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The trade deficit and falling wages

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Snapshot for June 23, 1999

The trade deficit and falling wages

The growth in the U.S. trade deficit between 1979 and 1998 has destroyed millions of high-wage, high-skilled manufacturing jobs in the United States and pushed workers into  other sectors, such as restaurants and health service industries, where wages are lower.

The figure shows that the U.S. trade surplus of the 1950s and 1960s was transformed into a deficit that reached 2.9% of GDP in 1998. Furthermore, based on forecasts by the International Monetary Fund (IMF), the current U.S. trade imbalance is expected to reach nearly $300 billion in 1999, exceeding 3.5% of gross domestic product (GDP) for the first time in the postwar era. The United States can expect to lose another 400,000 to 500,000 manufacturing jobs as a result, even if the economy continues to expand at a strong pace in 1999.

The chart also illustrates the interrelated paths followed by the trade balance and wages since the deficit first appeared in the 1970s. The average real wage for U.S. production workers peaked in 1978, then declined more or less steadily through 1996. Real wages increased between 1996 and 1998. Although the upturn boosted real wages by 4.5%, it was not enough to offset a decline of more than 11% since 1978, nor to return workers to the path of steadily rising wages they experienced from 1950 through 1973 — the last long period in which the United States enjoyed an overall positive trade balance with the rest of the world.Figure 1

Source: Economic Policy Institute and International Monetary Fund.

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