. Economists Eli Heckscher and Bertil Ohlin developed in the 1930s the theory that a country exports goods that are intensive in the use of its "abundant" factor (for the United States, skilled labor) and imports goods that intensively use its "scarce" factor (unskilled labor). Economists Wolfgang Stolper and Paul Samuelson further developed this theory in the 1940s to show that it implied trade liberalization would reduce the real wages of the scarce factor and increase those of the abundant factor. Essentially, more export opportunities would bid up wages of those primarily producing export goods while increased competition from imports would tend to bid down wages of workers producing substitutable goods domestically. . . .

Some other trade economists in turn reacted sharply to the first group of trade economists, to argue that trade had in fact major effects. Leamer (1993, 1994) reshuffled trade and industry data in a way that seemed to reveal the presence of falling relative prices for imports, and argued that factor combinations (skilled-unskilled intensities) did not have to change for trade effects to be present (citing the possibility of "fixed coefficient" production conditions). Wood (1994) made the most dramatic calculations of all. He adjusted skill intensities to account for low-skilled goods that had been totally transferred to developing countries, and applied some rough multipliers for effects in services as well as induced technological change, to estimate that 100 percent of the rise in the skilled/ unskilled wage ratio could be attributed to increased North-South trade. . . .

[Krugman] pointed out that by trade theory the relative wage change is considerably larger than the relative product price change, so that the corresponding decline in relative prices of imported goods might have been too small to distinguish from the statistical noise. At the same time, his general equilibrium formulation highlighted why the textbook "small country" case with domestic wages driven by the "international margin" of foreign wages under free trade (the driving force in the much larger estimates by Leamer) was misleading. In reality, for the US and other OECD economies, the home country is large and trade is small, and the supply-demand approach of the "Labor 2" economists provides a good approximation of reality.

I agree with Krugman�s revised view that the Labor-2 group had come closest to the mark. A new general equilibrium model developed in Cline (1997) finds trade and immigration effects comparable to or somewhat greater than that school, but also shows that nonetheless they are unlikely to have been the dominant forces in rising wage inequality.

E.g. "low-skilled labor", half the working-age population in the US, and their families, not only do not see the benefits from the liberalized trade and investment regime, but they actually lose ground to it, by a factor of who knows what.

This is what is described as "the general welfare". From what I understand if we had a stable credit system supplying low-interest loans to developing markets, some means of accounting for the socialized risk involved in environmental destruction, freely associating labor markets where workers are allowed to persue their mutual-interest, a democratic IMF making sensible policies for ag-dependent periphery nations that don't flood urban centers with a glut of disenfranchized slum dwellers out of the countryside begging for work, and security and development allowances for the losers skimmed from the winners - you know, correct for the ridiculous assumptions the trade argument begins with - we could maybe start talking about the advantages expected from the impeccable logic of trade liberalization.


:: posted by buermann @ 2004-03-13 16:57:58 CST | link





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