Globalization, Trade, and Income Inequality Barry Bluestone Center for Urban & Regional Policy Northeastern University September 30, 2004

Impacts of Globalization on U.S. Economy Increase standard of living through free trade.... inexpensive imports boost real incomes Increase standard of living through free trade.... inexpensive imports boost real incomes Increase standard of living through free trade leading to export earnings Increase standard of living through free trade leading to export earnings Contribute to income inequality Contribute to income inequality Reduce standard of living through outsourcing and trade Reduce standard of living through outsourcing and trade

Change in Real Hourly Wage by Education Level – Less than High School High School Some College College Advance Degree -18.5%-4.1%+1.0%+15.9%+19.4% Source: Economic Policy Institute, The State of Working America, 2002/2003, Table 2.17, p. 159.

Murder on the Inequality Express Suspect 1: Technology Suspect 1: Technology Suspect 2: Deindustrialization Suspect 2: Deindustrialization Suspect 3: Deregulation Suspect 3: Deregulation Suspect 4: Declining Unionization Suspect 4: Declining Unionization Suspect 5: Downsizing Suspect 5: Downsizing Suspect 6: Winner-Take-All Labor Markets Suspect 6: Winner-Take-All Labor Markets Suspect 7: Trade Suspect 7: Trade Suspect 8: Capital Mobility Suspect 8: Capital Mobility Suspect 9: Immigration Suspect 9: Immigration Suspect 10: Trade Deficits Suspect 10: Trade Deficits

Samuelson’s New Argument “Sometimes free trade globalization can convert a technical change abroad into a benefit for both regions; but sometimes a productivity gain in one country can benefit that country alone, while permanently hurting the other country by reducing the gains from trade that are possible between the two countries.” “Sometimes free trade globalization can convert a technical change abroad into a benefit for both regions; but sometimes a productivity gain in one country can benefit that country alone, while permanently hurting the other country by reducing the gains from trade that are possible between the two countries.” Paul Samuelson, “Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization,” Journal of Economic Perspectives” Vol. 18, No. 3, Summer 2004, p. 142.

China & India Trade with low wage countries with low- skilled, low productivity labor forces leads to higher real average wage in U.S., but exacerbates U.S. income inequality Trade with low wage countries with low- skilled, low productivity labor forces leads to higher real average wage in U.S., but exacerbates U.S. income inequality As low wage countries improve their skills and boost productivity, not only are low- skilled U.S. workers hurt, but high-skilled workers as well.... reducing overall real average wage As low wage countries improve their skills and boost productivity, not only are low- skilled U.S. workers hurt, but high-skilled workers as well.... reducing overall real average wage

Historical Examples Farming moved from U.S. East to West, reducing Eastern incomes before industrialization Farming moved from U.S. East to West, reducing Eastern incomes before industrialization Textile & shoe manufacturing moved from North to South, reducing Northern incomes before new Northern industries came on stream Textile & shoe manufacturing moved from North to South, reducing Northern incomes before new Northern industries came on stream

Importance of Technology Innovation is the key to productivity growth... which in turn is the key to economic growth Innovation is the key to productivity growth... which in turn is the key to economic growth But, if innovation is exported so that the technological gains go to another region, then the gains from technology can be lost, resulting in a decline in economic growth But, if innovation is exported so that the technological gains go to another region, then the gains from technology can be lost, resulting in a decline in economic growth

Outsourcing Problems with outsourcing: Problems with outsourcing: Short-term loss in jobs Short-term loss in jobs Long-term loss in technology... if outsourcing involves sending new technology abroad Long-term loss in technology... if outsourcing involves sending new technology abroad Combination of new technology and low wages abroad can eliminate both low-skilled and high- skilled jobs... leading to slower economic growth and lower standard of living Combination of new technology and low wages abroad can eliminate both low-skilled and high- skilled jobs... leading to slower economic growth and lower standard of living

Public Policy Implications Protectionism - Raise trade and outsourcing barriers Protectionism - Raise trade and outsourcing barriers Fair Trade: Fair Trade: Labor & Environmental Standards Labor & Environmental Standards Tie trade liberalization to country’s commitment to raising own wages in line with improved productivity Tie trade liberalization to country’s commitment to raising own wages in line with improved productivity