Key to job growth, equality is boosting tradable sector of economy

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By Steven Pearlstein
Sunday, March 13, 2011

Here are four things you often hear asserted about the economy. Guess which ones are wrong:

l The major reason job growth has been so slow is that there wasn't enough fiscal stimulus.

l Off-shoring creates more jobs at home than it kills.

l Industrial policy always fails.

l Globalization is not a major contributor to rising income inequality.

In fact, all four statements are wrong. And now Michael Spence has the proof.

Spence is former dean of the Stanford Graduate School of Business, former dean of Harvard's faculty of arts and sciences and a world-class economist with a John Bates Clark medal and Nobel prize. And last week, Spence was in Washington to make a presentation at a high-powered conference organized by the International Monetary Fund. The moment I heard it, I knew he was on to something important.

Spence and Sandile Hlatshwayo, a new colleague of his at New York University's Stern School of Business, took the U.S. economy and, from a statistical standpoint, divided it in two.

In one part were jobs in those companies that operate in a global market, subject to competition from foreign firms and suppliers. Most manufacturing wound up in the tradable bucket, but so did agricultural products, minerals, energy and a healthy chunk of business and financial services, from investment banking to management consulting. Not all these companies export, but they are all subject to import competition.

In the non-tradable bucket went activities such as government, health care, retail, construction, hotels, transportation, wholesaling - things that pretty much have to be done here and sold here.

When they looked at what happened between 1990 and 2008 - a period of rapid globalization - two things stood out.

One was that all the job growth came pretty much in the non-tradable activities, in particular government and health care, while across wide swaths of the tradable manufacturing sector, jobs declined significantly.


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