Globalization and the Income Slowdown

August 22, 2012

By: David Leonhardt
Via: The New York Times – Economix

Derek Thompson of The Atlantic offers a thoughtful response to our list of 14 potential causes of the great American income slowdown:

When I write about income stagnation apart from the Great Recession, I typically rely on a trio of explanations: Globalization, technology, and health care. Competition drives down costs. Shoppers understand this, intuitively. One reason that flat-screen TV prices have fallen so much in the last ten years is that so many electronics companies have gotten efficient at making them. Similarly, competition for jobs in tradable goods and services — manufacturing that could be done in China; retail that’s simpler on Amazon — competes down the price employers pay workers in those industries. It makes many workers borderline-replaceable and nothing borderline-replaceable is expensive. Those forces drove down wages, and employer-side health care costs gnawed at the rest of it.

In my exchanges with economists so far, globalization is certainly among the most commonly cited factors for the income slowdown. American workers today face vastly more competition from foreign workers — especially foreign workers who earn much less money than the typical American — compared with past decades.

Benjamin Friedman — a Harvard professor and the author of the ambitious economic history “The Moral Consequences of Economic Growth” — told me that he would put global competition and technological change at the top of his list of causes, with the education slowdown (which, he noted, interacted with technological change) and cultural norms not far behind. Mr. Friedman pointed to Lucian Bebchuk’s research on soaring executive pay as an example of how much norms had changed.

In his next bucket of importance, Mr. Friedman listed health costs, an innovation plateau, the minimum wage, family structure and immigration. Immigration, he said, largely affects workers at the bottom end of the income spectrum.

Stephen S. Roach, the longtime Morgan Stanley economist and China expert who now teaches at Yale, offered a list with some strong similarities to Mr. Friedman’s. Mr. Roach put global competition, the educational slowdown and the innovation plateau at the top of his list, followed by automation, deregulation, rising health costs, immigration and the falling minimum wage.

He also said that the supply chain explosion — “rapid growth of integrated global production platforms that squeeze labor income at all stages of the production process” — deserved a place on the list. I’d probably argue that the supply chain was a subset of either globalization or automation, but I see why someone else might list it as a separate factor.

Mr. Thompson, in his post, included a chart — of employment by sector — that underscored the importance of globalization:

Employment by industry since 1939

As he notes, only one line defies the business cycle and just keeps going up: education and health care. He writes:

“What do those sectors have in common? They’re all local. You can’t send them to Korea. As Michael Spence has explained, corporations have gotten so good at “creating and managing global supply chains” that large companies no longer grow much in the United States. They expand abroad. As a result, the vast majority (more than 97%, Spence says!) of job creation now happens in so-called nontradable sectors — those that exist outside of the global supply chain — that are often low-profit-margin businesses, like a hospital, or else not even businesses at all, like a school or mayor’s office.”

This chart measures jobs, not incomes. I think it’s possible that parts of other sectors have delivered big average pay gains (most likely, the high-skill jobs) even if overall employment in those sectors hasn’t grown as fast as in education and health care. I also wonder how much technological innovation explains these lines: education and health care are notoriously inefficient sectors. But no matter how you look at the picture, globalization seems to be one of the biggest changes that has accompanied the great American income slowdown.

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