Guess Who Said It
October 30, 2010 Economists

“Many advocates of free trade claim that higher productivity growth in the United States will offset pressure on wages caused by the global sweatshop economy, but the appealing theory falls victim to an unpleasant fact. Productivity has been going up, without resulting wage gains for American workers. Between 1977 and 1992, the average productivity of American workers increased by more than 30 percent, while the average real wage fell by 13 percent. The logic is inescapable. No matter how much productivity increases, wages will fall if there is an abundance of workers competing for a scarcity of jobs — an abundance of the sort created by the globalization of the labor pool for US-based corporations.” (Lind 1994: )

What is so remarkable about this passage? It is certainly a very abrupt, confident rejection of the case for free trade; it is also noticeable that the passage could almost have come out of a campaign speech by Patrick Buchanan. But the really striking thing, if you are an economist with any familiarity with this area, is that when Lind writes about how the beautiful theory of free trade is refuted by an unpleasant fact, the fact he cites is completely untrue.

More specifically: the 30 percent productivity increase he cites was achieved only in the manufacturing sector; in the business sector as a whole the increase was only 13 percent. The 13 percent decline in real wages was true only for production workers, and ignores the increase in their benefits: total compensation of the average worker actually rose 2 percent. And even that remaining gap turns out to be a statistical quirk: it is entirely due to a difference in the price indexes used to deflate business output and consumption (probably reflecting overstatement of both productivity growth and consumer price inflation). When the same price index is used, the increases in productivity and compensation have been almost exactly equal. But then how could it be otherwise? Any difference in the rates of growth of productivity and compensation would necessarily show up as a fall in labor’s share of national income — and as everyone who is even slightly familiar with the numbers knows, the share of compensation in U.S. national income has been quite stable in recent decades, and actually rose slightly over the period Lind describes.

There’s much wisdom in this piece. There might be a few nits to pick with it. Where have you gone Joe DiMaggio?

"2" Comments
  1. Sorry, I cheated before guessing. You posted this piece not long ago, and a good student would have remembered it for twenty extra credit points.

    One of the passages that caught my attention was his insight about how the Federal Reserve so often pursues a NAIRU dollar. Now he did not attempt to discuss alternative approaches, because his topic was on how so many people get hung up on Riccardo and free trade. But he did suggest that a NAIRU dollar, as opposed to a dollar tied to a commodity or index of commodity prices, might not be the best way to stabilize the value of the dollar.

    Where HAS Joltin’ Joe gone?

  2. But it is a great piece nevertheless. Ask anyone who Riccardo is, and they are most likely to say he’s the guy who pitched rich Corinthian leather in the Chrysler Cordoba. Regular readers of the WSJ probably understand comparative advantage sufficiently to agree and go on to the next subject. Economics professors surely understand the theory far better than Econ students. But you don’t have to sell me. Maybe he will sell Robert Reich.

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