Was it just pure tactics? According to the Economist (and many other commentators) Sarkozy’s successful battle to remove from the stated EU objectives “free and undistorted competition” had a simple goal: buy popular support at home for the new Treaty. But Sarkozy is unlikely to repeat the same mistakes of Chirac and De Villepin: rather than killing himself with a risky referendum on the Treaty, he will ask the Parliament, where he holds a comfortable majority, to ratify the Treaty. There is yet another interpretation of his editing of the Treaty: he believes that protectionism is indeed the way out of the unskilled workers problem.
While the decline of unskilled labour in rich countries is now undisputed, its main determinants are still to be identified. Is it trade, technological change or weaker wage compressing institutions (e..g., de-unionisation) or combinations of all these factors? Sarkozy seems to believe that it is trade and that some sort of factor price equalisation is at work: allowing free trade, wages of the unskilled workers are unavoidably bound to converge to those of Bangladeshi workers. Thus, we should protect our products rather than subsidising low-skilled workers.
There are three fundamental problems with this way of reading the unskilled labour share problem. First, it does not consider the counterfactual. Second, it is not enforceable. Third, it does not take into account that factor price equalisation is not at all unavoidable under free trade.
What is the counterfactual?
The new international division of labour is mainly the byproduct of falling communication and coordination costs. These technological improvements allow not only manufacturing, but also many service-sector jobs to be offshored . This means that there is much less which is non-tradeable than just a few years ago. True, protectionism can prevent trade from occurring in these activities now subject to international competition. But forcing a tradeable good or service to be non-traded is not just like having a non-tradeable good, a good which is not at all internationally traded. We simply do not know what could happen in this case.
This brings us to the second issue. It seems to me that changes occurring in the division of labour are unpredictable. And they take place within industries, more than across them. In
The diversification cone
What is certainly dated is my knowledge of trade theory. But I remember that there are many conditions under which factor price equalisation does not occur. This is the case when the endowments of trading partners are very different from each other. Large differences in technologies and factor intensities also prevent factor price equalisation. Data on sectoral K/L ratios suggest that the cross-country variation in factor endowments and capital/labour ratios is often much more marked than the within-country variation. This means that countries may just not belong to the same diversification cone. Under these conditions, even unrestricted trade does not necessarily lead to factor price equalisation.
What can be done then for unskilled workers?
This does not mean that the issue of unskilled labour is unimportant. Quite the opposite, it is the major issue facing social policies in the next decade. But it cannot be addressed by protectionist trade policies. True, the French way is very expensive and may soon become limitlessly expensive. But there is not only the French way.
More imaginative thinking is also required. Wage insurance, supplementing earnings of workers displaced by globalisation in order to preserve their pre-displacement incomes, is a very fascinating idea, but also faces a number of dauntingly difficult enforcement issues. Can pre-displacement earnings be monitored? Isn't there a risk of collusion between employers and displaced workers in raising earnings just prior to the dismissal? And how about artificial dismissals aimed at reducing labour costs of employers?
But the idea of insuring wages is there and is being taken seriously. Experiments should and will be made. Meanwhile, it is better not to use trade policies to protect low-skilled workers. Such a policy agenda would be a major disappointment for the consumers and for the unskilled workers themselves.