Free exchange, The Economist's new web log, has an awful piece about globalization and employment security. Mark Thoma does a good job, in his gentle and collegial way, of ripping it a new one.

The basic claim of The Economist piece is that unemployment is low and measures of job security have not fallen, despite the fears of antiglobalists that outsourcing would put them out of work. Mark points out that the research is not so unambiguously cheerful, and that The Economist's anonymous author doesn't have all his facts straight.

But let's be generous. Let's presume (though it isn't true) that "unemployment hit 4.1% in America, the lowest level the nation has seen in thirty years", that "there is little evidence that job security has declined in the last twenty-five years", and "[o]verall, globalisation doesn't seem to have had much effect on job security".

The magazine is called The Economist right? And doesn't economics teach us that it is meaningless to talk about the quantity demanded without also talking about the price?

What has happened to the price of labor over the last several years in the United States? Productivity adjusted, the price of labor has been falling. A dollar's worth of labor produces something between 8% and 12% more output than it did six years ago. So the quantity of labor demanded should be increasing, if the demand schedule for labor has not changed. Instead, the broadest measure of employment, employment to population ratio, has unambiguously fallen.

It's the mystery of the dog that didn't bark. If The Economist is right, then job security has remained stable despite a growing economy and falling output-adjusted labor costs. But job security ought to be improving under these conditions, dramatically. Labor has grown cheaper in the US, and fewer people are working. The last thing those who do have a job right now should have to worry about is losing it!

It's a complicated world. There is a supply-side to consider as well as a demand side. The population is aging. People may prefer education, hobbies, or leisure to employment. But these factors can't account for what we're seeing. During an alleged economic expansion, broad employment in the United States is falling. Where there ought to be labor shortages and firms bidding up the price of labor, the output-adjusted price of labor has fallen. If the explanation for the drop in employment were an increase in retirements relative to new entrants to the labor pool, or of it were a matter of people opting out, that would provoke bidding wars and higher wages for remaining workers.

Something else must be going on to explain these facts. Either the supply of labor must be increasing, or the demand for labor must be decreasing, or the bargaining power of labor must be falling. Now we can't say for sure, but it's reasonable to suspect that the ongoing infusion of around 2 billion new workers into the global market economy would have all these effects: The supply of labor available to firms (quantity at a given price) increases; The demand for domestic labor (quantity at price) diminishes, as firms can outsource; and the bargaining power of domestic labor falls as capital can look elsewhere to meet its manpower needs.

There may be other explanations. But if Sherlock Holmes were alive today (and if he were, like, real), I think he would pronounce globalization the culprit in this, the mystery of the labor boom that wasn't.

Steve Randy Waldman — Sunday November 19, 2006 at 3:56pm [ 2 comments | 0 Trackbacks ] permalink

Chris Dillow asks, "Why is protectionism popular? The answer is the title, and perhaps I should leave it at that.

But no. I have a reputation for verbosity to protect.

First, the current incarnation of free trade is coming under pressure not because people are stupid, but because people are smart. The publics in countries like the United States and Britain have been remarkably tolerant of free trade over the last two decades, because the policy-relevant public "gets it", has been persuaded by economists from Ricardo on down that free trade is a positive-sum good thing. The arguments for protectionism that Chris catalogs are old tropes that we had almost managed to put behind us.

I've done no study, but here's a conjecture: The countries where protectionism is becoming popular are those with both growing current account deficits and shrinking tradables sectors. A shrinking tradables sector is not the same as a declining industry. Declining industries are normal and good. Even the near extinction of manufactures as a whole is okay. But a shrinking tradables sector is not. A shrinking tradables sector means a decline in nation's capacity to produce goods or services of any sort that citizens of other countries want to buy, at competitive prices.

Free trade is positive sum because of specialization. The idea is that if someone else makes cars better or more cheaply than the UK can, Brits will do some other thing in which they have a comparative advantage, maximizing both overall productivity and the wealth of both nations. But there's a catch to this ancient Ricardian reasoning, a hidden assumption: The other thing that Brits do has to be tradable. If the UK stops building cars, and instead concentrates on home-building and retail sales, then there are no certain gains to trade.

Ricardo probably failed to agonize over this point, because if a country ceases to produce tradables, it stands to reason that it ceases to have the capacity to trade, and the question of whether trade is beneficial or harmful is rendered moot.

But Ricardo is dead, and we live in a brave new world where, at least for a while, some countries are willing to trade persistently for debt not backed expanding (if adjusting) tradables capacity on the part of the debtor. This is not a Ricardian paradise. This is economic terra incognito, and citizens are right to be spooked.

Chris writes:

People lose their minds when they think about national economies. It's obvious that, as individuals, we get rich by specializing in the trade we are least bad at, and buying stuff from others. When I go to work, I'm exporting. When I go to Tescos, I'm importing. No-one thinks of it this way, though.

I think he's wrong. I think that nearly everyone thinks of it this way, both on a personal level and at a national level, and that's precisely why "free trade" is under pressure. At a personal level, when we import by buying stuff at Tescos, but fail to export enough at work to fund our imports, we consider that a problem. When our credit card balances grow large relative to our expected capacity to pay-off or even service our debt, we get very nervous.

So it is, and ought to be, on a national level.

A consumer "importing" more than she is "exporting" has a bunch of alternatives: She can force herself to "import less", by cutting consumption or by turning to imperfect home-made substitites (fire the maid). Or she can increase her capacity to export, by, for example, upgrading her skills and getting a better job. The latter choice is best, both for the consumer herself and for the world as a whole. But if she can't succeed at increasing exports, cutting back on imports is much better than simply letting unfundable liabilities mount.

On a national scale, increasing exports is also better than forcibly cutting imports. But so far, some "rich countries" seem unable to expand exports relative to imports. When the first-best solution to a serious problem proves inaccessible, reasonable people eventually turn to less optimal strategies.

And that's why protectionism is becoming popular again.

Steve Randy Waldman — Wednesday November 15, 2006 at 3:02pm [ 1 comments | 0 Trackbacks ] permalink