“What are the Domestic Consequences of Unfair Trade Practices?

July 31, 2013

By Oren M. Levin-Waldman, Ph.D.

Middle class wages have been stagnant for more than thirty years. Stagnant wages are due to many factors, including the decline in unionism, the decline in the value of the minimum wage, rising healthcare costs, and the need to cut non-fixed cost, i.e. labor, because of global competition.

Although global competition affects domestic U.S. labor markets, these labor markets are also adversely affected by unfair trade practices, which only force U.S. companies to  to reduce costs further in an attempt (and sometimes vain) to compete against foreign goods. Consider if China undervalues its currency, U.S. goods are overpriced in China. At the same time, they are getting a huge price advantage for goods they sell here.

Comparative advantage in a global economy would nonetheless dictate that if U.S. companies cannot produce goods as cheaply here, then they shouldn’t and that perhaps American labor ought to go where the jobs are. And yet as a result of these practices, American companies have felt compelled to disinvest in the U.S. and set up shop where labor costs are a fraction of what they are here in order to be competitive.

Labor economists typically explain wage stagnation and the consequent growth in wage inequality in terms of a mismatch between relative demand and supply of skilled labor. Competitive market theory places the blame on structural changes that have resulted in a mismatch between good paying jobs and the skills of available workers. The main culprit is technological change biased towards those with higher levels of education and skills. According to this school of thought, the labor market is divided into a primary market where high premiums are placed on skilled workers, and a secondary market where unskilled workers are trapped in the lowest-wage service sector of the economy. The growth in wage inequality between the primary and secondary labor markets is a function of increasing skills differentials between the two markets. But it would be foolish to think that these trends weren’t exacerbated by trade imbalances. A contributing factor is often a nation’s politics, which include how it intends to deal with the unfair trade practices of others. Unfair practices and our inadequate response to them have had profound consequences for U.S. labor markets, particularly those labor markets that have sustained the middle class.

Those at the top of the distribution have seen their incomes increase while those at the bottom of the distribution have seen their incomes decrease in real terms. This has effectively narrowed the middle class, whose wages have stagnated in aggregate terms since the 1970s. In 1976 the average household income of the bottom 20 percent was $5,591 and the average household income of the top 20 percent was $33,500. In 2008, the average household income of the bottom 20 percent was $23,854 and the average household income of the top 20 percent was $194,375. Between 1976 and 2008 the ratio between the top and the bottom increased by 35 percent from 6.0 in 1976 to 8.1 in 2008. Most of the growth, however, was at the top, while most of the stagnation was below the 90th percentile.

During the same period the ratio between the top 90th  percentile and the bottom 10th percentile increased by 28 percent while the ratio between the 50th and 10th percentiles increased by 11.5 percent and the ratio between the 90th and 50th percentiles increased by 15.8 percent. This means that wages at the bottom were stagnating, thereby resulting in greater income inequality. But aside from the obvious growth in income inequality because the rate of increase among the bottom was much lower than the rate of increase among the top, wage stagnation meant that the economy was not going to grow as much because stagnant wages would decrease effective demand for goods and services. Or the growth that occurred, primarily during the late1980s and again during the late 1990s until the Great Recession in 2007, was primarily a function of people demanding goods and services on the basis of easy credit.

In other words, the consumer spending fueled by credit card debt was effectively able to mask the effects of wage stagnation, and ultimately the effects of trade imbalances. With the financial crisis resulting in the Great Recession, the credit card debt that fueled spending has largely disappeared. Now the effects are there for all to see. These consequences are not only experienced by domestic U.S. labor markets, but the broader American civil society.

Without a broad middle class, public policies tend to be skewed to the top of the distribution. Public officials tend to pay more attention to wealthier households while all but ignoring poorer households, thereby depriving them of voice. The cornerstone of American democracy is the local community with members of each community actively participating in the affairs of their communities. But those at the bottom of the income distribution tend to be much less civically engaged than those at the top of the distribution. Data from the Current Population Survey’s Civic Participation file for 2008 show that those in households with earnings below $30,000 were considerably less likely to be civically engaged in the affairs of their communities than those in households with incomes in excess of $100,000. Although civic engagement did improve dramatically from households below $30,000 to households earning between $30,000 and $60,000, the number earning in that range has been declining as it is reflective of the shrinking middle class.

In short, then, unfair trade practices have only exacerbated a structural change in the nation’s economic base that has resulted in middle class wage stagnation, rising income inequality, disparities in access between the rich and the poor, and declining civic participation. Unfair trade practices have not only adversely affected the structure of American labor markets, but by doing so they appear to have had a corrosive effect on American democracy. Market purists will no doubt argue that these trends are merely the effects of an efficient economy functioning in the larger global marketplace. To erect walls of protectionism will only make things worse. But the failure of government to respond is tantamount to government being complicit in these trends. There are do doubt many things that public policy can do to shore up the middle class. Enabling workers to demand more goods and services in the aggregate through some type of wage policy that affords them greater purchasing power would help considerably. At a minimum, however, the U.S. should force countries, like China, to engage in fair trade practices.

Oren M. Levin-Waldman, Ph.D. Professor, Graduate School for Public Affairs and Administration Metropolitan College of New York 431 Canal Street New York, NY 10013 (212) 343-1234 x2220 olevin

Just published Wage Policy, Income Distribution, and Democratic Theory:


July 31, 2013

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