Two short papers in the December 2005 issue of the American
Economic Review unintentionally but nicely complement each other.
The first paper is by Matteo Cervellatti and Uwe Sunde,
entitled “Human Capital Formation, Life Expectancy, and the Process of Development.” The second is by Chang-Tai Hsieh and Keong T.
Woo, entitled “The Impact of Outsourcing to China on Hong Kong’s Labor Market.”
Cervellatti and Sunde conclude that
Wages, which are determined by productivity, and life
expectancy are the crucial variables in the individual education decision. In turn, this education decision has
implications for the education decisions of future generations, both through
changes in life expectancy and the productivity of human capital. Thus, advances in technological progress,
human capital formation, and longevity potentially reinforce each other. The cost of acquiring skills are
prohibitively high, however, for large parts of the population in an
underdeveloped environment, that is, when life expectancy and productivity are
low. Only once the entire system is
sufficiently developed does the positive feedback loop have enough momentum to
overcome the retarding effects of costs for human capital formation.
Hsieh and Woo find
evidence of strong and persistent
relative demand shifts favoring skilled workers in Hong Kong since the early
1980s, which is when outsourcing to China started to take off.
We can infer from Hsieh’s and
Woo’s finding that Hong Kong’s comparative advantage today is in producing
goods and services with skilled labor. This fact is unsurprising given that Hong Kong has for several decades now been one of the freest societies on earth – and has
become one of the most prosperous. Cervellatti’s
and Sunde’s explanation drives this point home: because Hong Kong’s prosperity
is now long-lived and reasonably secure, people there a while back began
investing more heavily in the accumulation of human capital so that today most
people in Hong Kong enjoy a comparative advantage in skill-intensive sectors.
But shouldn’t we worry about Hong Kong’s unskilled workers? More generally, shouldn’t we worry about
unskilled workers whenever trade shifts demand from their output to that of
their more-skilled countrymen? I think
not. Or, put differently, here’s my
hypothesis for why the existence of low-skilled workers ‘left behind’ by freer
trade policies is no reason to reverse or even to slow movement toward free
trade.
By increasing labor productivity,
free trade increases general prosperity, which increases life expectancy. So free
trade increases the returns to human-capital investments. This fact, in turn, shrinks over time the size
of the group of people classified as “unskilled.”
In other words, because free trade
increases wealth (and, hence, life expectancy), it supplies increasingly
stronger ability and incentives for people to acquire work skills. Today’s group of unskilled workers (however
large or small it might be) would have been larger had trade policies been less
free. And the size of tomorrow’s group of unskilled workers will be even smaller if free-trade policies are followed.
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What about something else. Many emerging productivity centres were/are the results of derivative applications. By that I mean able to successfully use techniques developed elsewhere. The US did it in the early 1800s and the theft has been copied since. Intellectual property? Never used to exist, had a little value in decades past but I suspect it will become more important in the future.
This has happened all over the world–Hong Kong, Britain, Chile, Ireland–all have gone in the last 30 years from being predominantly poor/industrial and unskilled to skilled and wealthy. The countries as a whole are obviously better off (I've visited many of them).
Countries that have reversed course and followed the path of control–such as Argentina, Venezuela and Zimbabwe–have seen their conditions drastically worsen. Since these countries already had skilled people, they are either completely "deactivated" or are fleeing for places that appreciate them.
Its a fantastic natural experiment, yet people still do not get it: it is not worth squelching freedom to temporarily improve the positions of the most-vulnerable in society.
"By increasing labor productivity, free trade increases general prosperity, which increases life expectancy. "
Have you read the BLS data on productivity and wages of non-farm workers since 2000?
free trade increases the supplier's side quest for LOWER PRODUCTION OF GOODS cost. The benefit for buyers is more choice / lower price. The draw back is that the buyers who require jobs to sustain themselves (those who do not live off of the profits from sales of 15% dividend taxes and 0% stock options taxes) need to maintain a have a "good" job in order to benefit from free trade. It is quite obvious to anyone in IT, manufacturing, retail & now engineering, in the US, below the manager level, that their long term job prospects are grim without complete retraining and risk.
It is because of this that we will have many lower priced and goods, new brands, all produced elsewhere, and lower paying McJobs to go along with it. The downward pressure on prices will directly cause a downward pressure on wages, but the wages' pressure will be lagged by a decade.
Let's see… Lower prices of goods with an effective 2-class sytem where the majority of jobs are very low paying with little or no benefits (you don't have to be competitive with wages when there are more people than jobs available.) Sounds like the history of the rich vs poor struggle up until The New Deal in the United States. Labor unions will be busted up since there will be no one with a job to participate in them. Environmental protection and OSHA will be repealed in the name of creating jobs and expanding economic growth at the expense of uninsured workers.
Triangle-Waist Shirt Factory, we have learned nothing from you.
If the WTO had any use it would be to break up OPEC and other economic monopolies, not going after ancient German beer importation laws and online gambling legality in the US vs Antigua.
Life expectancy is more a result of affordable medical care. Guess which direction that is going due to medical pricing and supplier-side economic incentives from the government (my tax dollars are funding drug research, but I'll be charged heavily until derivatives can be created 20 years after the discovery of the drug when its patent expires.)
Walmart does not pay for its employees' healthcare, the united states tax payers do. Healthcare companies lobby congress to keep their product rates high and their product development subsidized.
When academic economists speak of free trade remember that they preach it, but do not participate thanks to tenure.
–Free Trade?
Ninja, please!
"It is quite obvious to anyone in IT, manufacturing, retail & now engineering, in the US, below the manager level, that their long term job prospects are grim without complete retraining and risk."
With the exception of manufacturing, absolute nonsense.
I'll speak specifically to IT since that is my field. A lot of folks are worried their jobs will be outsourced to the other side of the globe. Some of this will happen. But the basic truth is that most IT jobs, and all of the best ones, require closer collaboration than is possible through long-distance communication, and require more shared culture than India will ever have with the US.
For example, I develop business reports using Oracle. My job cannot be outsourced, not to India, not across the street, because it requires an intimiate, day-to-day, face-to-face relationship with dozens of people within the firm. It also requires a detailed knowledge of our business processes, which we change literally every week.
I am lucky to be an IT pro with an understanding of economics, because it frees me from all this unnecessary worry.
Trade implies an exchange of goods and services. The purchase of cheap unskilled labor in exchange for currency is not trade. The fact that governments allow these purchases should not be looked upon as free trade. Even as unskilled as the Chinese labor force is, it manages quite well on technology it had no hand in developing. The Chinese are not blind either. They realize that they are dismantling and disassembling the core underpinnings of any country purchasing their cheap labor. To be more precise, they are eliminating the inherent backing of any currency they hold. That means that after sufficient transactions, this currency becomes less acceptable to them. How does any country redeem its currency in such a situation? How does this relate to longevity. The fact that some obscure Russian community in the mountains has a life expectancy of 100 years, suggest that there is no correlation between free trade and longevity. And, what of the effects of increased industrial pollution? Does that decrease life expectancy? Cuba has a highly educated populace that does not seem to do them much economic good, so I don't know where the validity of any of the points in either article exists.