Globalization and inequality
Globalization and inequality
Globalization has been blamed in the last thirty years for many economic ills, including the rise of inequality. I will discuss the findings of a large body of work on the impact of globalization on inequality. Research does not confirm many popular views.
so so yes thank you very much can you put on my my slides yeah thank you yes so as miss nardin said i've published a book on globalization and inequality and this lecture is based to a large extent on the book itself and let me start with the main conclusion of the book and the main conclusion is that the impact of globalization through trade and offshoring on inequality is much smaller than commonly perceived now this conclusion uh builds on a very large academic research literature that has evolved during the last quarter century and has investigated this issue to be sure globalization impacts inequality and it also has other disruptive effects but my point is that it is not the great villain that it is typically portrayed to be moreover much of the impact of globalization is localized in various communities in the u.s it's across the country the same in brazil the same in other countries and this localization has political consequences that have been investigated but which i will not discuss today i will illustrate the main points that i just mentioned by discussing some of the key mechanisms that link trade offshoring and inequality and i will discuss the quantitative evidence in support of this mechanism and then you can judge for yourself whether this quantitative evidence is consistent with what you read in the newspapers for example but let me start with a little bit with a little bit of historical background so there have been historically two large waves of globalization and what you see here is essentially the volume of world trade relative to income and the first one started in the early part of the 19th century it pitted out between the two walls and then it caught on again after the second world war and the first one was discussed quite extensively yesterday by kevin o'rourke actually in this room if you were here now what's sort of important here is to note that this pattern is highly correlated with growth so when the first wave of globalization starts in the early part of the 19th century this is also a time when world grows in income per capita expands as well and the spectacular growth after the second world war is also correlated with globalization but i will not discuss these issues today the second point i want to make is that historically if you looked at the distribution of world personal income across individuals in the world economy then starting in the early part of the 19th century inequality has increased and what you see here is a decomposition of this rice inequality between how much of the rising inequality has been due to differences in income per capita across countries and how much of it was as a result of differences in income of individuals within various countries and the only point i want to make here is that the big rise in world inequality was driven by rising gap in income per capita between the rich and the poor countries the rich countries grew faster than the poor country and this generated these expanding gaps in more recent years there has been rising inequality within many of the rich countries as well as a fair number of poorer countries so i will come to this point in a moment but there is one point that i feel i have to make and this is what happened to poverty across the world so here is data produced by the world bank about the fraction of people in extreme poverty and their number and the important point to note here is that in 1981 there were two close to two billion people in the world who lived in extreme poverty and this number declined to one point by about 600 million over the time spent that's in the graph namely up to the great recession during the same time the population has expanded by about 50 percent and i want you to think about it was this decline in poverty which is actually spectacular was this possible without globalization and there are many good reasons to think that it wouldn't have been possible without the integration of the countries that were relatively poor into the world economy so my narrative starts from here on the apple panel what you see is the us college wage premium so this is by how many percent college graduate earn more than high school graduates and what you see here is that starting in the late 70s the college wage premium rose tremendously and this rise in the college wage premium was responsible to a large extent to the rise in inequality in the us during that period but it wasn't only this obviously in the lower power panel what you see is the relative supply of labor by college graduates and what you see is that over time more and more college graduates they joined the labor force and their hours grew relative to the hours of people with lower education levels so this raises a puzzle how come that this increasing supply of a particular type of label does not depress its relative wage but to the contrary the relative wage of this college graduate kept rising for many years so there has been a lot of research on these issues and i'm going to skip briefly some of the arguments like the decline of unionization the regul the regulation of labor markets capital markets and product markets and in the u.s a decline in the minimum wage each one of them had some effect but this is not the topic of my talk people who notice this dramatic rise in the college wage premium advanced two alternative hypothesis one was that it was caused at the time by international trade and the argument is the following this was a period in which many less developed countries joined the world trading system they exported to the richer country products that were intensive in low-skilled labor as a result they depressed the relative prices of goods that use low-skilled labor intensively and therefore in the rich countries like italy the uk the u.s this depressed the relative wage of the low-skilled workers and it increased inequality an alternative mechanism that was considered is what's known as skill bias technical change so the idea here is that the developments in technology were friendly towards skilled workers as a result they increased the relative demand for skilled workers and therefore despite the fact that they became more abundant in the western economies their relative wage increased nevertheless so this where the sort of competing hypothesis the quantitative studies at the time showed that international trade can explain a fraction about one-fifth of the rising inequality but not much more and one issue that came up at the time was that the shifts in employment were not consistent with the trade explanation because what the trade explanation suggests is that we should have seen a decline in the relative employment of high skilled workers in various industries because they have become more expensive but at the same time a shift in employment away from high skill intensive sector to low skill intensive sector and this is not what the evidence showed and this is a part of this evidence what is it shows is how much of the rise in employment of skilled workers took place within industries as opposed to across industries and what you see here is that in all these countries it was above a half so in sweden it was about 60 percent in belgium it was more than 90 percent and this rise in relative employment of skilled workers within industries took place at the time when they have become much more expensive and this is what shed some negative light on the explanation that used trade and offshoring for the rise in the college wage premium there was no quantitative evidence to speak of about the role of technical change but indirect evidence suggested that this might play an important role and in a variety of countries and i have listed here some of them what you could see is that sectors with a faster increase in the demand for non-production workers who are considered to be more skilled than production workers were sectors that were more innovative they were sectors that performed more research and development and they were sectors that used computers relatively more intensive there were a variety of other considerations so for example a study of a large number of countries found that the within industry contribution of the increase in the non-production workers was large in particular sectors in both rich middle income and poor countries and importantly these sectors in which this occurred were correlated positively correlated with skill upgrading in u.s industries so these are non-new non-us countries the countries i have listed at the top of the slide and what happened in these countries was correlated in what happened in the u.s so this provides evidence that the change in technology was of similar nature in all these countries what were the other problems with the trade explanation so if you buy into the explanation that i gave you at the beginning which is about the integration of less developed countries in the world economy as the main driver of rising inequality in the rich countries then you should expect the opposite shift in inequality in the poorer countries but this actually did not happen and trade liberalization in these countries raised also the college wage premium in many of them there was also a lot of work on the entire wage distribution and i don't have time to talk about it i talk about it in the book if you look at a variety of countries you see that the shifts in inequality were quite different in upper tails versus lower tails versus middle case of the wage distribution another phenomena which is quite important and i hope that i'll have time to talk about it is that trade liberalization in the form of the formation of for example free trade agreements or just unilateral reductions of trade impediments they have risen in a quality of wages of workers with the same within the same category so what i mean by this is if you take a cut of a category that consists of a an occupation and education level gender experience and you take this group they are all similar in these dimensions and you ask what happened to the wages of these people in the group and the answer is the wage inequality among them has increased and it has increased quite importantly in many of the countries moreover this residual wage inequality is quite large and you will show you some numbers later and potential explanations so there there was a whole set of puzzles that faced economies who were interested in these issues and the question was how did the profession respond so the profession responded essentially by broadening the canvas of links between globalization and inequality and the broadening of the scans thus consists of adding a variety of mechanisms that can produce such links so one is assaultative matching i'll say a little bit about it later and this is how workers with different abilities are employed by firms with different productivities or managers with different abilities or sectors with different technology levels things of this so the other is the original disparity this actually proved to be a very important phenomena which has very strong political implications that have been investigated in a variety of countries the other thing that has been introduced is explicit consideration of the fact that firms within industry are not all alike and that there is a big variation in their technology level and the question then is does this variation which possibly varies across sectors and possibly across countries has bearing a bearing on this relationship between international trade and offshoring on the one hand and inequality on the other hand and the other one is technology choice so when you think about a period of rapid technological change firms have a choice whether to adopt new technologies or keep working with older technologies there are typical differences between the technologies in the skill intensity the typical thing is that the newer technologies require more skilled workers relative to the unskill and profitability considerations of these business firms dictates what sort of technologies they choose to adopt and the last point i want to mention briefly has to do with frictions in the labor market these frictions vary across countries they vary across labor markets and they also impact the relationship between globalization and inequality so let me start with sorting and matching i'll be quite brief on this so here the point is the following that the where in markets workers choose to which job to apply and firms choose which workers to employ and if there are differences between the characteristics of the workers and characteristics of the firms then there is some matching process between workers and firms and what typically happens that if the technology has the feature of what we call complementarity then this matching leverages wage differences across firms and more productive firms with better technologies end up paying higher wages than firms with lower technologies and this can generate a pattern of inequality so this mechanism helps explaining inequality in wages both between sectors within sectors across firms different segments of distributions which i will not discuss today and it also generates shifts in the correlation between inequality of certain types of inputs and other types of inputs so in principle it is a sort of potentially a rich mechanism and then the question is how does international trade impact this matching process generally speaking what happens if there is a trade shock it can be the rise of china it can be a free trade agreement it can be a reduction in tariffs or hikes in tariff which is what we hear about more recently all of these induce a rematching in the labor market and this rematching has consequences for the structure of wages and for wage inequality so to illustrate there are here sort of two figures about correlation in compensation of managers and workers in different industries in two countries one is in brazil in 1994 this is immediately a few years after their trade liberalization process and when they started a stabilization program and the other is in sweden so the two countries are very different obviously in terms of their structure in terms of their size in terms of their degree of integration in the world economy but what you see is that in both cases there is a positive correlation which means that sectors that pay higher wages to their managers they pay also higher wages to their workers now this doesn't have to be the case we can think about analytical frameworks but this is not the case but this is essentially what we see in this type of data and this has implications for wage inequality so here is a a calculation derived from a relatively big study of many countries in the world economy these countries are linked by trade and there are in each country different types of workers that vary by gender that vary by education and so on there are five types of education levels here high school dropouts this is the first one high school graduates some college education college graduates and advanced degrees so we have here five groups of workers who very by education so this study has used as i mentioned before many countries they are linked to each other by trade and what i show you here is essentially a small table with results for the u.s so that you could perform different counterfactual analysis in order to identify how much different shifts in the world economy impacted inequality so in the first row what we have which says a decline in trade cost this is a calculation that answers the following question we know that trade costs have declined over these years from 2000 into 2007. in fact they have declined for many years and again kevin orr discussed yesterday the sort of global decline in trading costs and how important this was for globalization so they declined over these years and what this measures is by how much real wage just increased in each one of these groups in the united states so what you see is that the smallest hike in wages took place among the high school dropouts and the largest one among individuals with advanced degrees master's degree phds and the like but generally speaking you see this up for trend across education groups now this is sort of consistent with the matching theory that i mentioned before on the other hand what you see is that the increase is very small we are talking about a bit more than one percent for the lowest skill group and close to two percent for the highest skill group and this is way smaller than the actual rise in the college wage premium so the gaps here that this can explain are rather small compared to the big increases for example it was of the order of 45 percent that it increased between the late 70s and the early 90s the second line reports comparable numbers for another experiment and this is the experiment which answers the following question we know that during this period this is the period when china joins the wto productivity in china increased so this rise in productivity changed their competitiveness in the world economy and then the question is how has this increase in the competitors of competitiveness of china affected wages of these groups so the first point to notice that it did not cause a decline in wages it has caused an increase in wages of each one of these groups and again the biggest rise was for the people with the advanced degrees the more most educated and the smallest for the people who dropped out of high school but again these quantities are very small so this also basically is a far cry from explaining the rise the actual rise in the college wage premium so the next issue i want to discuss is the regional effects so the original disparity is quite important and it's a particularly important in large countries where there are big gaps in compensation across different regions so a very interesting study looked at the impact of trade liberalization in brazil so what we know is that in 1991 brazil argentina and some other countries they signed the free trade agreement known as merkuzu and this free trade agreement dropped tariffs among these countries and it was the case that these countries traded a lot among each other so this is similar like the eu countries they trade a lot among each other it's the same in north america uh what used to be nafta of three countries was also a case in which mexico us and canada they've been trading a lot among each other so this is a case where there was a reduction in tariff trade liberalization and what was found in the brazilian case is that this trade liberalization did not increase the wage gaps across these regions to the contrary it inc reduced these wage gaps so in a way across space at least this free trade agreement was an equalizing force on the other hand one could also ask was it an equalizing force with regard to the wage gaps between skilled and unskilled workers and the answer is yes it was so it reduced the wage gaps across space and also between the skilled and unskilled workers on the other hand the fraction of the shift in the skill premium that this mechanism explained is not that big it's only 14 so these mechanisms they work in the right direction so to speak so the evidence supports the mechanism but what it shows is that quantitatively they don't produce big enough effects to explain actually what happened and they explain only a fraction of what what has happened so the next topic i want to discuss is the rise of china and how it affected this economy so i discussed it a little bit as far as matching is concerned so this is just a simple graph showing the rise of china in the world economy what you see here is the share of china and the u.s in the world's merchandise exports so the u.s started with 12 percent in the early 70s and it declined to less than 10 percent by 2015 china started with approximately one percent and it increased to about 14 percent so this shows the well-known fact that china is now a bigger trader in the in the world than the us so the question that has been examined by multiple studies is how has this rise of china affected inequality in a variety of countries and equality both across space and between individuals with different characteristics so we saw that in brazil trade liberalization was an equalizing force both across space and across the skill groups in the u.s things are have been much more nuanced and the main point i want to make is the the following that the china shock which affected differentially different regions of the united states and here the regions are defined rather narrowly as what is known as commuting zone and there are about 700 of them this reduced mean weekly earnings but the interesting thing is that if you look at the fall in mean weekly earnings most of it is not in the manufacturing sector but rather in what we call non-traded or non-manufacturing sectors so much of this china shocked its impact on wages in this communi commuting zone was in the sectors that don't compete directly with imports from china so this is a sort of important point to bear in mind the other thing is that they had a very small impact on the college wage premium and what i should stress now is that all of these results are results about comparing commuting zones which have been more exposed to the signature the shock with commuting zones that have been less affected by the china shock so this i'm talking about differences across these different types of commuting zones the interesting thing about this study is that although the variation in the college wage premium wasn't very high there there were important impacts on other variables so for example people did not flee this zone on mass there have been some changes in population but they were not very big and this is an important point because what it means is that if people are tied to their localities this makes adjustment much harder on the other hand what happened is that the these commuting zones that were more affected by the china shock they responded by lower rates of labor force participation so people didn't leave but many started to give up on searching for jobs essentially this is what it means so there was of course an increase in unemployment in these zones but many people became discouraged and they stopped looking for jobs the important other thing that this study found was that government transfers to individuals in these zones increased very much so the u.s has a program called trade adjustment assistance this is the taa program which originally was designed to mute the negative impacts of this type of shocks the problem is that this program is underfunded and it's very small especially compared to the needs if you really want to provide this type of insurance networks for individuals who are harmed by trade and again kevin talked yesterday about the importance of these insurance networks and when they are available this makes policy design much easier and without them it's much harder to deal with the negative impacts so the people started to use more of the trade assistance and they started to use more unemployment benefits disability insurance and the like now they study focused on the impulse side so it did not factor in the fact that the china shocked also affected exporting industries and there is a question of whether this this regard for exports is important or not a sort of simple calculation that they made was that um maybe their estimates overestimate the real impact by 25 percent namely if they were to take account of export then the negative impacts would decline by a quarter this is essentially the implication of this i'll come to this point in a moment now the accounting for experts was actually very important in other countries so there is a very good study of germany which uses exactly the same methodology except that it factors in the export channel and what they find is that the china shock had a very small impact in germany not surprisingly the integration of eastern europe into the world economy played a bigger role in germany than the china shock but none of them was huge anyway okay so the question now is the following what is the overall effect of the china shock so it turns out that it's very hard to estimate it's much easier to estimate the differences across different regions than provide a reliable estimate of the overall impact and now why is this important is it found important for the following reason if you look at u.s data for example then you see a decline in a manufacturing employment over many years and then in the middle comes the china shock and you get still a decline in employment and then you have to answer the question is this additional decline due to the china shock or is it just part of this secular downward trend in employment in the manufacturing sector now generally speaking the decline in employment of manufacturing is driven by the fact that technological change is faster in manufacturing than in many other sectors and this reduces the demand for labor and therefore over the many years the share of labor employed in manufacturing has been declined so i will not go into all the details of how these things are handled uh but let me just focus on one particular number in a well-known study that received a lot of attention uh there there is an estimate of the contribution of the china shock to the fall in manufacturing employment in the u.s and this number is here on the lower right corner it's 2.4 million jobs now you can argue with this number and you can do some alternative calculations but let's take it at face value so let's agree that the china shock reduced u.s employment in manufacturing by 2.4 million so you can ask a simple question is this a big number or a small number we are talking about a fall in employment over a period of 12 years essentially so over 12 years there was a decline in employment in manufacturing of more than 2 million jobs so of course 2 million jobs is a lot in absolute terms nobody can argue with it but is it a lot given the way the u.s economy functions so one way to think about it is to consider what's known as labor turnover in the u.s economy the u.s economy is a huge economy obviously and it's generally speaking a very dynamic economy so it has a very large rate of labor to turn over what does labor turnover tell us it tells us how many separations we see in a period of time and how many new hires we see and if these numbers are approximately the same then generally speaking we don't observe a change in the total level of employment so in the u.s economy labor turnover has been estimated to be 12 million jobs per quarter every three months and in some other estimates nine million so if every three months nine to 12 million people separate from their jobs and another nine to 12 million people find new jobs and this happens every three months then a little over 2 million jobs over 11 years doesn't sound like a huge number why am i emphasizing this i'm emphasizing this to say that given the way the us economy functions the china shock or its effect on employment in manufacturing should have been relatively easily absorbed over this 12 year 12 year period now this is not to say that people didn't suffer it's not to say that certain regions became depressed and we have a lot of evidence on this but at a macroeconomic level it's not such a huge phenomena now there are alternative estimates that use different methods of the china shock and one very interesting is provided in a more recent study and they factor in exports imports the use of intermediate goods and they come up with much smaller numbers and the numbers are that this reduced u.s manufacturing employment by less than half a percent over a 15 year period so it's a little bit over half a million jobs but employment in non-manufacturing sectors was enabled by imports of cheap intermediate inputs from china got a very big boost and they all estimate that overall the outcome was positive so this is just to illustrate that there are many facets to international trade and if you do a partial calculation you don't account of exports you don't take account of intermediate inputs you can miss an important part of this story so the next set of issues i want to discuss have to do is an expansion of the view of international trade that has been observed in the last 20 years or less than 20 years so what happened to us that in the late 90s new data sets became available that were not available before and they are much more detailed than previous data sets and by now there are many of these data sets they are very detailed they are very big they are very interesting and they can be used to study a variety of issues but they produce new evidence concerning globalization in particularly what they pointed out was that in most sectors that export only a small fraction of firms export exporters are typically bigger and more productive than non-exporters large firms this has been known for some time pay higher wages but as a result exporters who are the larger firms they pay higher wages and there has been a theory developed to explain these patterns and this theory has many important implications so i'm going to just focus on a few of them which are germaine for the relationship between trade and inequality so one sort of interesting point is that if you factor in these features into your consideration you can show that under some circumstances trade leads to wage polarization and this is a well-known empirical phenomena in a fair number of countries the other thing you can do is you can link international trade to economic growth and inequality and typically international trade accelerates growth it can also raise inequality whether it raises inequality or not it depends actually on the international regime for example the extent to which there are free or limited international capital flows okay the point that i want to emphasize now is the following the once you think about productivity differences across firms within sectors namely some firms are more productive this is what they are bigger this is why they choose to export and other are less what you can also observe is that the relative employment of skilled versus unskilled workers varies across these firms in particularly what happens is that the bigger more productive firms they employ relatively more skilled workers now why is this important because trade liberalization leads to what we say call selection of firms into exporting so if you have a decline in impediments to trade either because shipment costs fall or tariffs decline or something else of this salt happens then what happens is that within these industries market shares get reallocated from the less productive firms to the more productive firms and a larger fraction of firms start exporting so what this does is it raises the relative demand for skilled workers and then potentially it can raise the college wage premium and so the question is how important is this phenomena so we have a very nice study that examines this across a large number of countries essentially 60 countries it builds in these relationships that i have just described and much more of course but i'm just focusing on what's relevant for the topic of my talk and this is what they found so you look at the right panel in this figure what this panel shows is the following if you took this count these 60 countries and you closed their trade you wouldn't allow them to trade with any other country by how much would the college wage premium decline so this is a pretty extreme experiment because in practice countries don't go from authority to free trade they go from some level of trade to a higher level of trade or a lower level of trade depending on the circumstances so in any case this provides an upper bound of how much of the rise in the college wage premium can be attributed to trade and what you see here is that the biggest figure is 12 percent and in russia it even goes down but the the key point is the following that the college wage premium is higher in countries who are more exposed to trade on the horizontal axis we measure trade exposure so countries that are more exposed in 2007 they suffer a bigger hike in the college wage premium but the hike is again not large for the u.s it's about five percent out of dozens of percent through which the college wage premium went up so again we we have a mechanism that works empirically but its impact is very small actually compared to what what happened in in the data the last point i want to discuss is residual wage inequality so this is a well-known phenomena that if you look at the variation in wages across earners and you ask the question how does it depend on their education level their experience their gender all the observable that you can consider you can explain only a fraction of the variation in wages and a very significant fraction remains unexplained by these worker characteristics so here in brazil what you see is that in 1990 the residual wage inequality is 57 percent and the change between 86 and 95 is of the order of one half so the rise in in wage inequality is of uh can be explained about half of it by this residual inequality so this is not explained really this is what's not explained you look at sweden the numbers are comparably large they are actually larger in sweden about uh 70 percent of wage variation uh is due to residual inequality and over this time when china joins the wto 87 percent of the rise in wage inequality is due to these unexplained characteristics so you can try to explain unobserved forces that drive wage inequality among individuals with very similar characteristics in different ways you need some frictions in the labor market so there have been studies that used different approaches i will not spend time discussing them but there is one approach which i favor of course and this one uh relies on very exact modeling of how individuals behave in the labor market and how international trade takes place so you can estimate a complete model using these characteristics and then you can ask the question what sort of impact does globalization has on unobserved components of wage inequality in this particular framework so here the answer is contingent on the framework if you don't believe the framework you don't buy the answer but it's really very hard to do it otherwise so this is the sort of graph that simulates from the estimated model the impact of liberalization trade liberalization on the residual wage inequality now the two graphs they provide different ways of trade liberalizing and all of this is done around again the brazil's joining of mercury and generally speaking what these numbers show is that you can explain again about one fifth maybe one quarter of the shift in inequality due to shifts in these unobservable characteristics so again it's a significant number but it doesn't explain the big changes in what happened in the world economy although we have this type of study only for brazil and it would be quite interesting to see comparable estimates for other countries so let me wrap up i hope that i convinced you that international trade and offshoring too i didn't speak explicitly about offshoring but in the book i cover offshoring the operation of multinational corporations and many other things trade affects earning inequality through multiple channels the understanding of these channels has evolved gradually over a long period of time and in may during the last quarter century we have amassed a lot of evidence on the operation of these channels so trait contributes to residual inequality as i've just argued as well as to inequality based on worker characteristics education gender and the lag yet the approaches that have dominated this field of inquiry use very high aggregates like skilled and unskilled labor but we have a lot of evidence on the wage distribution of actually millions of workers and the shifts in these distributions are not just between skilled and unskilled workers they are between different categories for for example wage paralysis polarization obviously requires to think about at least three groups of workers yes so we have now the tools to engage in this broader analysis and to announce the patterns that we see in the data and link them to trade the new thinking about international trade that i've described to you briefly towards the end of my talk suggests that there are a variety of new mechanisms that link my globalization within a with inequality and while all these novel mechanisms find support in the data they as well as the older mechanism they don't produce enough of a quantitative impact to say that globalization is the villain globalization is what's causing these rising inequality in the world economy so based on the available evidence and evidence or economics generally is always tentative so based on the available evidence i think we can conclude that foreign trade does not appear to be the main driver of inequality in the world economy thank you very much um regret since i'm not an expert on italy i want to comment on italy's policy it so i i wouldn't say that terrorists are neutral they do have an effect and tariffs cause distortions and they reduce the income they don't raise inequality by huge amounts this is the evidence but it doesn't mean that they are good you know if a tariff reduces income by one or two percent proportionately uh across everybody this is still bad to lose one or two percent of income even if everybody shares equally in this situation so this i wouldn't say now about industrial policy i mean there are well-known facts about industrial policy that governments are very poor in picking winners so this typically is something that i wouldn't recommend you mentioned other things such as research in development and this is an entirely different phenomena so we know for example that the rate of return on research in development is typically higher than the rate of return on on investment in capital equipment or structures and this provides a justification for government support for research and development a sort of important point is that the extent to which a country benefits from research and development depends on the degree to which it is integrated into the world economy countries that are more integrated into the world economy get higher benefits from research in in development they get higher benefits from research and development directly and they also get higher returns indirectly through the international channels so we have studies of this and we know that these differences are quite large and quite important i may also add that we have some there is evidence that countries that have better territory education systems they benefit even more from international integration via research and development so this is an area in which i think there's enough evidence to justify if somebody wants to call it industrial policy fine but it's essentially support for research and development as far as other aspects of industrial policy are concerned i think i'll choose not to comment hello my name is gianpaolo gali i'm a teacher in economics i'm fascinated by your lecture and it convinced me that i have to read your book carefully because i'm not really sure that i really understood the whole story i got lots of very interesting hints let me put the question in a very very simple way the way it is put in newspapers in the media and by in the political arena we suffer from the competition of low-wage countries so that our companies offshore in eastern europe or in china or wherever and we import low price products from these countries which reduce the demand for labor and our workers to suffer what's wrong with this well it's certainly wrong when it happens um yes so my my my argument is not that this doesn't happen it's just that the impact the quantitative impact of this channel is not very large it's not negligible but it's not very large and therefore to argue as is often done in the public debate that this is the villain and this is what's responsible for following wages in some cases like in the u.s at the time uh or for the rise in inequality that this is the major force that causing these changes it's simply there is no evidence for it so you know people can believe what they want but there is no evidence for this so for example exactly the mechanisms that you describe has been investigated very extensively for the u.s and for other countries but for the us especially during the 70s and 80s in particular and there is no evidence that this was the big shifter of the rise in inequality or there was no issue of unemployment were related to to add to other forces so this is my point i'm not saying that it doesn't have an effect i'm saying that the effect that the estimated effects are small and i'm there i'd be very happy if you read the book and you see the details i of course haven't reported everything here in the book i report many more quantitative studies how they were conducted what were the findings and what were the conclusions so you are welcome perhaps to send me an email after you read the book but then as a follow-up did you look also more at the micro level than at the macro level because you said for instance that in the u.s there were increases in some in true disability insurance unemployment benefits etc but they were underfunded so could you say that the united states was not ready for china not at the macro level if you want but at the micro level at the level of the communities and whether there are some lessons for europe which is now opening up a little bit more to china um italy has signed a memorandum of understanding with uh with china are we ready or should we be more concerned and prepare ourselves better yeah so a fair number of the studies that i mentioned and even more so studies that i mentioned in the book i i read the micro level so they use micro data there was regional and sectoral and so on uh i would say that the us wasn't ready yes but it wasn't ready because the normal programs that have to deal with shocks like this were grossly underfunded trade adjustment assistance is in principle a good program i mean it hasn't always been used properly but it is in principle a good program congress has underfunded it they never raise the funding to the level that can handle this type of shocks so yes the shock there were there were no suitable shock absorbers and the shock absorbers that went into action are in a way the wrong ones through the social security administration i mentioned for example disability insurance went up it's not that people became really disabled they started to draw disability insurance because this was the only source of funding available so i think generally speaking countries have to have a network that supports people in the harm way of shocks this includes international trade the shock can come from technical change it's not unconfined to trade only and personally my preference is to have a good support network but of course these type of networks require funding and there are countries like the us where there is politically very severe objection to large government programs so indeed if this political obstacle is not overcome then i think we'll keep seeing underfunded programs that can help people in distress and i think the same applies to europe and hopefully in europe you'll find a better way to deal with these issues thank you very much thank you very much you