Who Are "We"?
Trade and Wages
Trade patterns are evolving
Larger share with less developed countries (now 40% with Mexico included)
Trading partners: Canada, Mexico, Japan, Germany, UK...)
Trade affects incomes - earnings that accrue to owners of factors of production
The 90's - incomes in the US increased
Top 10% increased incomes; bottom 10% decreased
The disparity between high school and college graduates has increased from 1970's to 1990's
The ratio of college to high school income was 1.5 in 1980 If a high schooler made $50k, college made $75k
By 2000 the ratio was about 1.8 - If a high schooler make $50k, college made $90k
Why?
Trade
Increased demand for goods that require skilled labor
Which is more consequential?
Some problems with income statistics
Income statistics look different if you count benefits or spending
Underground economy
Is Trade To Blame?
Underdeveloped countries now comprise a larger share of trade with the US (70's a sixth, 90's a third)
Competition of US unskilled workers with the world's unskilled workers (min wage vs. 12 cents/hr)
Resources shift with free trade:
From areas where the country does NOT have a comparative advantage (unskilled labor areas of production)
To areas of comparative advantage (like skilled labor areas of production in the US)
Overall, both skilled and unskilled workers in the US have benefitted from trade - it's the proportions that are at issue.
International Comparison of Wages
Wage comparisons have limitations
They only apply to manufacturing
They do not account for price differences between countries (this means they don't indicate PPP)
Wages for unskilled workers in some other countries have risen RELATIVE TO those in the US
There are persistent wage gaps
Wages for manufacturing in some countries such as Germany and Japan are greater than in the US
Resource Prices
Determined in Resource Markets
Supply - opportunity costs of resource suppliers
Demand - Derived from the demand for the product it is used to produce
Marginal Revenue Product = Marginal Revenue x Marginal Product
Marginal product
Law of Diminishing Returns
Marginal Revenue
An Example:
E13MRPEg
Firms will hire up to the point where MRP = MRC
MRP is a firm's demand for labor
What happens to the quantity of labor a firm will want to hire if the wage rate changes?
What happens if the product price changes?
What happens if worker productivity changes?
The Resource Markets - price determination
Example
Diagram
E13ResSDEg
The Simple Relationship between Wages and Trade
If trade is permitted, production patterns change
The area where the country has the comparative advantage
Export opportunities exist
Resources in this industry experience an increase in demand - prices rise
In the area where the country does NOT have a comparative advantage
Imported goods flow in
The domestic price of the good decreases
MRP decreases (i.e., the demand for the resource decreases)
Wages fall in this area of production
Stolper-Samuelson theorem Revisited
Free trade raises the real earnings to the owners of the country's relatively abundant factor
Free trade lowers the real earnings to the owners of the country's relatively scarce factor
It Is Important to Remember That
With imports up, wages drop
With exports up, wages rise
The Net Effect?
On wages overall
Among unskilled workers
Among skilled workers
On consumers
Prices
Quality
Variety
Recap: When two countries have different factor proportions of skilled and unskilled workers and free trade is permitted
First, the relative wages of skilled workers in both countries will converge as will the wages of unskilled workers in both countries
Second, in the country with relatively more unskilled workers
The wages of skilled workers will fall
Rising imports of the skilled good will cause the price of that good to fall and with it, the MRP or demand for these workers.
The gap between skilled and unskilled closes - unskilled feel better off
Third, in the country with more skilled workers:
The wages of unskilled workers will fall
Rising imports of the unskilled good will cause its price to fall and with it the demand (MRP) of unskilled labor.
The Simple Relationship between Earnings on Capital and Trade
When goods are capital intensive vs. labor intensive
The capital rich country will experience a decrease in the MRP of the labor intensive good
The capital rich country will experience an increase in the price of the capital intensive good.
MRP of capital rises, demand for capital up, price of capital up
The labor rich country will experience a decrease in the demand for capital, lower MRP of capital and a decrease in the price of capital
Mobility of Labor or Capital
When Trade in Goods Is Restricted or the Goods Cannot Trade
But capital can move - foreign direct investment
The capital rich country exports capital instead of the capital intensive good
And labor can move - immigration, legal and illegal
When the goods can't move, the labor can - from labor rich to capital rich countries
US immigration is large - 12m 1991-20000 (but only 4% whereas 10% in 1900)
The composition of the immigration has changed
Previously it was from Europe and Canada
Now from Latin America and Asia
Much more illegal immigration now
Economic Development and Trade
The Distribution of Population, GDP and Trade
North America and Europe: 13% of pop, about 2/3 of trade
Asia: 50% of pop, 1/4 of trade
Africa: almost 20% of pop, 2% of trade
Latin America and Middle East: small and smaller
Less developed countries - more than 50% of world's fuels and mined products - resource rich
Less developed countries - lower labor costs?
Some yes, some no
Does cheap labor mean low labor costs?
The UN Trade and Development Report
E13LaborCosts
Explanations?
Does Trade or Protection Promote Development?
Protecting infant industries
Integrating the economy into the world economy - specialization and efficiency
Openness promotes growth
...And health!
How to Obtain Capital
Capital Is Consumption Forgone
Save - Romania and Albania
Borrow it
Volatility
Asian crisis of '97-'98
Foreign Direct Investment
Foreign owners earn the returns on these investments!!!
And the returns may not be reinvested in the country!!!
Got a better idea?
