Thursday, January 17, 2008

Compensating the unemployed?

The NYT has a stern neoclassical defence of free trade (by Stephen Landsberg) with outsourcing. Landsberg is clearly discussing US-Chinese trade from the US viewpoint. The gist is that just as we should not feel morally obliged to compensate a restaurant owner when we shop for food at a cheaper McDonalds store so too the US should feel no obligation to compensate a worker when his job disappears because of outsourcing of work to China.

A couple of weeks ago I outlined the non-new thesis by Paul Krugman that significantly higher levels of US trade with low labour cost countries promotes inequality. I argued that education and compensatory tax transfer policies could address these issues while leaving the benefits from free trade intact.

Landsberg’s argument seems to confuse efficiency and equity issues. Both he (and Krugman & myself) believe price reductions from trade liberalisation do provide ‘gains-from-trade’ to the community as a whole but there is still an issue of inequality that most of us are concerned with addressing. As far as I can see there is no substantial intellectual case against free trade. But there is recognition that inequality will worsen as most manufactured goods in developed countries are produced in low wage countries and this needs to be addressed. Indeed it wouldn’t make much difference how the inequality was generated it would need to be addressed.

By the way twice in my life I have been in situations where job layoffs occurred. I saw the psychic misery and anxiety that was generated. I have also had friends and colleagues who unsuccessfully sought paid work for long-periods – one did charity work for a time because he felt so useless and despondent.

Since these events I have always been fairly hostile towards well-paid economists whose attitude to people losing their jobs is, ‘oh well, that’s life’. Landsberg’s ‘ho-hum’ attitude does not impress.


Spiros said...

Harry, how many people actually get fired because of free trade? I know there are some, but isn't it more the case that over time job opportunities dry up in manufacturing industries and so people don't get hired in the first place?

I think it's an important distinction because I don't think there's a strong case for compensating someone just because they had their heart set on working for Mitsubishi when they left school only for them to find that they can't, and they have to find work elsewhere, which these days isn't that hard.

derrida derider said...

Well said, Harry. As a labour economist I can see the abstract benefits of "a more flexible labour market", as someone who has seen what that can mean in practice for people I'm not so dogmatic about it.

But I always thought that on good neoclassical grounds increased trade with a more unskilled country must, ceteris paribus, lower returns to the unskilled at home (Stolper-Samuelson and all that).

It oughtta be hard to deny the theory, so the arguments oughtta be about the empiric importance of that effect (as, to be fair, much of the US academic argument has been).

David said...

Inequality within countries is only one-half of the inequality issue isn't it? The other half is inequality between countries - and doesn't freer / more trade between wealthy and poor (low labour cost) countries tend to reduce that particular inequality?

davidp said...

I think determining the empirical significance of this is very important.

One important finding from plant level data for the US is that there is continual churning in labor markets (Davis, Haltiwanger etc). Put other ways, the gross flows (in and out) are much bigger than the net flows. So any sort of policy response to these changes needs to take account of this.

Similarly I don't know if this has changed (DD may know a more up to date resource) but the estimates I saw in graduate school was that most of the unemployed at any point in time found jobs very quickly. But that most of the unemployment was from the long term unemployed.

If these facts hold it is arguable that the appropriate policy is not to specifically target causes of change (like shutting down of Mitsubishi) but allow existing (or generate better?) general labor market programs to work (i.e. those aimed at the long term unemployed to deal with the long term unemployed from a shut down)

If the facts have changed then the policy perhaps should be changed.