Don't Blame Blue Collar Pay

"American manufacturing suffers from lots of things, but excess blue-collar pay isn’t one of them."

(By Josh Bivens at the Economic Policy Institute)

In a New York Times column today titled What Really Ails Detroit, Stephen Richter repeats a common story much beloved by serious-sounding pundits who don’t know much economics: that the thirty year run of broadly-shared growth after World War II was only possible because of "the absence…of any real competition from other nations," and that American workers’ troubles since then are their own fault for not getting smart enough to compete on the global stage. He asserts that even as this international competition increased, "companies like General Motors continued to shower blue-collar workers with handsome pay and benefits," hobbling their ability to compete, even as they refused to up-skill sufficiently to compete in the global economy.

This narrative is really common ---common enough to see if it holds up to any serious data scrutiny.

Start with claims that excessive blue-collar pay destroyed manufacturing. For a paper examining those claims, check this out. Spoiler alert: it’s not. Inflation-adjusted hourly wages for production workers in U.S. manufacturing peaked in 1978 and were about 8 percent lower in 2007, while manufacturing productivity rose by well over 100 percent in that period.

More generally, one really shouldn’t be allowed to just hand-wave about "global competition" as an inevitable destroyer of American living standards without mobilizing some evidence that you understand either what determines these living standards or the economic mechanisms through which globalization affects them.

The first-order determinant of average living standards growth in a country is simply domestic productivity growth, which is driven by labor force quality, the size of the capital stock, and the state of technology. It is hard to see how, say, a larger capital stock in Singapore or South Korea or Italy has any effect at all on these first-order determinants of U.S. productivity. Did a rising ability to produce stuff in these countries wreck U.S. factories, or make U.S. workers stupid, or make U.S. managers forget how to organize production?

Theoretically, increased global competition could introduce a wedge between domestic productivity and domestic living standards growth if it eroded a country’s terms of trade with the rest of the world. Imagine for a second that the United States only produced automobiles. Now assume that even though there has been no change in the pace at which we get more productive producing physical automobiles, international competition drives down the global price for them, so we get less and less on global markets for each auto produced. This is possible, but it hasn’t really happened. In fact, U.S. terms of trade dragged on living standards more between 1947 and 1979 (the alleged Golden Age of no global competition) than it did between 1979 and 2007, and this drag was trivial in both periods.

It is true that increased global trade can (and does) increase inequality in the U.S. economy, so even as average living standards growth continues apace that a large share of American workers are left behind. This has happened, and it’s a bigger deal than many think (I’ve written on this here and here).

But this is not a story of American workers getting stupider, as Richter sets it up. Instead, it’s a story about how globalization’s rules of the game increasingly place blue-collar workers in direct competition with workers around the world, while corporate interests are protected.

Further, the impact of trade on inequality is (mostly) a story about trade with much-poorer countries. But given that the large majority of autos and auto-parts imported into the U.S. come from Canada, Japan, and Germany --- countries with comparable or higher wages than the United States --- it fits strangely with a story about the long-run decline of Detroit.

Lastly, for a story that claims to tell you what’s really wrong with U.S. manufacturing, it is odd indeed to not see a word about exchange rates. The value of the U.S. dollar has consistently hamstrung U.S. manufacturing over the past 20 years and can explain a large share of (non-recessionary) employment loss in this sector since 1997. There is far, far more evidence linking this to manufacturing’s woes than any alleged skills-gap among American workers.