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It Lowered Wages, as It was Supposed to

NAFTA and Jobs

by DEAN BAKER

Given the trends in U.S. trade with Mexico over the last two decades, it is strange that there is much of a debate over Nafta’s impact on wages. At the time Nafta was passed in 1993 the United States had a modest trade surplus with Mexico. In 2013 we are on a path to have a trade deficit of more than $50 billion. The $50 billion in lost output corresponds to roughly 0.3 percent of gross domestic product, assuming the same impact on employment, this would translate into more than 400,000 jobs. If each lost job would have led to half a job being created as a result of workers spending their wages, this would bring the total impact to 600,000 jobs.

Of course some of the shift from surplus to deficit might have occurred even without Nafta, but it would be difficult to argue that Nafta was not a major contributing factor. After all, one of the main purposes of the agreement was to make U.S. firms feel confident that they could locate operations in Mexico without having to fear that their factories could be nationalized or that Mexico would impose restrictions on repatriating profits. This encouraged firms to take advantage of lower cost labor in Mexico, and many did.

This can produce economic gains; they just don’t go to ordinary workers. The lower cost of labor translates to some extent into lower prices and to some extent into higher corporate profits. The latter might be good news for shareholders and top management, but is not beneficial to most workers.

Lower prices are helpful to workers as consumers, but are not likely to offset the impact on wages. To see this point, imagine that Nafta was about reducing the wages of doctors by eliminating the barriers that made it difficult for Mexican school children to train to U.S. standards and practice medicine in the United States.

If we got an additional 200,000 doctors from Mexico over the last 20 years then it would likely go far toward bringing the pay of doctors in the United States more in line with the pay of doctors in other wealthy countries. This would lead to tens of billions of years in savings in health care costs to patients and the government.

Even doctors would share in these savings, since they too would have to pay less for their health care. However no one would try to tell doctors that they were better off from this trade deal because of their reduced health care costs. The hit to their wages would have swamped the savings on their health care bill. This is the same story with ordinary workers and the impact of Nafta.

Nafta could have been structured to bring the pay of doctors and other highly paid professionals more in line with their pay in other wealthy countries by removing barriers. This would have produced substantial economic gains to the economy as a whole (it’s the exact same model as economists use to show gains from the Nafta we have), except these gains would be associated with a downward rather than an upward redistribution of income.

The doctors and their allies among the elite have been able to prevent such a deal from being considered by the politicians in Washington, American workers don’t have that power.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This essay originally ran in the New York Times.