SYNOPSIS: Speech featuring Krugman's well-founded belief that trade and wages aren't correlated.

On October 4, the noted American economist Paul Krugman was the featured speaker in Industry Canadas Distinguished Speakers in Economics Series. In an address to department staff entitled Trade and Wages, Krugman took aim at those who argue that there is a close link between globalization, growing trade, and declining wages in industrialized countries.

On the relationship between trade and aggregate incomes, Krugman said that international competition has not been a major drag on aggregate real incomes in advanced countries and asserted that this position is solidly supported by readily available data. Krugman also considered it unlikely that competition from the newly industrializing economies would depress incomes in the future. In the OECD countries today, exports to newly industrializing countries are a small fraction of expenditures - less than two percent. Thus, even a large deterioration in the relative prices of goods exported from the OECD would have small impact on real incomes in these countries.

Nor, says Krugman, can redistribution from labour to capital have played a large part in the decline of wages. For example, there has been no rise in the share of capital nor a fall in the share of labour in the national income of the United States. He did not dismiss the possibility that capital mobility might reduce wages in the future, but he suggested that the size of the capital flow required to cause this decline would seem to be implausibly large in practical terms.

Deindustrialization and Wage Declines
Krugman was also skeptical, but did not dismiss outright, the theory that trade-induced loss of high-wage jobs or deindustrialization has had much to do with wage declines. He argued that with the economic models he has been able to construct, the negative impact of trade is well under 0.5 of one percent. He concluded that while there might be a grain of truth to the hypothesis that deindustrialization has led to declines in the wage rate, it is just a grain.

In the case of arguments pointing to a skill premium, Krugman again noted that trade between the OECD and the newly industrializing countries is still not a very large share of OECD GDP. Ultimately, therefore, declining wages cannot be created by skill differences.

Krugman was highly critical of commentators who blame declining wages on rising globalization and world trade. World demand, he asserted, is not a given. Therefore, the arrival of new players on the world market does not necessarily hurt those who are already there. Krugman, who developed his rebuttal on the basis of four separate economic models, noted in closing that it is exactly when the conclusions produced by our economic models surprise us, that economic theory is most useful. Regrettable then, in his opinion, that so many prominent economic commentators have chosen to ignore the economic results.