Pay growth has been weakening for four decades, since globalization began to take hold. But amid angst about protectionism, the topic rarely comes up.
The Canadian Global Affairs Institute recently hosted its annual trade policy conference, Canada’s State of Trade: At Home and Beyond. It was an informative event that covered various topics of concern to the business and trade policy community: Canada-US trade; trade with Europe; trade opportunities and challenges in China; the perennial issue of barriers to internal trade.
But the underlying drift of both the formal and informal discussions centred on growing protectionism – chiefly in the US – owing to what we might call the “New Populism.” Angst was expressed among business and the trade wonks about rising protectionism in America and possible spillover into Canada. The frustration was palpable. Why do many people get seduced by protectionism when it is so well established that it isn’t in their self-interest? The conventional economic arguments were aired on how protectionism ultimately hurts consumers, businesses and economies alike.
One key question posed was how can we convince workers to resist the seduction of the populist huckster who peddles the protectionism tonic? The only solution suggested, as it so often has been going all the way back to the US-Canada free trade debates of the late 1980s, was a greater effort to educate people about the benefits of trade to jobs, incomes, consumer choice, economic efficiency and so on. In other words, workers need a good dose of Economics 101.
What was left largely unexplored, however, was the source(s) of protectionism and populism. Yet, it’s hard to find a useful antidote to populism and protectionism without diagnosing the underlying cause of the disease.
So why are so many Americans increasingly protectionist? And do we need to worry about this afflicting Canada?
An industry has sprung up in the US trying to explain the rise of President Trump’s brand of populism and protectionism. The explanations range broadly from a generation long trend of outsourcing and offshoring of American manufacturing jobs to a corrupt political system in Washington.
There could, however, be another straightforward factor — namely, workers aren’t being paid what they deserve. Debates about trade have tended to focus on jobs that have allegedly been lost to more wage-competitive jurisdictions. What is less discussed is the general erosion in real wage growth that has attended the age of globalization.
Figure 1, compiled by the Financial Times, draws on data from the U.S. Bureau of Labour Statistics and other sources to show the historical relationship between labour productivity growth and real hourly pay of non-supervisory employees (which accounts for 80 percent of the American private-sector work force) over a 65-year period. From 1948 to the early 1970s — the so-called Golden Age — these two lines overlapped, as conventional economic theory predicts. But beginning around 1973, they began to diverge, and the divergence grew more and more pronounced over the following four decades, particularly when the modern age of globalization and trade liberalization emerged in the 1980s.
The divergence not only defies economic theory — which claims productivity growth should return similar compensation gains to workers over the long run. It breaks the basic bargain at the heart of the American dream – work hard and you will advance up the economic ladder. This could well be the chief reason for the rise of populism generally and support for protectionism specifically in America.
Social researcher Frank Graves calls this “the end of progress” in the Canadian context, as the trend data on wages and productivity are broadly similar in Canada to the American numbers. Lars Osberg’s recent research shows that since 1980 the bottom half of Canadian workers have seen their real earnings shrink! Fortunately, populism and protectionism haven’t taken off here to the same degree. However, the phenomenon could be coming soon. Graves’s public-opinion research shows that for the first time in a generation, Canadians think their kids will be worse off economically than they are.
Wages don’t explain everything about the rise of populism and attendant protectionism in the US or elsewhere. But pay probably matters a lot. Weak real wage growth seems to have been a slow boiling problem for most American (and Canadian) workers for many years, yet it hasn’t received the attention it deserves from policy makers and protectionism worriers.
And while it’s too simplistic to pin the blame for the “de-coupling” of productivity from pay entirely on trade, we should at least acknowledge that this trend grew sharply during the period of economic globalization. It is therefore rational for workers to conclude there is some connection between trade and weak pay growth.
The fact that rates of unionization – which presumably have a positive effect on wages through increasing the bargaining power of labour – plummeted in the US during this same period, to 10 percent in 2018 from 20.5 percent in 1983, is probably part of the problem, too. Canada has also experienced a downward trajectory on this measure, with rates of unionization dropping to just under 30 percent today from 37 percent in the early ’80s.
If indeed the breakdown between productivity and real wage growth has played a significant role in stimulating support for protectionism, how do we defeat it? It’s unlikely that can be achieved by educating people about the gains from trade, either in the abstract or with various anecdotes, case studies and public-relations campaigns. To defeat protectionism in America and fend off its rising tide in Canada, substantial real wage gains need to be realized by the majority of workers, thus confirming that economic progress is alive and well for most of us and will be there for our kids.
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