The low-skill/ high-wage fantasy

Globalization is in retreat on all fronts, but that doesn’t mean it’s been a failure, and it certainly doesn’t mean the world would be a better place if the restrictions on international trade that were in force half a century ago had not been weakened.

That’s a hard case to make these days. Donald Trump has been elected president of the United States, Britain has committed itself to withdrawing from the European Union, and the possibility that Marine Le Pen will lead her National Front to victory in the next French presidential election is no longer greeted with snorts of derision. Governments across Europe are at various stages of disengaging with the rest of the world and retreating into nationalism.

There’s a lot of blame to go around, and some of it is being thrown in the direction of economists who supported globalization. Harvard University’s Dani Rodrik is probably the best-known critic of what I suppose must be called the “mainstream” view among economists.

Even though it has long been well-established in both economic theory and in the data that the gains from trade liberalization are not equally distributed across the population and that there are many people who end up worse off, economists have nonetheless discounted these concerns in their enthusiasm for a world with increased international flows of goods, capital and people. According to Rodrik, “economists’ failure to provide the full picture on trade, with all of the necessary distinctions and caveats, has made it easier to tar trade, often wrongly, with all sorts of ill effects.”

There’s something to this. Perhaps some of the blame should be deflected to the he said, she said narratives that dominate media coverage of economics: supporters of liberalized trade present the case for, and opponents present the case against. There’s not much room for people who acknowledge the many risks and who still conclude that, on the whole, the benefits outweigh the costs.

And it should be stressed: by all but the most narrow criteria, the benefits of globalization far outweigh the costs. Thirty years ago, the distribution of world income was sharply polarized, with two distinct groups: a large group of people with low incomes, and a smaller number of people with higher incomes. When graphed, these groups formed two distinct peaks in the global income distribution. The integration of China and other low-income countries fewest income gains — are nativeborn men without post-secondary education. (Race is also important, but not central to the point I’m making here.) Trade is at best a partial explanation for their frustrations; demographic shifts and technical change are at least as important.

Increased female labour force participation and the arrival of the baby-boom cohort on the labour market was certainly responsible for some downward pressure on wages, at least temporarily. And on the demand side, technical change — especially automation — has largely favoured those with higher education and specialized skills.

So there are lots of reasons why unskilled native-born men in industrialized economies would have seen slow wage growth, even without expanded trade or increased immigration. The more pertinent question is why their wages were so high in the first place. Within industrialized economies, the median wages of women have been increasing, but they still are below those of men. And if unskilled men in low-income countries have seen wage gains, they are still out-earned by their counterparts in high-income countries. Even though the standard narrative is one in which unskilled men in industrialized economies are “falling behind,” what’s really happening is that other workers at home and abroad with similar skills are catching up.

The economies of post-war industrialized countries produced a unique set of circumstances that favoured unskilled men. For one thing, women were still largely excluded from the labour market. And the decline in fertility during the Great Depression meant there was heightened competition for a relatively few men who entered the labour markets of the 1950s. This era of low skills and high wages remains powerful in men’s imaginations, even if its lessons have been flatly contradicted by the experience of the past 40 years. (Doubtlessly one of the reasons why women’s educational achievements now outstrip men’s is that girls have never been told that they could combine low skills with high wages.)

The role of status is still a poorly understood aspect in labour markets, but at least some of the frustration that is being attributed to globalization is resentment at a loss of status. And it’s easier to blame foreigners than it is to blame demographics and technology.