But I'm not sure US wages are still "higher". Higher than wages in China, maybe, but China is a latecomer to our trade deficits problem. So I have to stop and wonder if higher US wages really are the problem. Because, you know, for me it's always the cost of finance that creates our problems.
At a glance, all the Google search results mention labor. Like my wife, everybody thinks US wages are the cause of our trade deficits. But that's why I do graphs.
To see for myself.
The trade deficit developed in the 1970s...
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| Graph #1: US Trade Deficit as Percent of GDP |
... just about the same time that wages inexplicably started falling behind:
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| Graph #2: via EPI |
Odd, isn't it? Looks like the trade deficit developed when we didn't have the income to "buy American" because our wages were too low. Not because our wages were too high.
Nobody ever points this out, but if wages were too high, wouldn't that be good for wage earners? When I look at the economy I don't see "good for wage earners".
You've heard of "labor share" -- labor share of income. You might have heard people say labor share has been falling since the year 2000:
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| Graph #3: Labor Share |
At FRED a search for Costs per unit of real gross value added of nonfinancial corporate business: turns up 10 series. Five of them show quarterly data. Among these are "Compensation of employees (unit labor cost)" and "Unit nonlabor cost".
If a cost is not a labor cost, it's a non-labor cost, right? So if I take labor cost per unit, and add in non-labor cost per unit, then I have the total cost per unit.
Labor cost per unit relative to total cost per unit shows decline from beginning to end:
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| Graph #4: Unit Labor Cost as a share of Unit Total Cost |
Here, maybe this is a better picture. Compensation of employees as a share of Gross Domestic Income:
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| Graph #5: Employee Compensation as a Share of Income in the US |
Maybe the big spike in compensation, 1965-1970, made US goods and services too expensive to compete in global markets, creating our trade deficits?
Maybe. But compensation has been trending down since that peak in 1970. Meanwhile, trade deficits have been getting worse, not better. So there does not seem to be a clearly defined "high employee compensation causes trade deficits" relation.
Anyway, since the early 2000s, employee compensation (as a share of US income) has been lower than it was in the 1950s and 60s. And the trade deficits just get bigger.
Are US trade deficits caused by high US labor costs? I don't think so.
2 comments:
Maybe there were other things going on, like reduction of tariffs, introduction of free trade agreements, etc, from the 80s on? I think there were but I don't see a graph for it.
It would make sense to me that the goods from over there are cheaper since they are generally regulated less (pay people less, pollute more, lower safety standards, probably lower materials standards, etc).
It does seem counterproductive to reward countries (at our expense?) for that kind of behavior...I don't know if this would work or not, but I would be tempted to put contingent tariffs on to try to compensate for that difference, and then remove them as those regulatory issues were addressed. e.g. "if you add a minimum wage and your labor costs go up to what ours are, we'll lower the tariff by X. If you enforce equivalent environmental regulations and your pollution goes down to such and such target, we'll lower the tariff by Y." etc. It wouldn't really be "America first", but it would be good for everybody (e.g. in the sense of ozone holes and climate change).
Hey Jerry. Here is a not-very-informative graph on tariffs since 1800.
I like your "contingent tariffs" idea. A lot.
I also have no problem with a small tariff that favors domestic over foreign production & consumption. Tariffs are always evaluated on their economics but never on the thought that The Wealth of Nations (for example) was implicitly and explicitly based on "Nations" as the context in which wealth was produced.
And yes, in the pre-Trump world we could have had an "America first" that dealt with ozone holes and climate change. And wouldn't it be nice if the idea was presented to the world as an American idea.
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