Economist Alan Krueger

Rakesh Bhandari bhandari at phoenix.Princeton.EDU
Tue Apr 20 09:54:40 PDT 1999

Leamer studies the impact of trade on American wages. His thesis is that there is an impact, one broader and more complicated than standard theory has acknowledged. An apparel worker, for example, driven from his job by cheap imports, may seek work as a waiter or warehouse hand, perhaps driving down wages in those fields. A few years later, apparel imports decline, but Japanese machinery imports rise and machinery workers accept a wage freeze. The impact on wages continues, with different evidence.

"Economics is so theory-driven," Leamer said, "that until you have a theory that explains your findings, people will retain the old theory. You need new theory to drive out old theory." ---------------------

It seems that Leamer's findings are roughly similar to Adrian Wood's; the latter has argued that trade with developing countries has been the main cause of the recent rise in wage inequality in developed countries.

In response to a book length criticism by Robt Lawrence, Adrian Wood has written in the Journal of Econ Lit co-edited by Prof DeLong:

"Another flaw in the Heckscher-Ohlin story emphasized [by Lawrence] that the ratio of skilled to unskilled employemnt has risen within most sectors, whereas in theory it should have fallen (because of substitution in response to the relative wage change). The author argues that the empirical predominance of intra-sectoral over inter-sectoral shifts in the skill ratio of employment suggest that the main cause is technical progress and organisational change. He recognizes that all sectors are mixtures of goods of varying skill intensity, whose composition might be altered by trade, and mentions that technical progress and organisational change might be induced by trade, but does not find these counter-arguments plausible (despite econometric evidence that increases in the skill intensity of employment within manufacturing sectors are correlated both with rises in import penetration and with exporting)."

Journal of Economic Literature, March 1998, p. 261

I don't think the reluctance to adopt the Wood/Leamer (?) thesis derives only or mainly from theoretical commitments but from these kind of empirical findings about rising intra sectoral skill intensity, i.e., in those sectors not exposed to trade.

Moreover, there is the widespread, albeit unfounded, fear that lower wages in Mexico and elswhere means that all new capital investment will tend to be in the South. Now it's true that Wood and Feenstra are very explicit that only certains unskilled labor intensive parts of the production process may be 'outsourced.' At any rate, as Alejandra Valle Baeza argues in a brilliant new analysis "National Differences in Average Wages: THe Case of Mexico and the United States" in International Journal of Political Economy 27/4 Winter 1997-8, "the unit cost of a commodity may be greater in a country with lower wages, since what counts is absolute advantage which consists of productivity and wages, and as Marx taught us, when wages are low costs (both in labor and in monetary terms) tend to be high, because they are associated with low levels of productivity, that is, with a lower level of the development of the productive forces."

Yours, Rakesh

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