How Large Is the Depressing Effect of Increased Trade on the Wages of Blue-Collar Americans?
Paul Krugman says that he does not know.
From his first draft for the spring 2008 BPEA:
Paul Krugman (2008), "Trade and Wages, Reconsidered": [T]he change illustrated in Figure 15 seems to resemble the actual change in North-South trade since the early 1990s.... The share of advanced country GDP spent on imports from developing countries rises sharply, because components are shipped to developing countries for assembly, and the assembled goods are then exported back tothe first world.... [T]he actual effects on workers in the advanced economy would reflect a sort of Stolper-Samuelson effect: the real wages of... unskilled workers would fall.... outsourc[ing] labor-intensive industry segments to the third world would depress the demand for less-skilled workers, a shock not captured by data that lumped labor-intensive assembly operations together with skill-intensive component manufacture [in the same industry]....
[N]ote, however, that this example does suggest that the type of calculation performed by Bivens (2007), in which the distributional effects of trade are assumed to be essentially proportional to the import share... may exaggerate the distributional effects of recent trade growth. In this example, the trade share grows fourfold, but the distributional effects do not grow in proportion.... [M]uch of the content of the new imports from developing countries is actually skill-intensive production from advanced countries.... If the United States imports computers from China, and China assembles computers largely from components made in Japan, only the assembly share of the sales price reflects labor-intensive imports....
Nonetheless... the rapid rise in manufactures imports from developing countries probably is, indeed, a force for growing inequality... factor content calculations suggesting otherwise are missing the essence of what is happening....
What really comes through from the analysis here, however, is the extent to which the changing nature of world trade has outpaced our ability to engage in secure quantitative analysis--even though this paper sets to one side the growth in service outsourcing.... Plain old trade in physical goods has become remarkably exotic. In particular, the surge in developing-country exports of manufactures involves a peculiar concentration on apparently sophisticated products, which seems at first to put worries about distributional effects to rest. Yet there is good reason to believe that the apparent sophistication of developing country exports is, in reality, largely a statistical illusion, created by the phenomenon of vertical specialization....
How can we quantify the actual effect of rising trade on wages? The answer, given the current state of the data, is that we can’t... [I]t’s likely that the rapid growth of trade since the early 1990s has had significant distributional effects. To put numbers to these effects, however, we need a much better understanding of the increasingly fine-grained nature of international specialization and trade.
Source: Paul Krugman.
Source: Paul Krugman.######
