The great global debate on inequalities

Those who have read the great historical classics of political economy already know that this is not true, as the title of Piketty evokes Capital, the magnum opus of Karl Marx, who prophesied a fall in the rate of profit amid the collapse of the capitalist system and the excesses of a market economy. More generally, discussions of inequality have been at the heart of much of mainstream economics and political science even before Marx, and will undoubtedly continue long after Piketty.

Yet with all of its resonance in public debate and discourse, and the celebrity status that Piketty has achieved, one could reasonably argue that in terms of impact on policy outcomes, a previous generation’s debate on inequality had a greater impact, and may well be more relevant in the future.

The early 1990s were a period of unrest in the United States, with fears surrounding what was then called “deindustrialization” – that the United States, and other advanced economies, would become largely focused on services, most people turning burgers while “good jobs” were associated with factory work had migrated to low-wage developing and emerging economies.

The debate around deindustrialization might have been confined to university seminars – in fact, I remember attending when I was a student at Columbia – except for the fact that it quickly gained political prominence with the approach of the presidential election of 1992 and the debate around the bill. North American Free Trade Agreement (Nafta) which was at the heart of it.

Criticisms of the outgoing president George HW Bush argued that, during his administration and in previous years, the United States had foregone valuable concessions to trading partners in successive rounds of multilateral trade negotiations, and that the process of what we today call the globalization (mainly through trade liberalization, but also foreign investment, and the proliferation of multinational companies, outsourcing, etc.) was jeopardizing the wages of American workers – and, in particular, unskilled workers – and thus exacerbated wage inequality between skilled and unskilled workers.

The trade and wage debate has found its way into the pages of newspaper articles and even in the presidential debate itself, in which, facing President Bush and his main rival, the Governor of Arkansas Bill clinton, independent candidate Ross Perot spoke of the “giant sucking noise” as Nafta would lead to the displacement of unskilled jobs to Mexico.

While Perot – who also ominously warned of a ‘race to the bottom’ between Americans and poorly paid, unorganized foreign workers – could have been a populist fear-monger, there was some academic credibility to at least some of his arguments establishing a cause and effect relationship between growing economic integration through international trade and falling wages of the unskilled. Also, for what it’s worth, many believe that Clinton defeated Bush on the strength of voter dissatisfaction with the economy – despite the latter being very high in the polls. a year earlier, after the first Gulf War.

The central edifice of neoclassical trade theory is the Heckscher-Ohlin-Samuelson (HOS) or “factor proportions” model, and one of its pillars is the Stolper-Samuelson (SST) theorem. Essentially, the SST says that trade protection in the form of tariffs and quantitative restrictions benefits the “scarce” input in the production process, while free trade benefits the “abundant” input – where the scarcity and abundance are defined in terms of the supply of relative or proportional factors.

In the context of the US political debate, OSH would therefore imply that protection has benefited unskilled workers, while trade liberalization benefits skilled workers – the perfectly reasonable presumption being that the United States is relatively abundant on hand. -qualified labor and relatively scarce in unskilled labor compared to its trading partners.

The empirical fact that trade liberalization has been followed by stagnation of the wages of the unskilled, an increase in skilled wages and a corresponding sharp increase in wage inequalities seemed, at first glance, to confirm OSH and validate the findings. concerns of those who blamed international trade. for the evolution of the wage structure.

Yet as Jagdish Bhagwati and I discussed at a conference at the American Enterprise Institute in 1993 – an article subsequently published in a (now out of print) volume edited by Bhagwati and Marvin kosters, Trade and wages: leveling wages down? (AEI Press, Washington, DC, 1994) – Blaming free trade may be premature or, at best, incomplete.

SST postulates a conventional channel through which the liberalization of international trade can have an impact on the wage structure: working through the relative prices of exports and imports, called terms of trade. In contrast, Bhagwati and I have suggested that trade may contribute more indirectly to flattening the income growth of unskilled workers and, therefore, contribute to widening wage inequalities.

The indirect mechanism we had in mind works through what Bhagwati and I called “kaleidoscopic comparative advantage”. By this we meant that, thanks to globalization, the margins of comparative advantage had narrowed and that even a slight change in costs could induce a strong rotation of the structure of production and hence of the model of production. ’employment.

In a world where the churn rate is higher – in which labor turnover, in particular, is increasing – we have assumed that unskilled workers, who do not have a university education and depend on on-the-job training to increase their productivity, could suffer proportionately. more of increased job turnover than skilled workers, who tend to embody general rather than job-specific human capital.

Thus, increased labor turnover – regardless of any changes in the terms of trade – could be an important indirect mechanism through which trade could adversely affect unskilled workers.

Another element of the “Bhagwati-Dehejia hypothesis,” as it is now called in the literature, assumes that unskilled workers may experience longer spells of unemployment than skilled workers – perhaps due to a lower intensity of job search or as an additional effect of job-specific degradation of human capital – which will accentuate the differential impact of trade-induced job turnover on the relative wages of skilled workers and unqualified.

Another argument we made in the same paper postulated that some, although probably not all, of the evolution of the wage structure could be due to the nature of technological change – in particular, that new technologies , as information technology, which was only just beginning to become mainstream in the early 1990s, tends to be biased in favor of skilled workers and against unskilled workers. Thus, a skilled worker (such as a university professor) equipped with a personal computer could replace a pool of unskilled typists, who previously typed, for example, lecture notes and correspondence, making the latter superfluous. and thereby exerting downward pressure on unskilled people. salaries.

Interestingly, the thesis that technical change is skills-biased, which appeared largely in the academic literature of the 1990s, strongly resembles much older literature claiming that capital and labor skilled labor are complementary in the production process. that increasing the stock of capital is good for skilled workers, and vice versa – but will have detrimental effects on unskilled workers. The classic reference is a 1969 research paper by the end Zvi Griliches, a brilliant labor economist who many say was robbed by the death of a Nobel Prize winner.

Reflecting on the changing contours of the trade and technology debate, I now feel that – perhaps correct – some of us have been overly optimistic in downplaying the role of international trade and playing the role of technology to help explain wage inequality – although we were certainly fair, I believe, in highlighting the role of technology at a time when doomed to the end of the world pointed to the blame largely, if not entirely, on the international trade.

In the 20 years since that initial debate, most observers, even free trade devotees, would now admit that trade is one of the many major culprits in explaining wage inequalities and the like. I too agree with this observation and suggest that trade and technology are roughly equally responsible for explaining the persistence of inequality in the wage structure.

This, of course, does not mean that protectionism is the answer, since a country as a whole benefits from free trade. The challenge for policymakers is to design appropriate adjustment mechanisms to mitigate the impact of free trade on those negatively affected – unskilled workers in the case of the United States and other advanced economies.

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