Trade with China decreases U.S. producer prices in trade-affected sectors, but the decreases are due primarily to increases in total factor productivity (TFP), not lower wages. Dani Rodrik (via Mark Thoma) wonders why the increased competition from China increases TFP:

Perhaps what is happening is a kind of industry rationalization--exit of the least efficient firms--in which case we should see this restructuring and the associated layoffs in the data as well. Moreover, labor does not exactly come out unharmed in this case either. It is after all job loss, and the threat thereof, that workers complain about.
Dani: look to the immigration literature. The effect of immigration of unskilled workers should be to lower wages for unskilled native workers, right? But it does so only marginally. Instead, the increased competition for low-skilled jobs often forces unskilled native workers to move to other cities and other industries—in effect, it causes a restructuring of the labor market. This National Academy of Sciences report on the effects of immigration puts it best:
[Studies of a particular industry in a particular city] typically trace the employment patterns in an industry as it is penetrated by immigrants. Often, they find substantial "displacement"—in the sense that native workers leave the industry as the immigrants enter it. ... However, such studies are not inconsistent with our overall conclusion that immigrants have no large negative impact on wages. ... [T]hese case studies are asking a question different from ours: employment displacement may well be very large without any noticeable wage adjustment if the displaced workers find employment often in other industries or in other areas of the country. ... [T]he evidence that the wages and employment of natives are not substantially lower in areas with large numbers of immigrants suggests that, if substantial displacement occurs, displaced workers must either find other jobs with similar pay or move to other areas.
Assuming that trade with China has more or less the same effect as the immigration of unskilled workers, then trade with China would also induce a restructuring of the labor market. Dani Rodrik is right. He, unlike Naomi Klein, is smart.


Unknown said...

I'm not an economist and have no formal training in economics so I know that my belief may be compeltely off base. It seems to me that the rising price of oil and other commodities has to do with the true decline in the value of the dollar. Countries with large dollar holdings have an incentive to keep the exchange rate between the dollar and their currency from getting too out of whack. Could it be the case that currency exchange markets aren't reflecting the true value of the dollar whereas the commodities markets are?

I'm curious to know if this could, in part, explain the oil situation.

Economics of Contempt said...

Your belief is not off base at all: the fall in the dollar is definitely part of the story (probably a big part). But oil prices in euro terms have spiked as well, and the ECB has held the line on rate cuts, so there have to be other things driving oil prices up as well.

With so many countries' currencies pegged to the dollar and the Fed furiously cutting interest rates, investors have flocked into commodities because commodities are the traditional inflation hedge. This is kind of what I was getting at in my post about high vs. rising oil prices, but this is more of a second-round effect. First the mortgage market sent investors seeking higher returns flocking into commodities. Then when the Fed cut rates in response to the subprime/credit crisis, investors fearing inflation flocked to commodities as well.

It's obviously much, much more complicated than that, but I don't think it's inaccurate to say: "Basically, every market suddenly became shitty at the same time: mortgage bonds, equities, foreign exchange, you name it. Except commodities. So investors have been flooding into commodities, which has contributed to the run-up in commodities prices."

At least I hope that's not inaccurate, because that's the way I explained it to my boss yesterday.

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Mateusz Domański said...

Great article.