In the wake of some of the comments from my last post, I thought I should make a few points on inequality and trade. 1) High-end professionals like doctors and lawyers have been winners in the economy of the last quarter century. It is not true that only the very wealthy have benefited. (If only the wealthy had benefited, then it would be much easier to win the political battle to change the system) According to the latest State of Working America (the bible for data on the economic well-being of the country�s workers), real wages for workers at the 90th percentile rose by 26.7 percent over the last quarter century, and 5.1 percent over the last five years. These are workers who are more highly paid than 90 percent of the workforce, but less highly paid than the top 10 percent. Workers at the 95th percentile saw their real wages rise by 33.2 percent over the last quarter century. Clearly these workers are doing just fine. Reliable wage data for higher paid workers is not available, but they would almost certainly be doing even better. Most doctors, lawyers, and accountants are in this top 5 percent. The average hourly wage for a worker at the 95th percentile was less than $42 in 2005. This comes to $84,000 a year, assuming a 2000 hour workweek. The average earnings of doctors (net of expenses) was more than $200,000 in 2005, more than twice what a full-time worker at the 95th percentile would earn. 2) Higher wages for high end workers lower the real wages for middle and low income workers. This is basic and worth reading and rereading until the point is clear. The wages for high-wage workers are a cost of production. They get passed on in the prices of health care, legal fees and all the sectors that directly or indirectly employ high-wage workers. Higher prices for goods and services lower the real wages for the workers who consume them. Think about it -- $30 an hour might be a reasonably good wage today. Suppose all prices double, then $30 an hour will not be a very good wage. Suppose that the price of all goods and services got cut in half, then someone who was making $30 an hour will suddenly be doing very well. If the pay of high end workers gets cut, then all the workers at the middle and bottom get a pay increase. This is why I want to see competition put downward pressure on the wages of highly paid professionals � it will raise everyone else�s pay. Let�s make the case even stronger � if the real wages of high end professionals doesn�t get cut, then people are just wasting their time trying to raise the wages of middle and lower income workers. Higher pay for middle and lower income workers will get passed on in higher prices. If the highest wage workers get pay increases to compensate for higher prices, then there will be another round of price increases, and then middle and lower income workers will end up right back where they started. (Yes, some money could come out of profits, but rising profit shares is not much of the story as the data clearly show.) 3) A main point of the trade deals of the last quarter century has been to put downward pressure on the wages of less-skilled workers by putting them in direct competition with low-wage workers in the developing world. Again, the loss of manufacturing jobs and pay cuts for large segments of the workforce was not an accidental outcome of these deals, or a case where the reality of international trade did not conform to theory, it was the purpose of these deals. If you put U.S. manufacturing workers in direct competition with low-paid workers in the developing world, you screw manufacturing workers in the United States and benefit highly educated professionals. If you put highly educated professionals in the United States in direct competition with their counterparts in the developing world, you screw highly educated professionals and benefit everyone else. It�s that simple.
--Dean Baker
