The answer, I suspect, is: not much. These papers by Ann Harrison and colleagues (pdf) and Jonathan Haskel and colleagues (pdf) show that it is very hard to link declining US real wages to increased openness to trade. Equally, it is unproven (to say the least) whether increased immigration has contributed to falling wages: George Borjas’s claim that it is has has been sharply challenged (pdf).
Common sense should also make us doubt whether globalization is to blame.
For one thing, cheap imports should help workers. If you’re spending $5 on a Chinese T-shirt rather than $10 on a US-made one, you’ve got $5 more to spend on other things. That should increase demand and jobs. And insofar as it cuts inflation, cheaper imports should allow real interest rates to fall – which should increase economic activity and jobs. And this is not to mention that globalization has probably cut interest rates in another way since the 1990s, thanks to the Asian savings glut.
Such doubts about the adverse effects of globalization are reinforced by casual empiricism. The pace of globalization – measured by growth in world trade - has slowed markedly since the financial crisis. But US real wages, until very recently, haven’t improved. This tells us that other things might have depressed wages of ordinary Americans.
What might these be? Here are seven other suspects (there might well be more), some of which date back years and some of which are more recent:
- Financialization. For example, increased corporate debt, especially in the 80s and 90s incentivized firms to cut costs aggressively. Englebert Stockhammer estimates (pdf) that this was a more important factor in depressing the share of wages in GDP than globalization.
- Skill-biased technical change (pdf). Since the 1980s, new innovations have increased demand for skilled workers rather than for unskilled ones.
- Power-biased technical change. Innovations such as CCTV, containerization and computerized tills have given managers more direct oversight of less-skilled workers, which has removed the efficiency wage element of their pay.
- Lower minimum wages. The real value of the US minimum wage is 20% lower now than it was in the 1970s.
- A meaner welfare state. In incentivizing people to find work, cuts in welfare benefits have reduced wages by increasing labour supply and weakened workers’ bargaining power by worsening their non-work options.
- The productivity slowdown. In the last five years’ labour productivity has grown by just 0.7% per year, compared to 2% per year in the 30 years before the 2008 crisis.
All this poses a paradox. Although the economic evidence suggests that globalization is, at most, only one of many contributors to the declining fortunes of middle America, it has dominated the political debate to the exclusion of those other factors. Why might this be? At least part of the answer is that it suits some people very well for foreigners to get the blame rather than for inequality and the health of capitalism to come under scrutiny.