Friday, November 6, 2009

I Don't Think This Means What You Think It Means

. Friday, November 6, 2009

Trade skeptics Eyes on Trade noticed that wages decline during a recession:

On Nov. 3 the U.N. agency on labor, the International Labor Organization (ILO), released a 15-page report finding that real wages fell in countries around the world, including the U.S. and some other wealthy nations, raising questions about whether workers are sharing in any global economic recovery.

The report included data from 35 countries, and found that monthly wages have fallen almost 2 percent in the U.S. since January 2009. The ILO found that inflation-adjusted wage growth fell sharply around the world in 2008 to 1.4 percent, down from 4.3 percent in 2007, and wages continued to fall in a number of countries in 2009.

This continuing drop in real wages around the world illustrates the need for trade policies and agreements that protect workers’ rights and prevent a further “race to the bottom” in global wages.

So first of all, this means that real global wages actually increased in 2008, though at a slower rate in 2007. And it is not surprising that wages fell during a global recession in 2009. Why? Well, what is a recession? It is a drop in economic output. In other words, the world produced fewer goods and services in the first half in 2009 as it had before. The IMF projects that global GDP for all of 2009 will be negative 1.1%. When output goes down, employment goes down. When employment goes down, so do wages.

More importantly, this has nothing to do with a "race to the bottom" in wages. Wages aren't down because states are trying to lure foreign capital by weakening standards; wages are down because economic activity is down, full stop. A "race to the bottom" story would have to show that real wages declined even as output increased. The U.N. report cited by EoT contradicts this story by demonstrating positive wage growth in 2007 and 2008 (years in which output increased), as does this ILO report (pdf).

The truth, of course, is that "race to the bottom" narratives are too simplistic: exposure to trade affects different states differently, affects some standards differently than others. In most cases, trade exposure improves labor standards (perhaps through a "California effect"). But in terms of wages, on average workers in export-oriented industries get higher wages whether they work for locally-owned firms or MNCs. (Dr. Oatley discusses this on pp. 366-372 of his textbook.)


I Don't Think This Means What You Think It Means
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