Jagdish Bhagwati Blames Technology for Wage Stagnation
Mark Thoma makes the catch:
Economist's View: Globalization, Wages, and Jumping J-Curves: Jagdish Bhagwati of Columbia University defends globalization in this commentary from the Financial Times:
We have recently witnessed a flurry of comment in the US on the long-running stagnation of wages. Many believe that the future livelihood of the “middle class” is also at risk.... Democrats newly elected to Congress believe that globalisation has much to do with the economic distress of the working and middle classes. Therefore they ... want to lean on the door – even to close it – on trade with poor countries and occasionally on unskilled immigration from them. Proponents of globalisation ... find themselves in a politically implausible position: they typically ... accept this “distributional” critique of globalisation – yet nonetheless propose that those adversely affected should accept globalisation but be aided...
As it happens, globalisation’s supporters are on firmer ground than they fear. Examine the common arguments linking globalisation to the distributional distress and little survives. First, all empirical studies, including those done by some of today’s top trade economists (such as Paul Krugman ... and Robert Feenstra ...), show that the adverse effect of trade on wages is not substantial....
Second, the same goes for ... studies by the best labour economists regarding the ... influx of unskilled illegal immigrants into the US. The latest study by George Borjas and Larry Katz ... also shows a virtually negligible impact on workers’ wages, once necessary adjustments are made.
Can it be that globalisation has reduced the bargaining ability of workers and thus put a downward pressure on wages? I strongly doubt this. First, the argument is not relevant when employers and workers are in a competitive market and workers must be paid the going wage. As it happens, fewer than 10 per cent of workers in the private sector in the US are now unionised.
Second, if it is claimed that acceleration in globalisation has decimated union membership, that is dubious. The decline in unionisation has been going on for longer than the past two decades of globalisation ...
Has the outflow of direct foreign investment ... contributed to a decline in wages? As I look at the data, the US has received about as much equity investment as it has lost over the past two decades. One cannot just look at one side of the ledger. The culprit is not globalisation but labour-saving technical change that puts pressure on the wages of the unskilled. Technical change prompts continual economies in the use of unskilled labour. Much empirical argumentation and evidence exists on this. ...
Such technical change is quickly spreading through the system. This naturally creates, in the short-run, pressure on the jobs and wages of the workers being displaced.
But we know from past experience that we usually get a J-curve where, as increased productivity takes hold, it will ... lead to higher wages. So why has there been no such significant effect in the statistics on wages for almost two decades?
I suspect that the answer lies in the intensity of displacement of unskilled labour by information technology-based change and in the fact that this process is continuous now – unlike discrete changes caused by past inventions such as the steam engine...
