Why Wages Fall

by F.

Jagdish Bhagwati has a good piece in today’s FT on what really causes wages to fall or stagnate (as with the American middle class):

The culprit is… labour-saving technical change that puts pressure on the wages of the unskilled. Technical change prompts continual economies in the use of unskilled labour. Much empirical argumentation and evidence exists on this. But a telling example comes from Charlie Chaplin’s film, Modern Times. Recall how he goes berserk on the assembly line, the mechanical motion of turning the spanner finally getting to him. There are assembly lines today, but they are without workers; they are managed by computers in a glass cage above, with highly skilled engineers in charge. Such technical change is quickly spreading through the system. This naturally creates, in the short-run, pressure on the jobs and wages of the workers being displaced.

Contrary to popular bullshit (e.g., Lou Dobbs), trade does not depress wages:

First, all empirical studies, including those done by some of today’s top trade economists (such as Paul Krugman of Princeton and Robert Feenstra of the University of California, Davis), show that the adverse effect of trade on wages is not substantial. My own empirical investigation concludes that the effect of trade with poor countries may even have been to moderate the downward pressure on wages that rapid unskilled labour-saving technical change would have caused.

Second, the same goes for the econometric studies by the best labour economists regarding the effects of the influx of unskilled illegal immigrants into the US. The latest study by George Borjas and Larry Katz of Harvard also shows a virtually negligible impact on workers’ wages, once necessary adjustments are made.

So don’t blame that sweatshop worker in Thailand or the call-center manager in Bangalore; blame the computer for stagnant middle class wages.

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