Technology and Trade

John van Reenen of the London School of Economics gave a very neat paper recently.

A huge literature has demonstrated the growth in inequality in the U.S. and Europe in the past two decades, with most papers pointing to skill-biased technical change, and others pointing to the growth in international trade. This new study combines the two, showing how the expansion of imports from low-wage countries, particularly China, has induced European and American firms to switch to higher-technology products, to innovate more and to reallocate workers to plants that use more up-to-date technologies.

These changes in the nature of production, which have been strongest in those industries and those times where/when imports from China have grown most, may have contributed substantially to the decreasing relative earnings of the less-skilled. So it is not only trade, not only technological change that has altered Western labor markets; it’s the interactions between them, worked out through the profit-maximizing behavior of firms.

No question this competition enhances U.S. well-being in the long run; but what about the short run?


Ian Kemmish

"... has induced European and American firms to switch to higher-technology products, to innovate more and to reallocate workers to plants that use more up-to-date technologies"

Errr, wasn't this the centre of the argument in the 1980's about the decline of old industries (textile in the UK, cars in the US)? The Thatcherites telling us that the future lay in the "knowledge economy" and the opposition pointing out just how few award-winning video game designers the world actually needs?

Jessica Shummer

The nature and aim of most technological advance is to enhance efficiency and reduce (labor) cost. It is just unrealistic to expect after we invested trillions on technology to improve productivity over last 2 decades yet we still have the same level of employment as 20 years ago.
Anyone fly recently? Did you notice self-check in lane (you make your own boarding pass in advance online) at most airline counters. Anyone shopping in Supermarket lately, did you notice self-checkout line? 30 years ago, you need to call plumber to fix a clogged kitchen sink, today half bottle Liquid plumr would do the trick. All those will translate to Structural Permanent Job Loss.
Over last 10 years, IBM sales have increased 18% and it work force has decreased 8% during same period time.
Simply put, just as most European nations, US just doesn't have enough jobs for every able body. And the current massive unemployment rate will be with us forever. Blame politicians don't do any good. What we need is out of box thinkers to explore how to lead meaningful life without full employment for at least 16% American adults(not the same people) at any give date.

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Sully

Offshore talent is not a new concept. The United States' humble beginnings were originally an off-shore operation for lumber and tobacco farming.

Technology is the new construction business. Foreign talent building US infrastructure is not a new concept either. In the late 19th C and early 20th century, the Irish, Italian and Jewish immigrants build New York City's buildings. Today, the Indians, Chinese, Russians and even a growing population of Africans are coming to the US to build our new technological infrastructure.

Long run or short run it's neither good nor bad. "It is what it is" - and it is what it has always been.

sds

Shummer,

You are ridiculous. If I build a computer that can make a checkout, then yes, the store doesn't need to hire a 16yr old to swipe things. However, I have to hire a workforce to build the computer, and the store will need to call a computer repairman to fix it when it breaks. Then, indirectly, there will need to be people to ship the computer to the store and people to set the computer up. Then, more indirectly, since the store doesn't pay that 16 yr. old either it (a) lowers the price of the goods it sells by, lets say, $.01 or (b) makes $.01 profit on each good it makes. Either way, someone is gaining, and that extra penny on each good sold is either saved or re-invested in the economy.

if (a) it is not easy to show b/c of the time it takes. but .01 on every good purchased by a consumer over the course of a year could easily be $100. That is enough for another good that they would otherwise not be able to afford.

if (b) it is easier to show b/c the store owner will have more profit and open more stores, or upgrade existing ones, or dividend the profit to himself (see (a) above for the results of that) thus employing more people etc. . .

Essentially, you could not be more wrong.

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Eric M. Jones

Reminds me of the Oriental deference shown by the Japanese in the trade wars of the 1950'-1980's. They said, (disingenuously), "Oh, we can just copy-- Americans are the great innovators and engineers!" The persistence of this illusion is astonishing.

This enticed the excessively greedy American CEOs to send all their manufacuring to Japan and later other Asian centers where the manufacuring WAS done and the Asian engineers (with degrees from US universities) reinvented and improved the product while US engineers and product developers sat on their thumbs.

The very notion that the "natural" (Hah!) changes to industrial society will evolve to leave the US smelling like a rose is a childish delusion.

I don't see anything good coming out of this in the short-run.

sds

The real question is what to do with the proverbial 16 yrd old who is no longer needed to swipe things.

If its a 16 yr. old, then the answer is simple: trade school/university for a marketable skill.

If it is a 40/50/60 yr. old laid off assembly line worker it gets more difficult.

In the EC they decided to just pay those people to retire once they were laid off. This is causing a huge debt/entitlement burden on all segments of society.

In the US, these people are being laid off and we are having a debate about how to use them. In Detroit/Pittsburgh they continued to be paid to sit at work an not work or were given early retirement packages. In the south they were moved to assembly lines for different products and re-trained. In the north-east and West-coast they were moved into service industries.

The results over the past 15 years can be seen quite clearly.

Emhert in Norway

sds:
I have some questions just on mechnical level on your comments:
"store will need to call a computer repairman to fix it when it breaks"
how often computer breakdown nowadays, if at all? Does your personal computer breakdown annually?
I have drove an used Volvo for 5 years, haven't had any repair thus far.
"there will need to be people to ship the computer to the store and people to set the computer up."
How often new stores open up in America? (or close down? I travelled to California and NYC last years, everywhere is Store Closing Sale sign.)
"the store owner will have more profit and open more stores, or upgrade existing ones, or dividend the profit to himself (see (a) above for the results of that) thus employing more people"
Do you have any data suggest more profits lead to more stores opening? This is very common misjudgement. If more employers profit lead to hire more people, Wall Street would be the Fastest growing sector of employment in US, it is not and it will not be!
British author Bernard Shawn once said: "Most Ignorance come from apply sloppy thought process and outdated theory to different reality."

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htb

The country-specific income inequality issue always seems like a bit of a red herring to me.

At some level, I think: So what? Why is it terrible for low-paid/low-skill jobs to be paid what they're worth here, rather than having them paid what they're worth elsewhere?

Let's say that my next-door neighbor has a low-skill job and is paid poorly.

Why is it worse for my next-door neighbor to get paid barely enough to eat and pay the rent, than to have some other human get paid barely enough to eat and pay the rent?

Why should I consider myself "just" if I increase equality in my own country by decreasing equality in the entire world?

htb

Emhert, even in this weak economy, there are thousands of new stores and other businesses opening each day. Opening a new retail store requires:

(1) A place to have the store.
(2) A 'business license', which basically requires you to provide your contact information to the city government and to pay a small fee, and which can often be issued on the same day that you apply for it.
(3) A sales tax identification number, which is usually issued instantly by the state.

Things are slightly more complicated if you want to sell unpackaged food, dangerous things like gasoline, or some kinds of medicine, but as a general rule, everything else (such as structuring it as a corporation or hiring employees) is legally optional.

Because the transaction overhead is so small, people are constantly starting up new businesses (including people that know so little about their industry that they're going to go broke before long). These days, my local runs a few stories a week about new businesses, and often describes the location of the new business by telling readers which now-closed business used to be in the same building.

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Panem et Circanses

What always gets forgotten in stories such as this is that cheap Chinese products help prosperity now by allowing people to buy more things with less money. That benefit disproportionally helps those with lower incomes, to whom the benefit can be large.

gary

upgradation from the value chain had been a common phenomena for centuries. Even with the industrial revolution, people in Europe who were mainly peasent or farmers moved to industry related jobs... and most of the agriculture work was done in the colonies conquered by the Western empires... What is happening today is the same thing with a different aspect of technology. This global/local shift of labor is nothing new, though with the advancement of technology the "cycle" has been reduced considerably, therefore one is always in a constant learning cycle which can be very stressful....

Mile high

#9, just because people starting up new business everyday, doesn't mean our economy is healthy.
right, starting business in easy, the hard part is staying open and remains profitable.
US very likely repeating the mistakes, easy credit, or liar's loan or speedy mortgage, shortly afterward,
Chapter 7 or chapter 11 bankruptcy, store closing, foreclosure etc.
Less than 18 months after closing his pet grooming business in Denver, my neighbor opening up a dessert shop at the very same site of pet grooming. Our so called consumer oriented economy is vey phony, to say at the least.

justin

I would like to suggest that there is a larger dynamic at work, namely that of "The Jobless Future", the ultimate product of capitalism, the greatest system humanity has ever developed for creating material wealth. Unfortunately it's rather poor at distributing the wealth it creates. Capitalism succeeds because its core function is to create greater and greater material wealth by continually increasing the efficiency of its production. It does this by harnessing and nourishing science, technology and social innovation to get more and more output at less cost from its human creators, i.e. fewer and fewer people (the most expensive part of production) are needed to meet society's material needs. While the final result of this process is probably asymptotic, it, like the growth of material production, is probably also non-linear.

Intisar Malhi

Justin (post 13) is right on the money. A purely capitalistic system, and even worse - one that is further skewed by government bailout of large companies, drives wealth into the hands of few. The eventual flow of wealth is from poor and middle class to the wealthy.

We need a system that encourages growth and competition but not the expense of the poor and middle class.

Intisar Malhi

Justin (post 13) is right on the money. A purely capitalistic system, and even worse - one that is further skewed by government bailout of large companies, drives wealth into the hands of few. The eventual flow of wealth is from poor and middle class to the wealthy.

We need a system that encourages growth and competition but not at the expense of the poor and middle class.

F. Karlson

htb:
What's motivate people starting up new business in US? It would be the Wrong reason to start a business due to -
transaction overhead is so small and or unable to find a job.

steven

the increase in innovation is the competition effect in standard endogenous growth models, aka Aghion and Griffith (2005 i think).

but not considered in the paper is the demand side effect, where innovations have increased production in new industries, pushing up wages making low technology industries undesirable. hence people now earn more and can afford to import from countries were the wages are still low. I would suggest that most of the impact comes from the demand side, that we can now afford imports we no longer wish to produce these products ourselves. Forget trade liberalisation as the reason. trade restrictions simply delayed the impact. It is not that trade caused innovations, but that innovations caused more trade and a greater need for trade liberalisation.

If we had no trade restrictions in the first place, those employed in low skilled industries wouldn't have had careers in those industries and would now have skills useful to the economy. lets not go backwards and force this on another generation by maintaining trade barriers.

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