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Paul Krugman on trade and wages
Here is his new paper, but start first with this Mark Thoma summary, and two graphs from Brad DeLong. The main point is that some U.S. imports may be more labor-intensive and less skill-intensive than previous classifications had indicated. Here is one key paragraph (p.20):
But what are we to make of NAICS 334, Computer and Electronic Products? In U.S. data it ranks as the most skill-intensive of industries, yet it is also an industry in which more than three-quarters of imports come from developing countries, especially China.
If these sectors count as "importing labor," we can find that trade is creating more downward pressures on U.S. wages than we had thought.
I don't think Krugman is quite right to claim: "the apparent sophistication of imports from developing countries is in large part a statistical illusion." I would sooner say that China and some other Asian countries are specializing in new (and sophisticated) techniques of cooperation, made possible by long-term historical investments in human capital and social norms. At least in certain sectors, they are combining complementary labor inputs, with complementary capital inputs, more effectively than before; it's hard to explain that change in the impoverished vocabulary of the substitution-obsessed Heckscher-Ohlin model. The skill is in the combination not in the people themselves. "Capital-intensive" vs. "labor-intensive" or "skilled" vs. "unskilled" are not simple either/or questions.
So I think Krugman is confused on the semantics, but in the final analysis this perspective supports and perhaps even strengthens his point. If the paper looked at wages and employment in northern Mexico, following the move of China onto the world stage, the revisionist conclusions would fall more easily into place. On one hand Chinese competition hit Mexico (a home of unskilled but relatively cooperative labor) very hard; on the other hand northern Mexico responded successfully by moving up the value chain rather than by folding and losing. Both developments suggest that the Chinese competition is not just a simple example of skill-intensive labor.
You might say: "Chinese competition with northern Mexican textiles and plastics isn't at all like Chinese competition in the hi-tech sector." I would sooner say: "The Chinese are applying common production techniques across the board." Of course the phenomenal Chinese levels of both personal savings and labor migration to urban areas also support the overall interpretation of complementarity.
Addendum: Here is a good paper on the changing nature of Chinese exports.
Posted by Tyler Cowen on March 2, 2008 at 07:43 AM in Economics | Permalink
Comments
It amazes me that economists are just now discovering what factory workers knew about wages a decade ago. So who is really smart?
But give some credit to PK, at least he is not delusional like some economists we know.
Posted by: save_the_rustbelt at Mar 2, 2008 8:55:51 AM
I think what's missing here from an analysis of electronics manufacturing is the wide range of skills and abilities needed in the manufacturing process.
You may be seeing a lot of assembly work happening in China, but I doubt you're getting much of the component manufacturing happening there.
For example, the 80 gigabytes of memory chips that go into the Chinese manufactured iPod are probably being made in South Korea. The display is probably made in Singapore. But the final assembly is being done in China. Assembly is relatively easy (small, nimble hands work). Chip manufacturing is hard (ultra-clean rooms and poisonous chemicals that could kill all of your workers). But the stamp on the back of the iPod says "Made in China" since almost every other component in the iPod is made there and the final assembly is done there.
Posted by: Xmas at Mar 2, 2008 10:52:24 AM
The point that Xmas makes in important. Today, manufacturing is spread all over the planet. Here's just one example of how distributed manufacturing is these days. This is typical.
I live in the US and design integrated circuits (chips) for a company that manufactures industrial control equipment. The last chip I designed is being fabricated by another US company at their facility in France. The finished wafers are then shipped to their US facility for testing. The tested wafers are shipped to Korea where a Korean packaging company slices up the wafer and the previously identified good parts are molded inside plastic packages. The country of origin, Korea, is stamped on the part. Is it really a Korean part? The law says it is.
The packaged chips are then sent back to the US to be tested again. The tested and packaged chips are then shipped to Bangkok to be placed on circuit boards by yet another subcontractor.
The blank circuit board was designed by my company in the US. The actual blank board was made in the Philippines. The other components on the board come from all over the world although most of the chips are from american companies. The assembled boards are also tested in Bangkok but on a tester that was designed and built by my company in the US. The assembled and tested board shows Thailand as the country of origin.
The boards are variously sent to Singapore, Germany, China, the UK, or one of several factories in the US for inclusion in the final assembly of various products. The final products are then sent to customers all over the world.
The only labor intensive part of the above process steps is the final assembly. The rest of the steps are highly automated and the labor content is relatively small. However, the skill level of the labor varies greatly. The highest skill level is the design and chip fabrication in the US and France. The next highest labor skill level is final assembly of the end product in the US, etc. The chip packaging (Korea) and board assembly (Bangkok) highly automated and don't use a lot of labor but the labor they do use is relatively low skilled.
Twenty five years ago we bought all of our chips and other components from mostly US companies. All of our production was in a single factory in the US. About 75% of our sales were to North America and 25% to the rest of the world.
Today our sales are about seven times greater than 25 years ago. We have about the same number of production workers in the US as we did then. We have about twice as many engineers and administrative people in the US as we did 25 years ago. Today about 40% of our sales are to the US and 60% to the rest of the world.
Saying a particular widget is manufactured in a particular country is not a very useful metric. We go for the lowest cost and highest quality we can get at each step in the process. With low cost transportation, that could be anywhere in the world. There are some "ground-up" high technology products coming out of low labor cost countries but most of what you see coming out of the low cost countries is really assembly of things from components and designs that come from high cost countries.
This is changing and we will see more and more capabilities in these low labor countries. However, as labor skills improve, productivity goes up. With increasing productivity you see higher wages. We are already seeing this in places like India.
The labor cost advantage of software engineers in India is about half of what it was five years ago. As they gained experience, the Indian software engineers got better. As their skills improved, so did their productivity. As they became more productive they started to demand, and get, higher wages. Expect to see this happen more in the future.
Posted by: DWB at Mar 2, 2008 12:34:58 PM
DWB is completely correct. Even outsourced software (which isn't all its cracked up to be) is never completely "outsourced".
I think all this just goes to show how silly economic nationalism is. Why do we create statistics which are organized by country? Who cares who if a product is made on one side or the other of some line drawn on a map? This sort of thing is almost totally irrelevant to the IT industry (as I can't speak for others). I'd say the biggest problem I have with working with people from other countries is the time zone difference.
Might one thing missing be that most people don't like blue-collar industrial jobs? It seems like many people would be willing to take white-collar employment and lower salary than a factory or construction job. This would show up on labor statistics as lower wages, but overall utility would be higher.
Posted by: Grant at Mar 2, 2008 2:00:55 PM
Grant:
I think all this just goes to show how silly economic nationalism is. Why do we create statistics which are organized by country? Who cares who if a product is made on one side or the other of some line drawn on a map?
I don't think people care about "Americans losing jobs due to trade," so as a whole they don't care if the stuff they buy is made on either side of that line, but what they ARE worried about is that line going through their house. They don't want to be one of those Americans losing a job.
The point of creating statistics based on borders is because people live within those borders, so, say, if unemployment is relatively high in a certain city, you have a higher risk of being unemployed if you live there.
Let me put it another way: if you're living in Ethiopia, does it make sense to say "living standards are high across the entire world, so why should we care what living standards are in Ethiopia?"
Posted by: brian at Mar 2, 2008 3:11:02 PM
brian, you're right on borders of course, but I don't think that line of reasoning works with trade. Trade necessarily effects two or more parties, so judging the results of free trade by looking at a subset of the population of one party seems silly to me. To the extent that two areas have free trade, their economies are integrated and any economic borders are arbitrary. Drawing arbitrary lines around segments of the population probably yields statistics that interest economists, but it seems to me that sort of thing is often used as fuel for ill-conceived political propaganda.
However, if much of the anti-trade propaganda is telling of anything, a good number of people do care which side of the line goods are made. I've never seen anyone mention how trade with China has lifted so many Chinese out of poverty; instead the media focuses on the "destruction" of American jobs.
Posted by: Grant at Mar 2, 2008 5:13:55 PM
the same people complaing about inequality on the Staes are complaining about poor people in the third world getting a bigger slice of a bigger cake.So, inequality amongs american is bad. inequality between american and etiopians ? who cares?. at least not people like Krugman or some commentors here.Or social justice end in the edge of the sea ?.Or in the Rio Grande?
By the way since Bush I unemployment in the USA have been 6 % or lesser .That is full employment and you still criying foul?
Good point, Grant
Posted by: karl at Mar 2, 2008 6:08:36 PM
Who's complaining about poor people in the third world getting a bigger slice of a bigger cake? Is that a typo? I've never heard of such a complaint from anyone. If it's not a typo, quotes, paraphrases, even vague attributions would be welcome. I have heard many people worrying about increased inequality in China, by the way. They're worried it might destabilize the country.
Posted by: MostlyAPragmatist at Mar 2, 2008 7:11:37 PM
The labor cost advantage of software engineers in India is about half of what it was five years ago. As they gained experience, the Indian software engineers got better. As their skills improved, so did their productivity. As they became more productive they started to demand, and get, higher wages. Expect to see this happen more in the future.
Uh, no. That is NOT what happened. The truth is, there was so much demand for cheap Indian engineers, that the cost went up. The rise in their wages had nothing to do with productivity but rather demand. This situation has everything to do with the MNC's chasing the low wage engineering workforce.
Posted by: dissent at Mar 2, 2008 9:22:53 PM
think all this just goes to show how silly economic nationalism is. Why do we create statistics which are organized by country? Who cares who if a product is made on one side or the other of some line drawn on a map?
Oooh, where to start. This is a good summary statement of why "free trade" advocates often don't seem to be on the same planet as most folks.
The latest BusinessWeek has an article on MNC's: it turns out they eliminated TWO MILLION American jobs between 2000 and 2005 - probably that number is signif higher now. They hired more than 2 million overseas.
Can you grok why an American blue OR white collar worker might feel a tad unsettled by globalization? The fact is, globalization is happening at the expense of American workers,
who have been financing consumption with credit.
Posted by: dissent at Mar 2, 2008 9:32:16 PM
MostlyAPragmatist, I don't think many people specifically complain about that. But many (such as dissent) do complain about Americans "loosing" jobs to overseas workers and those people often suggest different trade policies because of that. An implicit assumption in this stance is that American jobs are more valuable than jobs in other (likely much poorer) countries.
Posted by: Grant at Mar 2, 2008 10:15:29 PM
But many do complain about Americans "loosing" jobs to overseas workers and those people often suggest different trade policies because of that. An implicit assumption in this stance is that American jobs are more valuable than jobs in other (likely much poorer) countries.
I will make it very simple for you:
American jobs are MUCH more valuable for Americans that hold them.
American jobs are MUCH more valuable to other Americans such as myself.
You may need a brain to understand this.
It is jobs my American neigbours are holding that allow local, state and fed goverments to extract taxes.
And taxes pay for infrastructure, hospitals, defense, welfare, etc.
Taxes paid or heavily subsidised your education. If it was a good deal for taxpayer is very questionable.
Without those American jobs taxes will not be paid.
And without taxes the USA will become another Mexico.
As far as jobs in other countries, I have nothing against them. Just not at my expense and not at expense of my neigbours and all other Americans.
You, of course, are welcome to give your job to a poor country of your choice.
Posted by: mik at Mar 3, 2008 1:12:57 AM
The labor cost advantage of software engineers in India is about half of what it was five years ago. As they gained experience, the Indian software engineers got better. As their skills improved, so did their productivity. As they became more productive they started to demand, and get, higher wages.
Let me see.
I have one job opening that pays the same as the last year.
There are 20 applicants who could do the work more or less competently, why would I pay more for that work now than in the past?
Even if the applicants are more productive, there are still 20 of them.
Why would I pay them extra instead of pocketing the extra profit?
In fact I will probably reduce salary to see if I can get the same work done for less money.
If you don't understand such simple facts of life, should you be posting?
India produces humangous number of engineers per year. At some point in 2, 3 or 5 years India will absorb all or most outsourcable software work in the world.
At that point software engineering wages in India will start dropping rather dramatically till they will equal wages of occupations requiring similar IQ and education.
Posted by: mik at Mar 3, 2008 1:40:08 AM
"It amazes me that economists are just now discovering what factory workers knew about wages a decade ago. So who is really smart?"
Obviously, the problem is that they knew it 20 and 30 years ago too, when they were wrong. Trade had little effect on wages for low-skilled workers as a whole, though of course, if you were a union auto-worker stuff was hitting the fan. But the fall of Detroit had much more to do with machines than the Japanese car companies that claimed so much of the attention.
What I don't really understand is why we care that much of the pressure on low-skilled labor in the U.S. is due to trade or technological changes? The wage gains of lower skilled workers have been sluggish or stagnant depending on the data one looks at. Yet, both trade and technological gains will still be net wealth creators. Regardless of which is the culprit, it is obvious that the whole nation is not sharing the nations growth.
So, the pertinent questions seem to be, do we care? And if so, what should we do about it? I can think of two reasons why the answer to the first would be yes. 1) An appeal to fairness, maybe most Americans just feel that all Americans should share in the nations growth regardless of their talents. 2) Political Economy - low skilled and medium skilled workers vote, if growth isn't shared expect to get major changes in the ballot box, and potentially bad major changes.
If you say no to the should we care question, then this whole debate is meaningless. And if you say yes, than regardless of whether your reason is 1 or 2. You will still want to have the same policy prescriptions that is, free trade and free markets altered by changes in the tax/benefit structure of government--that is less taxes, more goodies for the groups that are doing relatively less well and more taxes less goodies for the group doing well.
Posted by: Charlie at Mar 3, 2008 3:11:22 AM
"It amazes me that economists are just now discovering what factory workers knew about wages a decade ago. So who is really smart?"
Obviously, the problem is that they knew it 20 and 30 years ago too, when they were wrong. Trade had little effect on wages for low-skilled workers as a whole, though of course, if you were a union auto-worker stuff was hitting the fan. But the fall of Detroit had much more to do with machines than the Japanese car companies that claimed so much of the attention.
What I don't really understand is why we care that much of the pressure on low-skilled labor in the U.S. is due to trade or technological changes? The wage gains of lower skilled workers have been sluggish or stagnant depending on the data one looks at. Yet, both trade and technological gains will still be net wealth creators. Regardless of which is the culprit, it is obvious that the whole nation is not sharing the nations growth.
So, the pertinent questions seem to be, do we care? And if so, what should we do about it? I can think of two reasons why the answer to the first would be yes. 1) An appeal to fairness, maybe most Americans just feel that all Americans should share in the nations growth regardless of their talents. 2) Political Economy - low skilled and medium skilled workers vote, if growth isn't shared expect to get major changes in the ballot box, and potentially bad major changes.
If you say no to the should we care question, then this whole debate is meaningless. And if you say yes, than regardless of whether your reason is 1 or 2. You will still want to have the same policy prescriptions that is, free trade and free markets altered by changes in the tax/benefit structure of government--that is less taxes, more goodies for the groups that are doing relatively less well and more taxes less goodies for the group doing well.
Posted by: Charlie at Mar 3, 2008 3:11:42 AM
mik,
I know American jobs matter to Americans. However, the vast majority of Americans benefit from free trade, and America gets higher tax revenues because of it.
But try looking at it this way: What do we do if one state looses workers in a specific sector to another state? Do we erect trade barriers? Is it a "problem" if Silicon Valley is loosing IT entrepreneurs to Texas? Most people (not being entrepreneurs in Silicon Valley) wouldn't think so. My point is that it is silly to value the jobs of one group of people you'll never meet over another group half a world away. For liberals, I think this is also often ethically inconsistent.
Posted by: Grant at Mar 3, 2008 3:24:26 AM
What do we do if one state looses workers in a specific sector to another state? Do we erect trade barriers? Is it a "problem" if Silicon Valley is loosing IT entrepreneurs to Texas? Most people (not being entrepreneurs in Silicon Valley) wouldn't think so. My point is that it is silly to value the jobs of one group of people you'll never meet over another group half a world away.
If you don't understand or do not appreciate differences between California and Texas and USA and India, you are living on entirely different planet.
And yes, SilliValley is unhappy when jobs are moving to Texas. But in this case there is a hope that some moneys from taxes from those newly Texas jobs will pay for SV highways and universities via US gov.
If you don't understand that, you really should not be posting.
And yes, I value jobs Texans have infinitely more than jobs your beloved third-worlders have. Even though I have never met those Texans.
They are my countrymen, some of their taxes might help me in some ways just as my taxes might help them.
I think of them as members of my extended family of sorts.
If you don't think there is a difference, why not send job of your cousin to Africa?
After all a poor African needs that job much more than your relatively reach cousin.
Posted by: mik at Mar 3, 2008 3:55:23 AM
"If you don't think there is a difference, why not send job of your cousin to Africa?"
Suppose there was some way I could actually do that, go to my cousin's boss and have him replace my cuz with an African. What would my cousin do? He would get another job.
Most any numbers you've put on jobs going over sees are meaningless, because they ignore that there are other jobs in the US thoses people take. The unemployment rate has hovered around 5%, so most people are finding new jobs. Some of them may have to take lower paying jobs, so then the question becomes what should we do about that. When someone goes from $30 per hour to $20 and still makes more than the average American, should public policy dollars be sent his way.
"They are my countrymen, some of their taxes might help me in some ways just as my taxes might help them."
If you are trying to raise tax revenue, then you should be an adament free trader. If an employer lowers cost by moving some tasks over sees, that will show up as corporate profits taxed at a pretty high rate. The worker fired will have to find a new job and possibly accept a lower wage. If he is high skilled then it is likely his wage decline not be very high as free trade increases the demand for high skilled labor. If he is low skilled, his wage decline may be more, but in percentage terms he won't be paying as much in taxes so the loss in tax revenue will not be as much as the gain.
So the values you give do not seem to support your political opinions. Interestingly, I would guess that you will change your values to support your political opinions rather than your political opinions to support your values.
Would it be caddy to add, "If you don't understand that, you really should not be posting"?
Posted by: Charlie at Mar 3, 2008 6:28:41 PM
Posted by: 燈光音響 at May 23, 2008 11:32:01 PM
