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Claudiu Mihai. REI 2nd year. 935C

Ronu

Peer-reviewed Academic Article

Trade, Jobs and Wages

Krugman, P., Lawrence, R. (1994). "Trade, Jobs, and Wages." Scientific America (April 1994).

Introduction
Krugman and Lawrence (2004), sewed together empirical evidence to dismantle the
negative effects of international trade upon US workers over a period of 20 years, from 1970 to
1990. The article counters the conventional mentality that the erosion of blue-collar wages in US
is attributed to foreign competition, which consequently led to a decrease in the number of highly
paid jobs in the manufacturing sector. The inability of some US companies to sell in the world
market, while unskilled labor abundant Third World countries flood the country with cheap
imports, seems to support this common way of thinking. This view is contradicted by
accumulated evidence which shows that international competition has little to do with the
stagnation of real wages in US. Rather, the culprit lies inside the domestic economy.

Summary
The article is structured on three major parts: the effects of international trade upon US
manufacturing sector, the influence of international competition on real income and the course
followed by income distribution under growing trade conditions. In the concluding section the
author draws the attention upon the biases in the assessment that international trade is
responsible for the deindustrialization of U.S. and crystalizes a final argument against this
misconception.
After the introductory part, in which Krugman and Lawrence familiarize their readers
with the topic of the text, they begin the debunking work by formulating the prevalent hypothesis
that supposedly explains the shrinkage in the manufacturing sector. Between 1970 and 1990 the
manufacturing sector declined in its contribution to GDP and employment by 6.6% and 9.9%
respectively. In the same period manufacturing imports rose with 26.8 percentage points. This
simple argument does not explain itself the decline in the relative importance of manufacturing.
Looking also at the exports, Krugman and Lawrence found that US registered a trade deficit
since 1970. This deficit though is overestimated since only 60% of the value of manufactured
sales is paid to labor or capital and the rest going to the service sector. Such a small deficit could
not therefore cause only itself a disproportional decrease in the share of manufacturing.
An accumulation of stimuli actually led to this effect. Contrary to the common view at
that time, productivity growth in manufacturing sector actually increased, mainly due to the
automation of most production processes (consequently, the demand for blue collar workers

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decreased). This increase in efficiency meant a decrease in consumer prices but not in the
quantity bought. Parallel to the shrinkage of the employment pool in the production sector,
domestic spending increased for services in the detriment of manufactured goods. Caught
between a rock and a hard place, employees were in reality affected by domestic changes rather
than by foreign competition.
For the full understanding of the second part, a vital prerequisite is obligatory. Due to the
many assertions attributed to the term competitiveness, the authors argue that an objective
definition is required. Thus, one cannot speak of a competitive problem if a smaller percentage
growth is registered in US than in other countries. The slow growth in earnings relative to other
countries does not mean a decline in the standard of living of income recipients. This biased
vision derives from the outrage of certain commentators regarding the unequal growth between
manufacturing productivity and income, the latter rising slower than the first. But as it was
demonstrated above, this increase in productivity is due to automation of the production lines,
thus to innovation and scientific development not to the rise in productivity of laborers
themselves.
When discussing the distribution of income in relation to trade the best suited
international trade theory to explain this phenomenon is factor price equalization. Under this
theory, the US ratio of skilled to unskilled labor should follow a downward slope in every
industry, thus modifying the mix of employment. This means that due to the fact that wages for
specialized workforce rise, all industries would employ lower levels of skilled workers. The
empirical evidence actually shows the opposite of this prediction: although the skilled employees
were getting paid more, all sectors continued to employ even more of them. Also industries
requiring skilled personnel grew almost in the same pace as low-skilled industries. The growth in
demand for skilled workers is thus a consequence of the demand changes within an industry
rather than of international trade. The reduction in demand of less skilled workers should be
attributed to another factor: technological advancements. Krugman (2000) supported this
assumption through a mathematical analysis.
The concluding remarks restate the authors main points in countering the toxic effects of
trade but also points out the fact that although the data is not hard to interpret, the way it is
displayed could guide the readers into a misleading deduction.

Personal evaluation
The clear and concise style of the authors, polished by their intensive work in the study of
international trade, gives the article a simplistic approach that would appeal even for the
inexperienced reader. Although using the most basic methods of presenting both theoretical
knowledge and empirical findings, the text doesnt lack the depth characteristic for the academic

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work. Another strong point is that in his demonstration, Krugman and Lawrence present multiple
ways of looking at the same problem, thus eliminating any ambiguity that might revolve around
the subject.
On the other hand, while the style is fluid and accessible, I encountered a lack of detail
regarding the factor which prevented the factor price equalization from happening: technology
advancement. While in discussing the relevance of domestic factors on the decline of the
manufacturing sector and on income the author gave extensive presentations, when supporting
the argument of technology on income inequality, the exposition is missing altogether. Although
Krugman (2000) discussed in great detail its effects, I still believe that more arguments in the
present paper were necessary in this area.
The article successfully presents arguments which contradict the view that international
trade leads to a worsening of certain industries. An inward perspective would help policy makers
and businessmen understand the macroeconomic disparities better than attributing the fault to
foreign competition. All things considered, the work of Krugman and Lawrence (1994) remains
relevant even today for many developed countries, helping them address domestic issues
regarding decreasing industry shares.

References
Krugman, P., Lawrence, R. (1994). "Trade, Jobs, and Wages." Scientific America (April 1994).
Krugman, Paul. R. "Technology, Trade And Factor Prices," Journal of International Economics,
2000, v50 (1 Feb), 51-71.