Thursday, July 11, 2013

Free Trade and Salaries in Academia

Somewhere, perhaps not in this blog, we pointed out that the equalization of factor prices was eventually going to affect the salaries paid to economists in academia.  In labor terms, equalization of factor prices means the wages of workers in different countries with free trade between them are driven to the same level. (Wages are a factor of production, as are the other inputs of production, such as materials and capital.) So when a country with high wages trades with a country with low wages, its wages are driven down. (While in the low wage country, wages are driven up.  However, with the high wage country running a massive trade deficit, it seems that wages in that country are driven down more than the wages in the low wage country are pushed up.)

Now you might think that industries insulated from free trade, such as home-building and medicine and- economics, would not be affected, but this is not the case, although the insulation does delay the effects. However, no part of an economy is truly isolated from any other, and  depression of wages in one sector will eventually affect wages in all sectors.  

This delay has been part of the cause for the relative increase in educational costs and tuition, as in the rest of the country income has stagnated and more recently even declined. In particular, the taxes paid to the states have remained stagnant, and more recently declined, with median income.  The fact that this is also affecting the quality of education, and universities in general, rather than just depressing salaries, is also interesting.  It hasn't affected private universities as much yet, since they are further insulated from the effects of trade, not being as dependent on income from taxation, but it is just a matter of time before they too suffer from degradation.   

This would seem to be part of a general degradation of capital inputs. This may also be because of the chronic trade deficit, rather than merely the effect of the equalization of factor prices.  Net imports of Goods and Services was $560 Billion for 2012. (BEA Table 1.1.5)  That is a trade deficit of 3.5% GDP, which, since it has been persistent for the past 12 years or so, adds up.  See: 
The nation’s management at all levels seems to be adversely impacted, as we should expect.  One observation is that, with the Sequester, for example, the Federal Government is going after the wrong deficit.

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