U.S. Workers Pay a High Price for Free Trade


China’s rise as an export juggernaut has coincided with a big drop in labor’s share of U.S. national income. Photographer: Kiyoshi Ota/Bloomberg

When I was in business school, way back at the turn of the millennium, one of the things we learned was that labor always got about two-thirds of national income, with the other third going to capital. That percentage might fluctuate, as the economy waxed and waned, but it was basically steady.

The last 10 years have completely upended this “fact.” No matter which data source you look at, labor’s share of national income has declined pretty dramatically over the last decade.

Progressives have tended to look at the decline in unionization to explain this; conservatives have tended to look away. But another provocative paper from Brookings this week argues that the best explanation is what they call “import exposure,” which is to say, trade. Offshoring of the labor-intensive portion of the supply chain has deprived workers of bargaining power and driven them into lower-wage jobs — or into government programs like disability.

"Labor's Declining Share of Income and Rising Inequality," by Margaret Jacobson and Filippo Occhino. Federal Reserve Bank of Cleveland.

“Labor’s Declining Share of Income and Rising Inequality,” by Margaret Jacobson and Filippo Occhino. Federal Reserve Bank of Cleveland.

Meanwhile, capital is doing well. And yet, when you talk to manufacturers, they don’t feel that they have a choice about either outsourcing or squeezing their labor force for higher productivity and lower wages. In order to compete with China, they need to automate, or they need a much lower-wage workforce; try to keep to the old model and they’ll be out of business. Sure, there’s always special pleading by bosses, but I don’t think you can put the radical changes in the U.S. manufacturing base down to an outburst of employer greed. They were presumably just as greedy before; the difference is, they weren’t competing with low-wage countries brought closer by modern telecommunications and cheap shipping.

Back when I was in graduate school, or working at the Economist, such thinking would have been heresy. Free trade was pretty well established to be good for everyone. Maybe some workers were dislocated, but you gave them trade adjustment assistance to move into another sector where they’d be fine — better off because of all that trade, which effectively made the economy more productive.

And maybe it’s still heresy. This is, after all, just one paper. But it’s hard to deny that at least one of the two things that are supposed to make us all better off — trade and technological innovation — are making many workers worse off, even as the owners of capital, and the people in naturally sheltered sectors like health care, see big gains. It’s not just wages. In fact, in many ways wages are the least of the problems; wages can be finessed with transfers or the higher consumption possibilities created by trade. Rather, I’d argue that the biggest problem is simply the disappearance of reliable jobs. A large swath of Americans without college diplomas have no sense that they can build a stable life for themselves. Even if you get a job at $9 or $10 an hour, it could disappear at any moment, and you could be back to minimum wage, or nothing.

Yet if trade is the problem, a policy solution isn’t obvious. When there’s a surplus of workers, and employers are competing with even lower-wage labor, then unions or higher minimum wages are a recipe for unemployment, not prosperity: Some workers are better off, but others work for manufacturing firms building products on thin margins — companies that eventually give up and move their operations to China. Protectionism might benefit those workers, but creates other big problems, like giving domestic manufacturers an oligopoly to exploit with high-cost, low-quality products. Then there’s the fact that we’re helping comparatively rich Americans by dooming comparatively poor Chinese people to lose their jobs.

Nor do transfers seem ideal — necessary, maybe, yet also curiously inadequate. A disability check is a poor substitute for a job, from both the recipient and the taxpayer’s perspective. The sort of person who prefers a disability check to a decent job is the only person we don’t want to help.

On the other hand, for workers who have been dislocated over the past few decades, this may actually be more hopeful than attributing the declining labor share to technological change. My sense is that we are through the largest part of the trade transition. The explosive-growth phase of China’s rise seems to be tapering off, as wages rise and their great population centers run into some natural limits. And no country seems poised to fill the role that China did in the 1990s and 2000s, relentlessly driving down the cost of goods all over the world. Vietnam is ramping up manufacturing, but it has nowhere near China’s population; India has the population, but for various reasons, does not seem poised to become a global manufacturing power. So as China matures into a middle-income country, U.S. workers will be able to breathe a bit. Sad news for those of us enjoying flat-screen televisions. But for the workers and manufacturers whose lives have been upended over the last few decades, things may be about to get a bit brighter.

Megan McArdle

Megan McArdle is a Bloomberg View columnist.