Trade Sequence Part 3 – The Tribulations of the Working Class
Greetings loyal readers!
My apologies for taking so long on this part, but life got in the way a little.
I’m glad I’m getting some really interesting discussion on these posts, and based on the discussion so far, I’m amending the sequence to address issues of cultural distinctiveness. The new contents page is as follows:
- Introductions and Definitions
- They took our Jobs!
- The Tribulations of the Working Class (you are here)
- The Race to the Bottom
- Getting Strategic
- You will be Assimilated
Remember, if there’s anything else you want me to discuss, let me know in the comments.
Even if society as a whole isn’t made worse off by free trade, the distributional effects may be a problem – if free trade lowers wages, then even something that’s a net social good might legitimately be seen as a bad outcome. Inequality is a legitimate concern, but it’s more complicated than most people realise.
First off, the Stolper-Samuelson theorem does suggest liberalising trade will benefit those who have the relatively abundant factor of production at the expense of those who have the relatively scarce factor. In an industrial nation that would means that the owners of capital would benefit at the expense of workers. However, that theory is pretty unrealistic – it only holds for a world with 2 countries, 2 factors of production and 2 goods. A “2 x 2 x 2” model, as they are known, is a good way to teach trade theory to undergraduates, but it’s a lousy approximation of the real world. In the real world, whether you gain or lose from liberalising trade on a particular good (I’ll use removing an import tariff for my example here) depends on your economic relationship with that good:
- If you are a producer of the good but not a consumer of it, you will probably be either worse off, or unaffected. Foreign competition will drive down revenues, reducing wages (for workers) and profits (for owners). You could even lose your job / investment entirely. How badly you are affected will depend on the specificity of your skills / capital, or how easily you can use your skills or investment to produce other goods. People with many options (or who’s other options aren’t much worse than what they currently have) won’t lose much, or possibly not at all. If all your job skills are tied up in this one industry, or you own machinery that is good for nothing else, then you are going to take a bath. One complication – as I noted above, liberalising trade causes some industries to expand, so even if you lose your job, you may be able to get a better one in one of the expanding industries, but this come back to how product-specific your skills are.
- If you consume the good, and don’t produce it then you are strictly better off. Foreign competition makes the good cheaper, and your job isn’t affected so this is a win for you.
- If you produce and consume the good, then the two effects push against each other, and which one is larger will depend on your circumstances. The more versatile your skills / investment and the larger a fraction of your income that you spend on the good, the more likely you are to win out.
- If you produce an export good (or start doing so due to trade being liberalised), you may gain. As your industry expands, your career / investment opportunities will expand with them.
- Bear in mind that some domestic industries rely on imports to function. If those imports get cheaper then chances are everyone working / investing in that industry is better off.
Note that because of the gains from specialisation that trade permits, the winners win more than the losers lose.
So what does this mean, if you’re worried about the distributional effects of trade:
- the biggest losers will be people whose skills or investment are highly specific to one industry. Note that to get people to make an investment like that to a specific industry, you will most likely have to compensate them. An unskilled worker can probably get another job that pays nearly as well. This means the biggest losers from liberalisation will be richer, all things being equal.
- The poorest people in a country will gain from liberalisation. A lot of low-income jobs are in non-tradeable services. Checkout operators, janitors and hairdressers aren’t losing their job to foreign competition. And the very poorest people don’t have jobs at all, so they stand to gain from liberalisation of any good they consume.
- The game changes if you liberalise many goods at once. Any one person will probably only be adversely affected by the liberalisation of one good, so every other good will be a win for them. And since gains exceed losses, spreading the gains and losses more evenly leads to fewer net losers. Farmers might not like the abolition of sugar tariffs, but if cars and tractors are cheaper, they may not mind as much.
- Even if there are still vulnerable groups you are worried about – there may be better ways to help them. Offering assistance with retraining or moving to other parts of the country will help the people adversely affected without trying to hold your entire economy in stasis. Remember that there will almost certainly be some people in a bad way who will get a job as a result of trade liberalisation, and their interests matter too.
As you can see, there’s no clear winners and losers by income here. This is why I tend to be cynical of class-based analysis. In some situations (some welfare, tax rate progressivity), income groups are interest groups, but most of the time they aren’t. The reason Occupy Wall Street’s claim to represent “the 99%” fell apart – 99% of the time the 99% aren’t on the same side.
In part 4 I’ll be looking at inequality from an international standpoint – and I’ll look at whether free trade with poorer countries is exploitative.