Imports, Exports, and the American Worker

By Susan M. Collins | Go to book overview

TWO
Trade and Wages: A Malign Relationship?

Jagdish Bhagwati

THE DECLINE in real wages of unskilled workers in the United States during the 1980s, and the increase instead in the unemployment of such workers in Europe (due to the comparative inflexibility of European labor markets vis-à-vis those of the United States), has prompted a search for possible explanations.1 This search has become more acute in light of evidence that the adverse trend for unskilled workers has not yet been mitigated in the 1990s.

I thank Manmohan Agarwal, Don Davis, Vivek Dehejia, Bill Dickens, Robert Feenstra, Marvin Kosters, Robert Lawrence, Edward Leamer, Jacob Mincer, Arvind Panagariya, T. N. Srinivasan, and Martin Wolf for their helpful comments. Susan Collins deserves special thanks for many careful and constructive suggestions. A first draft of this paper was completed in February 1995 and revisions finalized in October 1995.

____________________
1
Note that this contrast between the United States and Europe is just that. It is supposed to explain only the differential impact of technical change, trade, and the like on wages in one country and on unemployment in the other. This labor market explanation is almost a cliché by now, having been propounded by virtually every economist who has spoken on the issue in the last several years. Among the more recent writings on the subject are popular pieces by Paul Krugman, me, and many others. Inflexible and hence distortion-characterized labor markets can be modeled in alternative ways, either as Brecher ( 1974a, 1974b) economies with a uniform, across-all-sectors, minimum-real-wage floor, or as relevant only to the modern sector in a dualistic economy. In the latter case, we can model the modern sector as

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