Trade could cost people with no college diploma $1,800 a year

March 22, 2013

In 1995, Princeton economist Paul Krugman developed a simple model to estimate how globalization was affecting the wages of low-skilled workers in the United States. He found there wasn’t much effect at all. Eighteen years later, an economist at the Economic Policy Institute has re-run the numbers with updated data and has come to a strikingly different conclusion.


Source: Economic Policy Institute

EPI is a liberal think tank in Washington; Josh Bivens is its director of research and policy. He concludes in the new study, based on Krugman’s classic model, that trade with developing nations such as China reduced wages by 5.5 percent in 2011 for a typical American worker without a college diploma. That adds up to about $1,800 per year for an individual.

One-third of the effect is entirely attributable to trade with China, Bivens writes.

There’s a growing gap in America between college-educated workers and their less-educated counterparts. Since 1979, Bivens concludes, one-third of the increase in that gap has been attributable to trade.

Krugman’s model is based on the premise that as America traded more with low-wage developing countries, its higher-skilled workers would benefit and lower-skilled workers would suffer. That’s because, under basic trade theory, countries who exchange goods and services move to specialize: America, in this case, specializes in things that require more-educated workers. Its partners specialize in low-skill work.

In the model, the results of that specialization are a) efficiency gains – which means faster growth – in both trading partners, b) higher wages for higher-skilled American workers and c) lower wages for lower-skilled American workers. Krugman found the wage effects were fairly small, mostly because America still traded relatively little with low-wage countries.

Today, though, trade with developing nations is rising – and, in Bivens’ calculations, so is the toll exacted on lower-wage workers from trade. Trade, he said in an interview, has had “a pretty powerful effect” on the distribution of income in America.

Bivens did a similar analysis several years ago. Krugman addressed it in a 2008 paper, where he seemed to say the data on trading patterns were too complicated to draw detailed conclusions about wage impacts. Essentially, he said the United States wasn’t just importing what you might call “low-skill things” from China. It was also importing iPods. But those iPods weren’t entirely made in China, just partly, and it was very difficult to separate out the high-skill and low-skill parts.

In an interview, Bivens acknowledged the uncertainty that global supply chains create for his analysis. But he said he’s making a big assumption: that imports from other developed countries are now more complicated, too, and likely contain a lot of low-skill stuff from developing countries. In other words, he’s assuming it all cancels out and that the basic story, about imports from developing countries pushing down wages among low-skilled American workers, holds.

“There’s no way that we have not seen a very large increase in value add being imported from China,” he said, “and if you believe that, you believe it’s [lowering] wages” for low-skilled Americans.

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