Recent U.S. economic history confounds these predictions. Between 1979 and 1989 the real compensation of white-collar workers rose, whereas that of blue-collar workers fell. Nevertheless, nearly all industries employed an increasing proportion of white-collar workers. Moreover, skill-intensive industries showed at best a slight tendency to grow faster than those in which blue-collar employment was high. (Although economists use many different methods to estimate the average skill level in a given industrial sector, the percentage of blue-collar workers is highly correlated with other measures and easy to estimate.)

Thus, the evidence suggests that factor price equalization was not the driving force behind the growing wage gap. The rise in demand for skilled workers was overwhelmingly caused by changes in demand within each industrial sector, not by a shift of the U.S.’s industrial mix in response to trade. No one can say with certainty what has reduced the relative demand for less skilled workers throughout the economy. Technological change, especially the increased use of computers, is a likely candidate; in any case, globalization cannot have played the dominant role.

It may seem difficult to reconcile the evidence that international competition bears little responsibility for falling wages among unskilled workers with the dramatic rise in manufactured exports from Third World countries. In truth, however, there is little need to do so. Although the surging exports of some developing countries have attracted a great deal of attention, the U.S. continues to buy the bulk of its imports from other advanced countries, whose workers have similar skills and wages. In 1990 the average wages of manufacturing workers among U.S. trading partners (weighted by total bilateral trade) were 88 percent of the U.S. level. Imports (other than oil) from low-wage countries -- those where workers earn less than half the U.S. level -- were a mere 2.8 percent of GDP.

Finally, increasing low-wage competition from trade with developing nations has been offset by the rise in wages and skill levels among traditional U.S. trading partners. Indeed, imports from low-wage countries were almost as large in 1960 as in 1990 -- 2.2 percent of GDP -- because three decades ago Japan and most of Europe fell into that category. In 1960 imports from Japan exerted competitive pressure on labor-intensive industries such as textiles. Today Japan is a high-wage country, and the burden of its competition falls mostly on skill-intensive sectors such as the semiconductor industry.

We have examined the case for the havoc supposedly wrought by foreign competition and found it wanting. Imports are not responsible for the stagnation of U.S. incomes since 1973, nor for deindustrialization, nor for the plight of low-wage workers. That does not mean, however, we believe all is well.

Some of those who have raised the alarm about U.S. competitiveness seem to believe only two positions are possible: either the U.S. has a competitive problem, or else the nation’s economy is performing acceptably. We agree that the U.S. economy is doing badly, but we find that international competition explains very little of that poor performance.

The sources of U.S. difficulties are overwhelmingly domestic, and the nation’s plight would be much the same even if world markets had not become more integrated.
The share of manufacturing in GDP is declining because people are buying relatively fewer goods; manufacturing employment is falling because companies are replacing workers with machines and making more efficient use of those they retain. Wages have stagnated because the rate of productivity growth in the economy as a whole has slowed, and less skilled workers in particular are suffering because a high-technology economy has less and less demand for their services. Our trade with the rest of the world plays at best a small role in each case.

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