Saturday, April 19, 2008

Trade and Wage Inequality

The Economist critiques Krugman's views on trade's impact on wages (H/T: Greg Mankiw). The highlights:

  • From Krugman: "“It's no longer safe to assert that trade's impact on the income distribution in wealthy countries is fairly minor,” he wrote on the VoxEU blog last year. “There's a good case that it is big and getting bigger.” He offered two reasons why. First, more of America's trade is with poor countries, such as China. Second, the growing fragmentation of production means more tasks have become tradable, increasing the universe of labour-intensive jobs in which Chinese workers compete with Americans."
  • Responds the Economist: "[These two points] proved hard [to prove]. Certainly, America's trade patterns have changed. Poor countries' share of commerce in manufactured goods has doubled. In contrast to the 1980s, the average wage of America's top-ten trading partners has fallen since 1990. All of which, you might think, would increase the impact of trade on wage inequality. But by how much?"
  • "“How can we quantify the actual effect of rising trade on wages?” Mr Krugman asked at the end of his paper. “The answer, given the current state of the data, is that we can't.”"
Krugman himself acknowledges the difficulty in quantifying the effect is of trade. Color me skeptical as I'm still not convinced that inequality in itself is undesirable provided that there is income mobility. As small manufacturers and designers know, it's increasingly easier through firms like my own to avoid making substantial capital investments and outsourcing production. Real wealth is therefore achieved by great ideas - those who innovate and can create new products that people want. Further, technology means that for every dollar people earn, they can afford a lot more today than they could only a decade or two ago.

No comments: