Technology Not Globalisation Drives Down Wages

So says Columbia professor of economics Jagdish Bhagwati. And when it comes to understand the economis of international trade and finance you’d be hard pressed to find somebody more qualified than Prof. Bhagwati. And even better he takes a swipe at that sanctimonious boob Lou Dobbs,

Lou Dobbs of CNN, the labour groups’ think-tank Economic Policy Institute and nearly all the Democrats newly elected to Congress believe that globalisation has much to do with the economic distress of the working and middle classes. Therefore they have coherence on their side when they want to lean on the door — even to close it — on trade with poor countries and occasionally on unskilled immigration from them.

Proponents of globalisation, however, find themselves in a politically implausible position: they typically skirt around and hence accept this “distributional” critique of globalisation — yet nonetheless propose that those adversely affected should accept globalisation but be aided so as to cope with their affliction in other ways.

[snip]

First, all empirical studies, including those done by some of today’s top trade economists (such as Paul Krugman of Princeton and Robert Feenstra of the University of California, Davis), show that the adverse effect of trade on wages is not substantial. My own empirical investigation concludes that the effect of trade with poor countries may even have been to moderate the downward pressure on wages that rapid unskilled labour-saving technical change would have caused.

Second, the same goes for the econometric studies by the best labour economists regarding the effects of the influx of unskilled illegal immigrants into the US. The latest study by George Borjas and Larry Katz of Harvard also shows a virtually negligible impact on workers’ wages, once necessary adjustments are made.

In short, the great fear that many of these anti-free traders use to gain support for their policies have little to no empirical support. Note that this cuts across political/partisan lines in that the EPI and many of the incoming Democrats are opposed to things like off-shoring/outsourcing and yet many on the right are opposed to allowing unskilled immigration (legal or illegal) into the the U.S.

But the article doesn’t stop there, it keeps hammering away at some of the typical arguments. Such as the claim that globalization and free trade are weakening unions and that is why wages have declined.

Can it be that globalisation has reduced the bargaining ability of workers and thus put a downward pressure on wages? I strongly doubt this. First, the argument is not relevant when employers and workers are in a competitive market and workers must be paid the going wage.

As it happens, fewer than 10 per cent of workers in the private sector in the US are now unionised.

Second, if it is claimed that acceleration in globalisation has decimated union membership, that is dubious. The decline in unionisation has been going on for longer than the past two decades of globalisation, shows no dramatic acceleration in the past two decades and is to be attributed to the union-unfriendly provisions of the half-century-old Taft-Hartley provisions that crippled the ability to strike.

So why have wages declined on average? Well Bhagwati points to technology,

The culprit is not globalisation but labour-saving technical change that puts pressure on the wages of the unskilled. Technical change prompts continual economies in the use of unskilled labour. Much empirical argumentation and evidence exists on this. But a telling example comes from Charlie Chaplin’s film, Modern Times. Recall how he goes berserk on the assembly line, the mechanical motion of turning the spanner finally getting to him. There are assembly lines today, but they are without workers; they are managed by computers in a glass cage above, with highly skilled engineers in charge.

Sound bad, but there is more,

Such technical change is quickly spreading through the system. This naturally creates, in the short-run, pressure on the jobs and wages of the workers being displaced.

But we know from past experience that we usually get a J-curve where, as increased productivity takes hold, it will (except in cases where macroeconomic difficulties occur and are not addressed by macroeconomic remedies) lead to higher wages.

Historically this has happened before. When mechanization first appeared one of the first things it did was displace many American farmers. Basically capital displaced labor.

Now there is a potential problem here. If technological advancement is increasing then it is possible that the “J-curve” the Bhagwati mentioned becomes a sequence of J-curves where the workers are stuck on the downward portion and never really get to the upward sloping portion. But the problem is technology and the speed of its advancement not globalization, immigration of unskilled workers, or the other stuff that many like the wring their hands about.

Via Mark Thoma.

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Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Don McArthur says:

    And not only does technology drive down the wages of the worker bees, those crafty boffins have engineered it such that it drives UP the rewards for upper management. Truly we are blessed to live in such times!

    (How come so many of these free-market buccaneers are tenured profs?)

  2. Steve Verdon says:

    Yes Don, people like computer specialists are seeing their wages go down, down, down. Why they will soon make up the common foot soldier in the reserve army of the unemployed.

  3. Don McArthur says:

    ‘…they will soon make up the common foot soldier…’

    Steve, you might have stumbled upon the most devious and twisted conspiracy in world history – globalization designed to increase the IQ of the All Volunteer Army, at little or no cost!

    Crikey, what genius. This has Rumsfeld’s DNA all over it.

  4. NoZe says:

    The solution is clear. We need to roll back all of these new-fangled technological advances of recent decades in order to protect the American worker!

  5. Steve Verdon says:

    I can see I need to work on my sarcasm, and also I clearly assumed too much understanding on Don’s part of the Marxist theories he seems to espouse. My bad.