Does Trade Really Make U.S. Workers Poorer?

Does Trade Really Make U.S. Workers Poorer?

Confusing relative income and changes in absolute income

According to a headline on this Matthew Yglesias piece at Slate: “Foreign Trade Has Immiserated U.S. Workers After All.”

He’s wrong. In fact, U.S. workers are better off today than they were a generation ago. Workers in 2013 make 14 percent more than their predecessors in 1989 did, even after accounting for inflation. People in 1989 didn’t have access to smartphones, flat-screen televisions, or robotic surgery, either.

So how can someone claim that foreign trade has made U.S. workers poorer?  By pointing to a new Brookings Institution report by Michael Elsby, Bart Hobijn, and Aysegul Sahin that says labor’s share of total U.S. income has declined as a result of foreign trade.

According to the Brookings report: “Over the past quarter century, labor’s share of income in the United States has trended downwards, reaching its lowest level in the postwar period after the Great Recession.” The authors suggest that the offshoring of labor-intensive jobs could be responsible for the decline in labor’s share of total U.S. income, a trend that is likely to continue as a result of globalization.

Here is Slate’s summary of the Brookings study: “Over time, the labor share of national income tended to be constant. And most economists took that stylized fact and put it into their models. That led them to assure people that whatever happened when the country became more open to foreign trade, a fall in the labor share of income couldn’t possibly be the result. Yes, some specific workers would lose out but workers on the whole wouldn’t. You would see concentrated losses and diffuse benefits. Elsby, Hobijn, and Sahin are saying that’s not what happened.”

In fact, Elsby, Hobijn, and Sahin are careful not to say that’s what happened.

The confusion results from equating changes in relative income to changes in absolute income. Many liberals don’t appear to comprehend the difference between getting a smaller slice of a fixed-sized pie, and getting a relatively smaller slice of a much larger pie. They act as if the highest-paid player on the Frisco, TX RoughRiders (big share of small pie) is better off than the lowest-paid player on the New York Yankees (small share of large pie).

When she was Prime Minister of the United Kingdom, Margaret Thatcher demolished this way of thinking:

People on all levels of income are better off than they were in 1979. The hon. Gentleman is saying that he would rather that the poor were poorer, provided that the rich were less rich. That way one will never create the wealth for better social services, as we have. What a policy. Yes, he would rather have the poor poorer, provided that the rich were less rich. That is the Liberal policy.

The Brookings study concludes that labor’s share of the U.S. economic pie is smaller than it used to be. But the U.S. economy is bigger than it used to be, thanks in large part to increased international trade and investment.

Theoretical research and real-world results continue to demonstrate the benefits of trade. Economists overwhelmingly agree that reducing trade barriers increases the size of the economic pie, and that U.S. trade barriers — not foreign trade — make Americans poorer. 

 Bryan Riley is the  Jay Van Andel Senior Policy Analyst, The Heritage Foundation.

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