When Trump ran for President he proposed a total ban on Muslim's entering the U.S. until our representatives figure out what is happening. The last part was foolish and the first part was evil. That he would propose such a thing was something that made him unacceptable.
Before long, he came up with a different proposal. This time, it was not Muslims that would be banned but rather people from countries that are sources of terrorism and rather than the ban lasting until we figure out what was going on, people from those countries will be subject to "extreme vetting."
Trump's executive order appears more consistent with this second approach, which I think is sensible. The administrative incompetence was incredible. There was no need for a rush. How hard would be to slow down new visas? How difficult is it to devote more resources to investigation?
Of course, this would not involve some dramatic "action" by Trump. It just would have modestly improved security.
It is just difficult not to see Trump and his advisors as being both incompetent and cruel.
Tuesday, January 31, 2017
Saturday, January 21, 2017
Tariffs and Exports
If the Trump administration imposes a tariff on imports, it will result in a contraction of trade--both imports and exports. Frequently, it is claimed that this will only occur if foreign governments retaliate to tariffs on their exports to the U.S. with tariffs on U.S. exports to their countries. However, that is not correct. There is a market process that brings this about even without "retaliation."
The most direct process occurs with floating exchange rates, which is at least approximately the U.S. regime. The tariff reduces the amount of dollars paid for imported goods. This reduces the supply of dollars on foreign exchange markets and so requires an increase in the value of the dollar for the market to clear. This partly offsets the tariff by making the dollar prices of imported goods less, but it also makes U.S. exports more expensive for the foreign buyers. This results in a decrease in exports.
The U.S. currently has a trade deficit, and the stronger dollar will tend to reduce it. While an expectation of an increased value of the dollar will encourage foreigners to invest in U.S. financial assets, once the dollar is higher, U.S. real assets will be more expensive for foreigners. So, the result will tend to be a lower trade deficit as well as reduced exports.
The U.S. could use monetary policy to prevent the dollar from rising in value. This is done by increasing the quantity of money. The equilibrium consequence of this policy is higher inflation in the U.S. The higher prices in the U.S. will make foreign imports more attractive, partially offsetting the effect of the tariff, but will also make U.S. exports more expensive for foreigners, causing them to purchase less. Similarly, U.S. assets will be more expensive for foreigners to purchase, so that the trade deficit will be smaller.
Like most market monetarists, I think that prices are sticky, and that includes wages. The inflationary process would not be instantaneous or smooth. The increase in demand though out the economy would likely result in increases in output and employment. Wages are also very sticky, even in an upwards direction, so real wages would be depressed which should help employment. That effect would be especially strong in weak areas of the economy--including import competing manufacturing. Only in "the long run" would higher prices and wages result in a return to equilibrium.
It would be possible for the central bank to keep keep the dollar from rising while avoiding inflation by sterilization. The Federal Reserve would need to sell off dollar assets it holds while purchasing foreign exchange--foreign assets. This can last as long as the Fed has U.S. assets to sell. The result should be a reduction in imports and a reduced trade deficit. Unfortunately, the expansion in demand for the products of U.S. import competing industries will be offset by a reduction in the demand for the products of interest-sensitive industries--construction and capital goods. Once the Fed runs out of U.S. assets, allowing the dollar to rise would result in financial losses to the Fed. Perhaps this would lock in the inflationary equilibrium.
It would also be possible to blame the increase in the value of the dollar on currency manipulations by foreigners. A higher dollar is at the same time a lower pound, euro, yen, and renminbi. How dare they devalue their currencies to offset the effects of the tariffs?
Foreign nations could prevent their currencies from losing value by contracting their quantities of money. In the long run, this would result in them having lower prices and wages, and so U.S. buyers would find their imported goods cheap and they would find U.S. exports expensive. While that process would likely be long and painful, the effect on U.S. exports would be prompt. The recession induced by their monetary contraction would result in reduced U.S. sales in their markets.
Finally, they could keep their currencies from losing value by selling off any U.S. assets they hold and instead accumulating other sorts of foreign exchange or else each their own domestic assets. This would tend to shrink the U.S. trade deficit by reducing the amount of foreign funding of U.S. investment. This could last until they run out of U.S. foreign exchange. Again, any expansion in the demand for import competing industries will be offset by a reduction in demand in interest sensitive industries in the U.S.--construction and capital goods.
Changes in the composition of the Fed's balance sheet or the balance sheets of foreign central banks could shield U.S. exports from the decrease in imports for a time. It is only if such adjustments are made that a contraction in U.S. exports would only occur due to retaliation of increased tariffs.
The most direct process occurs with floating exchange rates, which is at least approximately the U.S. regime. The tariff reduces the amount of dollars paid for imported goods. This reduces the supply of dollars on foreign exchange markets and so requires an increase in the value of the dollar for the market to clear. This partly offsets the tariff by making the dollar prices of imported goods less, but it also makes U.S. exports more expensive for the foreign buyers. This results in a decrease in exports.
The U.S. currently has a trade deficit, and the stronger dollar will tend to reduce it. While an expectation of an increased value of the dollar will encourage foreigners to invest in U.S. financial assets, once the dollar is higher, U.S. real assets will be more expensive for foreigners. So, the result will tend to be a lower trade deficit as well as reduced exports.
The U.S. could use monetary policy to prevent the dollar from rising in value. This is done by increasing the quantity of money. The equilibrium consequence of this policy is higher inflation in the U.S. The higher prices in the U.S. will make foreign imports more attractive, partially offsetting the effect of the tariff, but will also make U.S. exports more expensive for foreigners, causing them to purchase less. Similarly, U.S. assets will be more expensive for foreigners to purchase, so that the trade deficit will be smaller.
Like most market monetarists, I think that prices are sticky, and that includes wages. The inflationary process would not be instantaneous or smooth. The increase in demand though out the economy would likely result in increases in output and employment. Wages are also very sticky, even in an upwards direction, so real wages would be depressed which should help employment. That effect would be especially strong in weak areas of the economy--including import competing manufacturing. Only in "the long run" would higher prices and wages result in a return to equilibrium.
It would be possible for the central bank to keep keep the dollar from rising while avoiding inflation by sterilization. The Federal Reserve would need to sell off dollar assets it holds while purchasing foreign exchange--foreign assets. This can last as long as the Fed has U.S. assets to sell. The result should be a reduction in imports and a reduced trade deficit. Unfortunately, the expansion in demand for the products of U.S. import competing industries will be offset by a reduction in the demand for the products of interest-sensitive industries--construction and capital goods. Once the Fed runs out of U.S. assets, allowing the dollar to rise would result in financial losses to the Fed. Perhaps this would lock in the inflationary equilibrium.
It would also be possible to blame the increase in the value of the dollar on currency manipulations by foreigners. A higher dollar is at the same time a lower pound, euro, yen, and renminbi. How dare they devalue their currencies to offset the effects of the tariffs?
Foreign nations could prevent their currencies from losing value by contracting their quantities of money. In the long run, this would result in them having lower prices and wages, and so U.S. buyers would find their imported goods cheap and they would find U.S. exports expensive. While that process would likely be long and painful, the effect on U.S. exports would be prompt. The recession induced by their monetary contraction would result in reduced U.S. sales in their markets.
Finally, they could keep their currencies from losing value by selling off any U.S. assets they hold and instead accumulating other sorts of foreign exchange or else each their own domestic assets. This would tend to shrink the U.S. trade deficit by reducing the amount of foreign funding of U.S. investment. This could last until they run out of U.S. foreign exchange. Again, any expansion in the demand for import competing industries will be offset by a reduction in demand in interest sensitive industries in the U.S.--construction and capital goods.
Changes in the composition of the Fed's balance sheet or the balance sheets of foreign central banks could shield U.S. exports from the decrease in imports for a time. It is only if such adjustments are made that a contraction in U.S. exports would only occur due to retaliation of increased tariffs.
Sunday, January 15, 2017
Border Adjustment Tax
Congress has proposed several reforms of the corporate income tax. One reform is a border adjustment tax. This means that corporate "profit" will be calculated with no deduction for the cost of imported goods and with a deduction of revenues from exports.
This has been characterized as a tax on imports and a subsidy for exports. Of course, it isn't actually the payment of a bounty for exported goods, but rather a relief from corporate income tax on profit generated from exports. Still, the economic impact should be similar to a more transparent tax and subsidy scheme.
However, a tariff on all imports and subsidy for all exports has approximately no effect on trade. A tariff on a single import tends to restrict demand for that imported good, but the resulting appreciation of the dollar expands the demand for other imports while reducing exports. Trade shrinks.
A subsidy for a particular export will tend to expand the production of that export, while the appreciation of the dollar will slightly contract other exports and expand imports. Trade expands.
But if you tax all imports and subsidize all exports the same, there is no reallocation between various imports or various exports nor is there any expansion or contraction of trade. The dollar rises, leaving the allocation of resources unchanged.
The result is not a reduction in the trade deficit or increase in the trade surplus unless the tax impacts saving or investment. For a trade deficit country, either investment must decrease or saving increase for the trade deficit to decrease. While possible, this is a second order effect.
The rationale for the border adjustment tax is to shift from taxing profits from production in the U.S. to instead taxing profits from selling in the U.S. The result should make the tax system neutral regarding location decisions for firms seeking to sell products in the U.S.
The tax proposal has other characteristics that also are inconsistent with a tax on profit. All capital expenditures are to be expensed rather than depreciated. That means that if a corporation invests its profit in capital equipment, it pays no tax on the profit. Also, interest expense is not deductible. That means that corporations will be paying tax on the income they pay out to bondholders, so that all investors, whether stockholders and bondholders will be taxed the same. This should make the tax neutral regarding the financing of corporations by the issue of stocks or bonds, taking away the existing artificial encouragement of leverage (borrowing.)
And the corporate tax rate is to be reduced to 20% rather than the unusually high 35% that exists today.
A true value added tax is a tax on income. However, the typical value added tax allows expensing of investment, which makes it a tax on consumption. Border adjustment taxes are typically applied, so that the consumption of imports is taxed just like the consumption of domestically-produced goods. Exports are exempt, because there is no intention of taxing foreign consumption.
A national sales tax is more transparent, and would involve the taxation of final sales of consumer goods and services. (A tax on the sale of all final goods and services would be an income tax.) Consumption of imported goods would be taxed the same as domestic products, and there would be no taxation of exports.
The proposed reform of the corporate income tax, then, moves it in the direction of a consumption tax, but the process is not complete because payroll expense will still be deductible. It would seem, then, that the proposal is a tax on consumption of capital income from sales in the U.S.
While the tendency for the dollar to rise could occur through a prompt adjustment of the nominal exchange rate with the inflation rate unchanged, this could be prevented by open market purchases of foreign exchange. This resulting money creation would raise the inflation rate. In the long run, equilibrium would return with prices and wages higher in the U.S. As U.S. prices rise, imports would expand and exports shrink, returning imports, exports and the trade deficit to its initial value.
The use of sterilized foreign exchange transactions would be possible. Here, the Fed would sell off its holdings of U.S. assets and purchase foreign exchange. This would tend to reduce the U.S. trade deficit by reducing foreign funding of U.S. investment. It could last until the Fed runs out of dollar assets. This policy could be introduced at any time, though it would usually generate a decrease in the U.S. nominal exchange rate. That would tend to shrink imports and expand exports consistent with the reduction in foreign funded investment in the U.S. This might be more politically acceptable if it limits and restrains what otherwise would be an increase in the nominal exchange rate.
Foreign exchange operations are the responsibility of the U.S. Treasury, so I suppose this could be implemented regardless of what the Federal Reserve wants to do. The Fed could either sterilize to keep to its inflation target or allow inflation to rise until the real exchange rate increases the necessary amount.
My preference, of course, would be to allow the nominal exchange rate to increase enough. While I do not favor inflation targeting, nominal GDP targeting would be qualitatively similar in this situation.
However, a tariff on all imports and subsidy for all exports has approximately no effect on trade. A tariff on a single import tends to restrict demand for that imported good, but the resulting appreciation of the dollar expands the demand for other imports while reducing exports. Trade shrinks.
A subsidy for a particular export will tend to expand the production of that export, while the appreciation of the dollar will slightly contract other exports and expand imports. Trade expands.
But if you tax all imports and subsidize all exports the same, there is no reallocation between various imports or various exports nor is there any expansion or contraction of trade. The dollar rises, leaving the allocation of resources unchanged.
The result is not a reduction in the trade deficit or increase in the trade surplus unless the tax impacts saving or investment. For a trade deficit country, either investment must decrease or saving increase for the trade deficit to decrease. While possible, this is a second order effect.
The rationale for the border adjustment tax is to shift from taxing profits from production in the U.S. to instead taxing profits from selling in the U.S. The result should make the tax system neutral regarding location decisions for firms seeking to sell products in the U.S.
The tax proposal has other characteristics that also are inconsistent with a tax on profit. All capital expenditures are to be expensed rather than depreciated. That means that if a corporation invests its profit in capital equipment, it pays no tax on the profit. Also, interest expense is not deductible. That means that corporations will be paying tax on the income they pay out to bondholders, so that all investors, whether stockholders and bondholders will be taxed the same. This should make the tax neutral regarding the financing of corporations by the issue of stocks or bonds, taking away the existing artificial encouragement of leverage (borrowing.)
And the corporate tax rate is to be reduced to 20% rather than the unusually high 35% that exists today.
A true value added tax is a tax on income. However, the typical value added tax allows expensing of investment, which makes it a tax on consumption. Border adjustment taxes are typically applied, so that the consumption of imports is taxed just like the consumption of domestically-produced goods. Exports are exempt, because there is no intention of taxing foreign consumption.
A national sales tax is more transparent, and would involve the taxation of final sales of consumer goods and services. (A tax on the sale of all final goods and services would be an income tax.) Consumption of imported goods would be taxed the same as domestic products, and there would be no taxation of exports.
The proposed reform of the corporate income tax, then, moves it in the direction of a consumption tax, but the process is not complete because payroll expense will still be deductible. It would seem, then, that the proposal is a tax on consumption of capital income from sales in the U.S.
While the tendency for the dollar to rise could occur through a prompt adjustment of the nominal exchange rate with the inflation rate unchanged, this could be prevented by open market purchases of foreign exchange. This resulting money creation would raise the inflation rate. In the long run, equilibrium would return with prices and wages higher in the U.S. As U.S. prices rise, imports would expand and exports shrink, returning imports, exports and the trade deficit to its initial value.
The use of sterilized foreign exchange transactions would be possible. Here, the Fed would sell off its holdings of U.S. assets and purchase foreign exchange. This would tend to reduce the U.S. trade deficit by reducing foreign funding of U.S. investment. It could last until the Fed runs out of dollar assets. This policy could be introduced at any time, though it would usually generate a decrease in the U.S. nominal exchange rate. That would tend to shrink imports and expand exports consistent with the reduction in foreign funded investment in the U.S. This might be more politically acceptable if it limits and restrains what otherwise would be an increase in the nominal exchange rate.
Foreign exchange operations are the responsibility of the U.S. Treasury, so I suppose this could be implemented regardless of what the Federal Reserve wants to do. The Fed could either sterilize to keep to its inflation target or allow inflation to rise until the real exchange rate increases the necessary amount.
My preference, of course, would be to allow the nominal exchange rate to increase enough. While I do not favor inflation targeting, nominal GDP targeting would be qualitatively similar in this situation.
Wednesday, January 4, 2017
Deindustrialization and Unionization
The long run trend for U.S. employment is up. The unemployment rate fluctuates with the business cycle, but any trend is at best minimal. Still, there are constant complaints that imported goods are destroying jobs. Or perhaps it is just the "good jobs." And what are these good jobs? They are factory jobs were men of modest education can earn high wages and benefits. These jobs are supposed to allow those workers to be part of the middle class.
Surely, this is why the loss of manufacturing employment is counted as a major concern. These middle-class jobs disappear and some of those losing the jobs, or perhaps just their children and grandchildren, must accept low paying jobs in the service sector. Of course, some that are more ambitious may accept more responsibility and risk, or at the very least, seek more formal education, allowing for more skilled work. Even so, people who are little different in terms of skills and attitudes from those who had "good jobs" in the past must now take substantially worse jobs.
A simple model of unionization has the union increasing wages in the union sector. The quantity of labor demanded by the firms in that sector is lower, reducing employment. The workers who would have worked in the unionized sector seek employment in the nonunion sector. The increase in supply in the nonunion sector lowers wages in that sector. In the simplest model, the workers are identical, so the result is that identical workers earn differential wages depending on their industry. Wages are above the competitive level in the union sector and below the competitive level in the nonunion sector.
In the nonunion sector, the labor market clears. In the union sector, there is a surplus of labor. Workers from the nonunion sector would prefer "good jobs" in the union sector. If the union sector is "manufacturing" and the nonunion sector is "services," then this would explain why manufacturing is identified with "good jobs" that are "scarce" and the service sector are "bad jobs."
Unions took off in the U.S. during the Great Depression. In my view, this was mostly due to money illusion. There was massive deflation during the first part of the thirties, and substantial decreases in nominal wages. While real wages actually increased, workers became very interested in joining unions in order to fight the unfair pay cuts. Federal government policy changed to strongly support unionization, but the workers supported unionization to fight nominal pay cuts despite growing real wages.
As time passed, the unionized workforce became less significant, mostly because the growth of unionization failed to keep up with the growth of the labor force. However, many years ago, someone from "management" once explained that there is little benefit for workers to join a union because employers provide pay and benefits for nonunion jobs that are competitive with union pay and benefits. There appears to be substantial truth to this notion, most obviously in industries and even firms that have both union and nonunion operations. Keeping pay and benefits low in the nonunion shop is just asking for an organization drive and the loss of the election.
This suggests that the proper division in the simple model is not between the union and nonunion sectors, but rather between the "easy to unionize" and "difficult to unionize" sectors. If manufacturing is on the whole easy to unionize and the service sector is difficult to unionize, then manufacturing will provide "good jobs" that pay more than the competitive amount and the service sector will have poor jobs that pay less than the competitive amount.
It is certainly plausible that manufacturing is easy to unionize because of economies of scale. There are also substantial sunk costs, which makes exit difficult, which in turn makes entry risky. In the rest of this post, I will assume manufacturing is easy to unionize and the result is higher than competitive wages in manufacturing. The service sector is difficult to unionize and so results in lower wages.
This ties to trade because it is a way to bypass the inefficiency created by unionization. The reduced employment in manufacturing results in too low output and too high prices. The shift of labor to the nonunion sector results in too high output and too low prices.
By importing manufactured goods, those in the service sector obtain products at lower prices. This raises their real income. The domestic manufacturing industry, which is already too small, reduces output further. However, the need to meet foreign competition lowers their too high prices. The reduction in employment in the manufacturing sector increases the supply of labor to the service sector, resulting in lower wages.
Trade must balance, but it is possible to export services. Tourism is an obvious example, and there are various sorts of financial services that can be provided to foreigners. It is also possible that a net capital inflow could fund imports of manufactured goods. Foreign investment funding an expansion of the service sector would fit in well with this account.
Certainly, this story does not account for all of the U.S. experience in the late twentieth century. The simple model ignores sorting in a labor market where workers are not all the same. Sectors with excessive wages and and a surplus of labor will tend to hire what they perceive to be higher quality workers. To some degree, workers left in the low wage sector may be less productive. Manufacturing output has generally increased in the U.S. and not disappeared. However, the "problem" of a lack of high paying jobs for workers with little education is not solved by a demand for highly-skilled workers in manufacturing.
Still, I think it does tell us something about the "problem" of the loss of "good jobs." That just doesn't make much sense in a competitive labor market. We can image shifts in the share of income going to labor and capital due to changes in trade or technology. These changes could tend to depress real wages. These changes simultaneously expand real output so that the net result is ambiguous. But these processes do not appear to create the phenomenon of the loss of "good jobs" in import competing industries.
If a single industry were unionized or were simply subject to unionization, those working in that sector would almost certainly benefit. They would receive a larger share of a very slightly smaller pie. When all manufacturing is unionized or even subject to unionization, the loss in total efficiency is more substantial. The unionized autoworker pays more for shoes produced by union labor. The expansion of imports similarly has ambiguous effects. The union shoe maker can buy a cheaper Korean car, while the union autoworker can buy cheaper Mexican shoes. Still, the analysis treating "manufacturing" as an aggregate provides some element of truth. Those keeping the unionized or unionizable jobs get cheaper haircuts and the barber pays more for cars and shoes. An expansion of imports allows the barber to get cheaper cars and shoes, even if there are more former autoworkers and shoemakers who want to set up barber shops.
Globally, a pattern of international trade that develops because of unionization is inefficient. World output and income may be higher than without the trade, but it would be higher still if wages in the unionized and unionizable sector were competitive with wages in the service sector. That is, if workers in the service sector did not covet "good jobs" in manufacturing, and workers in manufacturing did not see service sector jobs as undesirable. To the degree this makes the domestic production of manufactured goods more profitable and expands the manufacturing sector at the expense of the service sector, the result would be improved global efficiency.
Surely, this is why the loss of manufacturing employment is counted as a major concern. These middle-class jobs disappear and some of those losing the jobs, or perhaps just their children and grandchildren, must accept low paying jobs in the service sector. Of course, some that are more ambitious may accept more responsibility and risk, or at the very least, seek more formal education, allowing for more skilled work. Even so, people who are little different in terms of skills and attitudes from those who had "good jobs" in the past must now take substantially worse jobs.
A simple model of unionization has the union increasing wages in the union sector. The quantity of labor demanded by the firms in that sector is lower, reducing employment. The workers who would have worked in the unionized sector seek employment in the nonunion sector. The increase in supply in the nonunion sector lowers wages in that sector. In the simplest model, the workers are identical, so the result is that identical workers earn differential wages depending on their industry. Wages are above the competitive level in the union sector and below the competitive level in the nonunion sector.
In the nonunion sector, the labor market clears. In the union sector, there is a surplus of labor. Workers from the nonunion sector would prefer "good jobs" in the union sector. If the union sector is "manufacturing" and the nonunion sector is "services," then this would explain why manufacturing is identified with "good jobs" that are "scarce" and the service sector are "bad jobs."
Unions took off in the U.S. during the Great Depression. In my view, this was mostly due to money illusion. There was massive deflation during the first part of the thirties, and substantial decreases in nominal wages. While real wages actually increased, workers became very interested in joining unions in order to fight the unfair pay cuts. Federal government policy changed to strongly support unionization, but the workers supported unionization to fight nominal pay cuts despite growing real wages.
As time passed, the unionized workforce became less significant, mostly because the growth of unionization failed to keep up with the growth of the labor force. However, many years ago, someone from "management" once explained that there is little benefit for workers to join a union because employers provide pay and benefits for nonunion jobs that are competitive with union pay and benefits. There appears to be substantial truth to this notion, most obviously in industries and even firms that have both union and nonunion operations. Keeping pay and benefits low in the nonunion shop is just asking for an organization drive and the loss of the election.
This suggests that the proper division in the simple model is not between the union and nonunion sectors, but rather between the "easy to unionize" and "difficult to unionize" sectors. If manufacturing is on the whole easy to unionize and the service sector is difficult to unionize, then manufacturing will provide "good jobs" that pay more than the competitive amount and the service sector will have poor jobs that pay less than the competitive amount.
It is certainly plausible that manufacturing is easy to unionize because of economies of scale. There are also substantial sunk costs, which makes exit difficult, which in turn makes entry risky. In the rest of this post, I will assume manufacturing is easy to unionize and the result is higher than competitive wages in manufacturing. The service sector is difficult to unionize and so results in lower wages.
This ties to trade because it is a way to bypass the inefficiency created by unionization. The reduced employment in manufacturing results in too low output and too high prices. The shift of labor to the nonunion sector results in too high output and too low prices.
By importing manufactured goods, those in the service sector obtain products at lower prices. This raises their real income. The domestic manufacturing industry, which is already too small, reduces output further. However, the need to meet foreign competition lowers their too high prices. The reduction in employment in the manufacturing sector increases the supply of labor to the service sector, resulting in lower wages.
Trade must balance, but it is possible to export services. Tourism is an obvious example, and there are various sorts of financial services that can be provided to foreigners. It is also possible that a net capital inflow could fund imports of manufactured goods. Foreign investment funding an expansion of the service sector would fit in well with this account.
Certainly, this story does not account for all of the U.S. experience in the late twentieth century. The simple model ignores sorting in a labor market where workers are not all the same. Sectors with excessive wages and and a surplus of labor will tend to hire what they perceive to be higher quality workers. To some degree, workers left in the low wage sector may be less productive. Manufacturing output has generally increased in the U.S. and not disappeared. However, the "problem" of a lack of high paying jobs for workers with little education is not solved by a demand for highly-skilled workers in manufacturing.
Still, I think it does tell us something about the "problem" of the loss of "good jobs." That just doesn't make much sense in a competitive labor market. We can image shifts in the share of income going to labor and capital due to changes in trade or technology. These changes could tend to depress real wages. These changes simultaneously expand real output so that the net result is ambiguous. But these processes do not appear to create the phenomenon of the loss of "good jobs" in import competing industries.
If a single industry were unionized or were simply subject to unionization, those working in that sector would almost certainly benefit. They would receive a larger share of a very slightly smaller pie. When all manufacturing is unionized or even subject to unionization, the loss in total efficiency is more substantial. The unionized autoworker pays more for shoes produced by union labor. The expansion of imports similarly has ambiguous effects. The union shoe maker can buy a cheaper Korean car, while the union autoworker can buy cheaper Mexican shoes. Still, the analysis treating "manufacturing" as an aggregate provides some element of truth. Those keeping the unionized or unionizable jobs get cheaper haircuts and the barber pays more for cars and shoes. An expansion of imports allows the barber to get cheaper cars and shoes, even if there are more former autoworkers and shoemakers who want to set up barber shops.
Globally, a pattern of international trade that develops because of unionization is inefficient. World output and income may be higher than without the trade, but it would be higher still if wages in the unionized and unionizable sector were competitive with wages in the service sector. That is, if workers in the service sector did not covet "good jobs" in manufacturing, and workers in manufacturing did not see service sector jobs as undesirable. To the degree this makes the domestic production of manufactured goods more profitable and expands the manufacturing sector at the expense of the service sector, the result would be improved global efficiency.
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