Section 3: Good Jobs, Bad Jobs & Wage Inequality

Section 3: Good Jobs, Bad Jobs & Wage Inequality

“Weekly guide … Manufacturing Jobs in the Developed World … Collective Action Problem … What is the Truth About Jobs? … What’s the Impact of Trade on Income Inequality? … Country Specific Discussions … Conclusion & Looking Ahead”
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Summaries

  • Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 1. Weekly guide > Introduction: Good Jobs, Bad Jobs & Wage Inequality
  • Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 2. Manufacturing Jobs in the Developed World > Four Trends Lecture
  • Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 2. Manufacturing Jobs in the Developed World > Job Displacement Lecture
  • Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 3. Collective Action Problem > Trade Agreements and Protectionism Lecture
  • Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 3. Collective Action Problem > Defining Collective Action Lecture
  • Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 3. Collective Action Problem > Guest Lecture: Professor Kate McNamara on the Collective Action Problem Lecture
  • Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 4. What is the Truth About Jobs? > Globalization and Jobs Lecture
  • Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 4. What is the Truth About Jobs? > Partial Equilibrium Analysis Lecture
  • Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 4. What is the Truth About Jobs? > General Equilibrium Analysis Lecture
  • Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 4. What is the Truth About Jobs? > The Truth About Jobs Lecture
  • Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 5. What's the Impact of Trade on Income Inequality? > Heckscher-Ohlin Model Lecture
  • Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 5. What's the Impact of Trade on Income Inequality? > Stolper-Samuelson Extension Lecture
  • Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 5. What's the Impact of Trade on Income Inequality? > Skill-Biased Technological Change Lecture
  • Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 7. Conclusion & Looking Ahead > Conclusion: Summary

Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 1. Weekly guide > Introduction: Good Jobs, Bad Jobs & Wage Inequality

  • Look at the issues of job creation, job destruction, and wage inequality in the developed world.
  • Ask to what extent problems of wage, inequality, and job destruction in the developed world can be traced back to the developing world? So we’re not going to solve all these problems this week.
  • We ended with a surprise, and that is that flows of investment into developing countries don’t go primarily into lowest wage, lowest skill jobs like garments and footwear.
  • The question we want to address this week is, what is the impact of this industrial development in the developing world on jobs, prosperity, welfare, growth in the developed world? Does all of this activity in emerging markets come at the expense of jobs and growth in the developed world? Or, is there a compleme

Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 2. Manufacturing Jobs in the Developed World > Job Displacement Lecture

  • Let’s look at one of the most important costs, job displacement.
  • Now, the United States is perhaps the most dynamic in terms of job creation in the world- creating about 1.6 million new jobs each month.
  • People entering the workforce, entering new jobs, and being laid off or being displaced.
  • Recently, because we’ve been in recession, we’ve been losing about 1.6 million jobs per month and creating far fewer than that.
  • Job displacement can be very costly to the individuals involved economically, psychologically, even physically.
  • 25% of those who lose their jobs suffer permanent wage losses of 30% or more.
  • Now 25%. So 75% get new jobs roughly comparable to the jobs that they had previously or even better than the jobs that they had previously.
  • So the idea of losing a job in the textile mill and having to be a checkout clerk at a department store is a real possibility.
  • This specter hangs over the job market in the United States.
  • We’ve got to identify those and not falsely blame globalization for this job displacement and wage loss.

Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 3. Collective Action Problem > Trade Agreements and Protectionism Lecture

  • You remember, the North American Free Trade Agreement? The most unpopular free trade agreement ever? I’m in favor of the Trans-Pacific Partnership.
  • This is a possible initiative for freer trade across the Pacific.
  • I’m in favor, the politicians would say, of the US-Korean Free Trade Agreement.
  • These are bitterly fought issues, and frequently, protectionists, those who don’t want the US-Korean Free Trade Agreement, or are not enthusiastic about the Trans-Pacific Partnership have the louder voice.
  • Now, Lauren, it would seem that being in favor of trade liberalization would be a winner.
  • Every politician would be in favor of trade and investment liberalization.
  • Is NAFTA a popular trade agreement? No. Why is it that protectionist pressures are relatively so strong if the ratio of benefits to cost is 20 to 1? I don’t get that.
  • OK. And what about those who are in favor of freer trade, more investment? Well, I think that’s because they see their constituents as very concentrated, and they can be active, and that’s why protectionists are stronger than free trade activists.
  • How do free riders play into this calculation? Well, those are part of the collective action problem, where actually you can’t exclude them from the benefits, so although they’re not paying the costs, they’re still gaining.
  • George W. Bush was a free trader, his administration supported freer trade, and yet he intervened to protect steel workers.
  • The vast array of steel users was not organized, so that even the free trade administration of George W. Bush felt enough political heat that it intervened to protect the US steel industry.
  • We are going to be looking at the issue of whether or not freer trade and freer investment leads to more jobs, or fewer jobs in the domestic economy.
  • President Bush and President Obama both said that the US-Korean Free Trade Agreement, which opens up trade, but also investment would promote job creation in the United States.
  • Some of the labor unions, some of the politicians were afraid that opening up a free trade, free investment agreement with Korea would destroy jobs in the United States.
  • Santiago, what’s the truth? So, one of the common beliefs is that as the US opens its door to trades, this is going to result in a decrease in the number of jobs in the US. But this isn’t necessarily the case.

Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 3. Collective Action Problem > Defining Collective Action Lecture

  • The collective action problem means that those who benefit from freer trade are widely dispersed across the entire society.
  • Those who are hurt by globalization are concentrated and can identify each other easily.
  • The entire textile industry, or the auto industry, or the steel industry can worry about potential job losses.
  • The benefits of globalization come to us without us having to take any action to secure it.
  • I mentioned Trans-Pacific Partnership expanding trade between the United States, Canada, and Asian countries.
  • If that comes to pass, it will be over the objections of many protectionists.
  • So we are going to discover repeatedly in this course that even though the benefits outweigh the costs, the political dynamics favor protectionism.

Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 3. Collective Action Problem > Guest Lecture: Professor Kate McNamara on the Collective Action Problem Lecture

  • Kate, in our course, we have come across something called the collective action problem.
  • Collective action problems are really important because they are pervasive across political and social life.
  • Collective action problems are basically when one outcome that is desired by many people doesn’t get achieved.
  • So there’s a problem in getting that desirable outcome.
  • It’s a collective action problem because people individually don’t have a big burning interest in getting that fixed.
  • Many of those working mothers are pretty busy working all day long, taking care of the kids at night, and so it creates a collective action problem in terms of getting them motivated politically to spend the time to go about lobbying their policy makers and their legislatures to do something about it.
  • Collective action problems are also linked in many instances to the question of public goods.
  • So those tend to be the types of things that really suffer from collective action problems.
  • Well, Kate, how does the collective action problem relate to globalization? It’s actually very important for thinking through the politics of globalization because, in a way, free trade itself can be thought of as a public good.
  • It creates collective action problems in the sense that the benefits of free trade really do diffuse across the entire society.
  • Consumers, in particular, receive tremendous benefits through comparative advantage and specialization that come from free trade.
  • So if globalization through free trade is challenging some of these people in these very important areas like their jobs, of course you’re going to see a lot more political mobilization.
  • On the other hand, producers that might suffer from free trade, such as certain American agribusiness whose products in the world farm market won’t be competitive, may actually speak out and lobby strongly against globalization.
  • So we see a mixture of collective action problems with globalization, but at the same time certain highly motivated groups will, of course, speak out politically on globalization.
  • Kate, what is the free rider problem, and what’s the importance that those who benefit from globalization can’t be excluded from the benefits? Globalization is something that sort of goes across the entire society.
  • The free rider problem comes when people are benefiting from some sort of service or activity, but they’re not actually contributing to the production of that activity.
  • So in a sense, all of us who work are free riders on the benefits that those labor unions have actually pushed for.
  • Now, in the globalization field, I tend to think of the free riders as those consumers that are benefiting from increased choices and cheaper goods and services and also increased flows of capital for financing for different types of activities- mortgages, businesses, and so on.
  • So that’s where the free rider problem comes into play.
  • In all these ways, collective action provides a really useful tool in helping to understand the politics of globalization.

Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 4. What is the Truth About Jobs? > Globalization and Jobs Lecture

  • Now we’re going to ask a different question, what about globalization, the liberalization of trade, investment, and technology, and the number of jobs in the United States, or in a given developed country?
  • Well, this means – Did NAFTA result in a net job gain or a net job loss for the United States?
  • Does the US-Korean Free Trade Agreement, just negotiated, brand new trade agreement, is this going to result in job creation or job loss? What about the Trans-Pacific Partnership?
  • Potential future negotiation enlarging trade and investment with Asian countries.

Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 4. What is the Truth About Jobs? > Partial Equilibrium Analysis Lecture

  • This is a well constructed survey of firms that was taken, let’s say we take it right now, or we take it a year from now, and ask the firms, how did you react after the US-Korean Free Trade Agreement was passed? Did you add jobs? Did you lay off workers? And what was the net effect? That is to say, maybe some firms did one, maybe other firms did another.
  • So we know there’s going to be some churning, and there’s probably going to be good job creation, but what about the number of jobs? What is the net figure? A survey.
  • I have to say, we would hire the University of Michigan survey research team, or the Pew survey team.
  • We want somebody reputable who does a well organized, randomized survey, and again, we want a net figure.
  • Perhaps there could be some job loss, but let’s say the net comes out positive.
  • Or what could happen is that we create a few high tech, high paying jobs from the US-Korean Free Trade Agreement, but we lose a lot of import competing jobs, and the net is negative.

Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 4. What is the Truth About Jobs? > General Equilibrium Analysis Lecture

  • Some of them will even be smart alecky about it and know it all- I don’t want to mention Paul Krugman’s name- but he will tell you that the correct answer is and always is zero, no net job gain or net job loss.
  • The reason he comes to that conclusion is because he is using General Equilibrium Analysis, which looks at the impact of the Central Bank, the Federal Reserve System, and if the economy is at full employment and the US-Korean Free Trade Agreement were to result in big job gains, I think that’s unlikely, but big job gains, then it would be the job of the Fed to raise interest rates, cool off the economy, and bring the economy back to equilibrium.
  • If on the other hand, the US-Korean Free Trade Agreement were to result in huge job losses, it would be the job of the Fed to loosen interest rates and bring the economy back to equilibrium.

Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 4. What is the Truth About Jobs? > The Truth About Jobs Lecture

  • There’s another secret, it also allows more imports.
  • We’ve already talked about cell phones, flat panel display TVs, so consumers like imports.
  • An increasing number of imports are intermediates, that is to say, inputs into industries, including export industries, including domestic industries, that allow them to become more efficient and therefore, more competitive.
  • So we like imports, not just as consumers, but as workers.
  • Imports are good for workers, as well as, consumers.

Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 5. What’s the Impact of Trade on Income Inequality? > Heckscher-Ohlin Model Lecture

  • You know from the readings that there has been increasing wage and income inequality in the United States and that the wages of lower classes and middle classes have been stagnating you don’t have to do those readings.
  • This is the first time in the course I’m going to tell you don’t have to do the readings, because all you have to do is look at the newspaper every day, and you can see increasing inequality in the United States and stagnation of wages and benefits for lower classes and middle classes.
  • So the prediction of Heckscher-Ohlin is if high-skilled labor is relatively abundant, as it is in the United States.
  • Relatively- that means relative to China, relative to Mexico, we have more highly-skilled workers in the United States than China or Mexico does, relatively speaking.
  • So high-skilled labor in the United States benefits from opening of trade.
  • What about low-skilled labor in the United States? Well, opening up to trade introduces more imports, which will tend to be imports made with low-skilled labor, which means there will be less demand for low-skilled labor in the United States, which means the wages of low-skill workers will tend to decline.
  • Is this actually what is accounting for the income inequality and the wage stagnation in the United States? Well, how do we test this? I have given you readings that I want you to look at closely that do factor content analysis.
  • May account for 10%, 15%, at the uppermost, 20% of the income disparity in the United States.
  • So this is important for us to do this painstaking analysis, because 80% of the income disparity in the United States is attributable to something else besides globalization.
  • Let me say again, if we didn’t do this analysis, we might mistakenly think that income disparity in the United States is primarily due to globalization.

Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 5. What’s the Impact of Trade on Income Inequality? > Stolper-Samuelson Extension Lecture

  • We looked at standard trade theory, Heckscher-Ohlin, and found that it predicts that globalization may lead to income disparity, but that’s a theoretical prediction.
  • Then we had to test it against the data, and what we found is at most 10%, 15%, 20% of the income disparity in the United States might, maybe, be attributed to globalization.
  • We do not have a smoking gun in globalization that we can point to and blame for income disparity.
  • You will note that this is even more worrisome- that the impact of globalization on the wage disparity might be quite large and quite negative for low-skilled workers in the United States.
  • Increased imports lower the demand for low-skilled workers so their wages stagnate or weaken.
  • Their wages are rising, and the prices for high-skilled goods are rising.
  • The prices for low-skilled goods- so they shop at Walmart.
  • So they get a double benefit- higher wages and lower import costs- from globalization.
  • Their wages are weakening, stagnating, maybe even dropping, and yet the prices of the high-skill intensive goods that they want to buy are going up.
  • Lower wages and higher prices for high-skill intensive goods.
  • The way you test it is by looking at the price series for high-skilled intensive goods and low-skill intensive goods.
  • What the evidence shows is that the price for low-skill intensive goods are declining.
  • What about the price is for high-skill intensive goods? These are supposed to be rising.
  • Well, what has been happening to computers? What has been happening to standardized cellphones? What’s been happening to flat panel display TVs? The prices have been dropping dramatically.
  • The cost of Georgetown and the cost of health care are actually almost 100% isolated from trade and globalization.
  • So we still don’t have a smoking gun, and we have to figure out what is causing wage stagnation and increasing wage inequality if it is not globalization.
  • Why is this important? Because by the time we come to the end of this course, we have to devise some policies to deal with the problems of globalization, and we might misidentify the policies if we blamed everything on globalization.
  • 10%, 15%, 20% of income disparity is due to globalization.

Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 5. What’s the Impact of Trade on Income Inequality? > Skill-Biased Technological Change Lecture

  • So what is the cause of most of the income disparity in the United States? I have given you readings on the subject of skill-biased technological change.
  • What does that mean? What that means is there is a premium paid to acquiring skills that is ubiquitous, that is found everywhere in the economy.
  • If you don’t have skills, if you don’t continuously upgrade skills, than you are going to find that your wages either stagnate or they fall.
  • If you do acquire skills, then you could work your way up in the wage ladder.
  • If you don’t have any skills you might be a receptionist.
  • In any case, to be an office manager and to earn a middle class income, you have to be skill acquisitive.
  • You have to be state-certified, and you have to continuously upgrade your skills.
  • So we find skill bias- skill premium- in nurse’s assistants.
  • What you will find is, to become an auto mechanic, you have to be certified in computer diagnostics, in machinery diagnostics.
  • I’m going to go down and work in the auto shop now” without acquiring skills.
  • Introducing a course like this is enormously skill intensive.
  • So what we find is that skill- biased technological change, accounts for most of the wage inequality in the United States.
  • I would say that skill-biased technological change accounts for most of the wage and income differential from those in the United States who earn $30,000 to $40,000, up two $250,000, $400,000.
  • Acquisition of skills – To become a skilled mechanic.
  • To become a skilled businessman, up to- again, I’m saying $400,000 $500,000 maybe even $600,000- this is a skill story.
  • There is some phenomenon at work with the upper 1/10 of 1% that I don’t think can be attributed to skills.
  • I don’t say that businessmen and hedge fund operators are without skills.
  • I can’t think that simply acquisition of skills accounts for the very vast inequality at the top.
  • I don’t want you to leave with the impression that everything in the United States is simply skill acquisition and skill based.

Good Jobs, Bad Jobs & Wage Inequality (Week 3) > 7. Conclusion & Looking Ahead > Conclusion: Summary

  • So I told you that this was going to be one of the most important weeks, because we were going to look at the impact of globalization in the developing world on jobs and competitiveness in the developed world.
  • What we looked at was the impact of trade liberalization on kinds of jobs and discovered that it enhances export related jobs and good jobs.
  • We looked at two theories, Heckscher-Ohlin and Stolper-Samuelson, that predict maybe globalization is responsible for income inequality.
  • Because we discovered that it is not globalization, but it is skill- biased technological change.

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