Trade and Income Growth: some data

I’d like to finish up our discussion about international trade by presenting some data. There have been lots of comments in our discussion that have involved assertions regarding trade, income, and employment. I thought I’d provide a couple of graphs to help give some meat to your arguments.

The first graph shows the quantity of imports (adjusted for inflation) as the black line, rising throughout the 70s and 80s, but much more rapidly in the 1990s. The red line shows employment, which grew strongly during the 1990s (despite the rapid growth in imports). The green line shows that total compensation rose, but slowly. Between 1978 and 1995 real hourly compensation rose slowly, but from 1995 to 2002 real compensation grew quite rapidly. Total compensation, by the way, includes both wages and benefits (health insurance benefits taking up the majority of those).

The graph shows that while imports boomed, so did employment in the US. When imports stagnated during the period 2000-02, so did employment.

However, hourly compensation did indeed grow slowly during most of this period. Maybe the increased imports are to blame?

I will argue that imports are not the culprit. You may first notice that the fastest growth in real compensation since the 1970s occurred in the last half of the 1990s, when imports were growing faster than ever. If more imports caused wages to fall, that shouldn’t happen.

But the real evidence is this: higher wages are the direct result of, and are impossible without, higher productivity. Productivity drives wages. That is the conclusion of a mountain of theoretical and empirical evidence. The chart below provides one example of that.

The chart shows that real compensation almost exactly follows real productivity. Compensation grew much more slowly during the period 1973-1994, because productivity did. Compensation grew faster in the 50s, 60s, and late 1990s because productivity did. Trade is not the culprit.