The Challenge of Globalization
Remarks before the Canadian-American Business Council
© Peterson Institute for International Economics
Globalization. It's a new word-so new in fact that my 1997 Microsoft Word program underlines it in red. The term does not stir my emotions, but that bland reaction is obviously not shared by the thousands of demonstrators who appeared in Quebec City last week to protest against a new manifestation of globalization, the proposed Free Trade Area of the Americas.
Commentators have called attention to the diversity of causes and tactics represented at Quebec City and earlier demonstrations. At one end of the spectrum were self-described anarchists who condemned virtually all international economic activity. At the other end were law-abiding groups that could accept liberalized trade and investment, but only if linked to the mandatory observance of meaningful labor and environmental standards.
The interesting thing is that neither of these positions, extreme or moderate, would seem likely to resonate with US voters. The vast majority of Americans are repelled by violence, and only a minority is seriously moved by environmental degradation or poor working conditions in developing countries. Yet during the last decade US opponents of globalization succeeded in stymieing the Clinton Administration's efforts to win renewed "fast track" authority, now renamed "trade promotion authority," to negotiate trade agreements.
How is this possible if these groups and their agendas do not appeal to mainstream America?
To answer this question, let me begin by defining globalization. My learned colleagues at the Institute for International Economics describe it as "the increased integration of product and factor markets across countries via trade, immigration, and capital flows." To me, it is simply the increased cross-border flow of goods, services, people, and capital.
Whatever the definition, globalization is certainly a fact for the United States-and has been since 1960.
- US imports as a share of gross domestic product have risen from a scant 2 percent in 1959 to 12 percent in 1999.
- Legal immigration has almost trebled from the 1960s to the 1990s, and the addition of illegals would expand current figures significantly. The percentage of foreign-born in the US population has grown from 5 percent in 1960 to 10 percent in 2000.
- Foreign direct investment by US firms has increased from 7 percent of GDP in 1982 to 28 percent last year.
As the US economy was becoming increasingly globalized, the gap widened between the wages paid to more-skilled and less-skilled workers as measured by educational level. In 1979, for example, male college-educated workers earned 30 percent more than their high school-educated counterparts. By 1995 the premium for college-educated workers had risen to about 70 percent.
The effect of this increasing wage disparity among American workers has been compounded since 1973 by a fall in average real wages. US average real weekly earnings peaked in 1973 at nearly $320. They then fell to under $260 by the mid-1990s and recovered to only $280 last year.
You can quickly see the result of an increasing wage disparity and a falling average wage: sluggish to negative real-wage growth for most US workers. The lower the skill level, the greater the fall in real wages. Only workers in the top 10 percent of the overall wage distribution received higher real wages in 1998 than in 1979; earnings for the remaining 90 percent fell or stagnated. This development is radically different than the situation from 1948 through 1973, when family income for the lowest quintile grew faster than that for the highest.
Stagnant or falling wages are bad enough, but there is something even worse-job loss. In a book that will appear this summer, Lori Kletzer of our Institute examines the fates of workers who have lost their jobs in industries most impacted by import competition, such as textiles, apparel, footwear, and motor vehicles. During the 15 years ending in 1994, these workers accounted for about 39 percent of the 4.6 million manufacturing jobs lost.
Kletzer reports that individual outcomes varied considerably. About one-third of these workers found new jobs at wages equal or better than they previously received, generally in their previous industry of employment. But 25 percent reported earnings losses of 30 percent or more.
Women suffer disproportionately as they are more likely to be employed in and displaced from import-competing industries. Married women are especially disadvantaged as they are seven percentage points less likely than married men to become reemployed. Their towns presumably do not offer alternative employment, and they are unable to relocate when their husbands still have relatively good jobs.
To summarize, then, we have three simultaneous developments. The US economy has become increasingly globalized, wages of most workers have dropped or stagnated, and most workers laid off in import-competing industries cannot find jobs at their previous pay level. Now here's a big question: Have developments two and three been caused by development one? Is globalization the culprit?
The answer is a qualified no. Most economic research indicates that technological change favoring skilled workers has been the main cause of wage and job loss in the US economy. Unskilled workers are less needed as production processes become more efficient, and therefore their relative wages drop. This is not to say that imports, production outsourcing, and immigration have had no effect, only that the influence of these globalization factors is substantially less than that of technological change.
But there is an even bigger question, measured in political terms: Do Americans believe that globalization is responsible for wage and job loss? The answer to this question is provided in Globalization and the Perceptions of American Workers, a book recently published by our Institute. The authors, Kenneth Scheve and Matthew Slaughter, analyzed a wealth of polling data on this question, breaking down the responses by the skill levels of the respondents as measured by educational achievement or average wage, in addition to other factors.
According to Scheve and Slaughter's findings, large majorities of Americans think that trade generates the benefits predicted by economics. (Good news for economists.) However, nearly 90 percent claim that imports destroy American jobs. What's more, when asked a question that mentions both the benefits and costs of trade, a plurality or majority of respondents emphasized the costs, not the benefits. Even when a pollster explained that the cost of saving a job in the apparel industry was more than $50,000 and the 1997 average wage in the industry was $18,000, nearly two-thirds of the respondents still said the cost was worth it. Similarly, a plurality or majority of Americans want fewer immigrants coming into the country and less foreign direct investment because of perceived labor-market costs.
Further analysis of these data produces even more interesting results. Scheve and Slaughter found that preferences about trade and immigration policy divide strongly across skill levels without regard to industry. Less-skilled individuals, measured in terms of education or wages, are much more likely to oppose freer trade and immigration than their more-skilled counterparts.
Even more intriguing, there is no strong evidence to support several pearls of conventional wisdom. For trade, industry of employment is not systematically related to a worker's attitude toward trade policy. Workers in "trade exposed" industries like textiles and apparel are not more likely to oppose freer trade than their equally skilled counterparts in other industries. For immigration, people living in gateway communities in California are not more or less likely to oppose freer immigration than other Americans.
Let me try to pull all this together. Most Americans appreciate the overall economic benefits of globalization. However, they also understand that increased trade, investment, and immigration produces losers as well as winners, even though the gains outweigh the losses. Workers at lower skill levels empathize with the losers, even when-and this is important-they themselves are not likely to be losers because of their industry of employment or area of residence. These perceptions seem chiefly responsible for American concerns about globalization-not the demonstrators' demands for improved labor and environmental standards abroad, except insofar as these international humanitarian objectives are understood to be proxies for domestic economic goals.
If this analysis is correct, supporters of freer trade, investment, and immigration would be well advised to find ways of assisting less-skilled workers threatened by a changing economy. Core labor and environmental standards-the demands of many antiglobalization protesters-may be important in themselves, but they will not allay the visceral concerns of Americans about jobs and wages. Globalization is a positive-sum game, but means must be found for American winners to share their gains with American losers or the play cannot continue.
In this regard, Lori Kletzer of our Institute and Robert Litan of Brookings have proposed a new safety net of health and wage insurance for displaced workers-regardless of the reason for their job loss. All full-time displaced workers would be eligible for health insurance coverage for up to six months until they found a new job. In addition, eligible workers would receive some portion of their wage loss for up to two years following the date of job loss, but would start receiving that benefit only when they found new jobs. The limitations on these benefits are intended to encourage rapid reemployment, even in trainee positions where the displaced worker would initially take a pay cut. Their cost would be surprisingly low-only $3.6 billion in 1997, when the national unemployment rate averaged 4.9 percent, if the program covered half the loss in wages.
The Kletzer-Litan proposal offers a partial solution to our current political quandary, but additional measures will probably be required. The point is that we must begin to see the opportunities and challenges of globalization as they are and deal realistically with them. Demonstration and denial are not adequate responses. Instead, we must reason together across age, class, and party lines to craft solutions that will benefit all Americans.