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Blue Collars Lose Ground – Don’t Blame Trade

By Shlomo Maital

     Led by the Trump Administration in the US, worldwide there is a counter-revolution against globalization. Right wing governments are being elected in Hungary, Italy, Austria, partly in Germany, and elsewhere, reacting against the ravages of globalization – particularly, the claim that blue collar workers are being scalped by it – by migrants (free flow of labor) and by trade (free flow of goods).

     America, which invented this amazing system that made many emerging economies wealthy (East Asia, primarily) now leads the charge against it.

     And this whole counter-revolution is based on a falsehood. Don’t blame trade. Blue collar woes have another primary cause, according to Harvard University Professor Elhanan Helpman, in his new book Globalization and Inequality. It was not primarily free trade (globalization) that caused the large gap between blue collar and white collar wages.

     Earlier, in 2016, Helpman published an NBER working paper * showing this (typically understated, as academic researchers are wont to do):

       Trade played an appreciable role in increasing wage inequality, but its cumulative effect has      

       been modest, …globalization does not explain the preponderance of the rise in wage inequality

            within countries.

   What, then, does explain it? Technology and productivity.

     Studies show that the premium for a college education (i.e. skilled workers) was 63%.   The blue collar/white collar wage gap results from basic supply and demand factors, “…the dominant cause was an increase in the relative demand for skilled workers”.

   OK – so who is to blame?   American political leadership, for failing to find ways to upgrade the skills of blue-collar workers, especially in America’s failing and failed educational system.   And, as New York Times op-ed columnist David Brooks has noted – the educated elite simply ignored the plight of the non-educated elite – and the price they pay is the election of Donald Trump.

* Elhanan Helpman. “Globalization and wage inequality”.   NBER working paper 22944, Dec. 2016.