Economic snapshot | Trade and Globalization

Trade deficits and U.S. workers’ earnings

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A weekly presentation of downloadable charts and short analyses designed to graphically illustrate important economic issues. Updated every Wednesday.

Snapshot for February 28, 2001.

Trade deficits and U.S. workers’ earnings
Trade deficits are directly linked to declines in earnings for production workers and to the recent increases in the overall inequality of U.S. income distribution. Real earnings rose steadily for more than two decades after 1947, flattened out in 1973, and began to fall after 1978. Real earnings declined, more or less steadily, through 1996, as shown in the figure below. Between 1996 and 1999, there was a small upturn in real earnings, but not enough to return workers to their 1978 real wage level. Real earnings flattened out in 2000, and actually declined again in January 2001 (not shown). This figure shows that the stagnation and decline in real wages for U.S. production workers strongly corresponds with the worsening of the U.S. balance of trade in goods (measured on the right hand axis). This trade balance first became negative in the early 1970s, when real wage growth ended in the U.S. The period of real wage decline, which began in the late 1970s, has been a time of persistent and growing trade deficits for the United States.

Real earnings of U.S. production and nonsupervisory workers compared to the U.S. trade deficit, 1947-2000

The steady growth in U.S. trade deficits over the past two decades has eliminated millions of American manufacturing jobs and job opportunities. Most displaced workers find jobs in other sectors where wages are much lower, leading to lower average wages for all production workers. Even those workers who are not displaced by imports have seen downward pressure on their wages as a result of chronic trade deficits. Lower wages abroad, especially in some developing countries, explains part of the decline in U.S. wages. Many companies have used the threat of closing plants and moving the jobs abroad as a strategy to depress wages throughout the U.S. manufacturing sector.

But intense import competition has also consistently lowered the prices of goods in these manufacturing industries. While many economists point to the benefits of lower prices for consumers, import competition also puts downward pressure on the wages of U.S. workers, especially those workers producing import-competing goods.

This week’s Snapshot by EPI economist Robert E. Scott.

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