(2004-01-21) Kling Offshoring Ricardo

Arnold Kling on Off Shoring, David Ricardo, Michael Lind, and Paul Krugman. ...then we would observe a fall in the share of National Income going to labor. However, the labor share remains as stable today as it was when Krugman pointed out that this data refuted Lind's claim ten years ago. Stability of the share of income means that as the economy grows (and jobs moves offshore), workers are gaining as much in percentage terms as capitalists... Martin Neil Baily... reinforced what I wrote last year for TCS, where I argued that the key to increasing NetExports is to increase Net National Saving... There is no need to "create" Comparative Advantage. As long as two people have different skill sets, there will be Comparative Advantage. Even if one person has better skills in all areas, there is a pattern of Specialization that is more efficient than simply randomly assigning tasks to each person... When people claim that the overall economy has "lost" jobs because of trade, they are ignoring an equilibrium condition and speaking as if there were no symmetry (or no Federal Reserve). That is a fundamental error - the equivalent of ignoring gravity in physics or evolution in biology. What is true is that the demand for labor can fall in some easily-identified industries while it increases in other industries in ways that are less visible... This sort of Downward Mobility has been forecast repeatedly by noneconomists over the past several decades, and it has yet to occur. Economists see Upward Mobility as more likely, because it is extremely difficult to obtain Lind's prediction without violating equilibrium conditions. If wages and Productivity are linked, and Indian office workers become as productive as American office workers, then Indian office workers will earn American wages, and everyone will be better off. The only way that Indian office workers can continue to earn less than American office workers is if Indian office workers are less productive than American office workers. The only way that Indian office workers can displace American office workers without being as productive as American office workers is if there is some other industry in which America's productivity edge over India is even greater. In that case, American labor will tend to shift to that relatively more productive industry. That is more likely to lead to higher wages in America than to lower wages.