With the recent constant appearance of Alibaba on the news, the increasing relevance of Chinese exports to the world is extremely clear. Low-income countries accounted for just 9% of US manufacturing imports in 1990. But by 2007, they had more than tripled its share. And who do you think was behind this? China accounted for as much as 89% of this increase.
In this period, China's transition to an open economy included a massive 150 million people migrating from rural to urban areas. Imagine reallocating around half of the United States population geographically, with a particular focus on manufacturing production. Add to this formula novel access to foreign technologies as well as capital and Chinese exports growth to seem reasonable. However, did this come to the expense of anyone? This is the main objective of this post. One group being threatened by Chinese takeover of manufactures is obviously the manufacturing workers in the rest of the world. As these goods are easily tradable, we could expect job losses in these sectors. The figure below shows that as Chinese increased its relevance in US imports, the share of the population working in the manufacturing sector in the US decreased by one third.
However, many things could explain this decline. For example, it could be that Americans themselves were getting more educated and moving to other sectors. Alternatively, the service sector could be becoming more productive in the US, offering higher wages and hence draining employees from the manufacturing industries. These (and many other alternatives) do not involve China's exports growth. Moreover, they could be causing the increase in Chinese exports themselves. (Imagine US decides to get out of the production of manufactures, leaving a lot of unsatisfied demand which leads the Chinese to produce more). Hence, in order to make sure we are capturing the correct effect, modern econometric techniques come to the rescue! Autor and Dorn (AER, 2013) basically exploit the differences in the exposure to import competition across cities in the US. For example, it would be expected that - if the leading cause comes from the Chinese side - an area where manufacturing employed 25% of the people to be more affected by Chinese exports than an area that only employs 10% in manufacturing. Particularly, they will differentiate areas by how specialized they are in each division within manufacturing, and how imports from each of these changed over time. And these differences will give us the information we are after.
Looking at wages, the effect found of imports from China is negative. An increase in the imports per worker of around three thousand dollars (which was the average change from 1990 to 2007), would explain a decline of around 2.25% (0.76 times 3). More interestingly, this effect is stronger among men and people without college education. It is important to remark that this can only be calculated for the employed. Hence, if we expected workers with lower ability and earnings to be more likely to lose their jobs after the Chinese expansion, the effect on wages above would be understated. And so wages would have fallen even more for the whole sector, it's just that the effect could be hidden by the increasing number of people losing their jobs.
And what if we divide the effect between sectors? I would have expected the wage effect to be stronger in the manufacturing sector itself. But well, the data seems to suggest the opposite: wages seems to have been unaffected in this sector. However, the manufacturing sector was particularly affected by a major reduction in employment (predicting a decline of 12% due to China's increase in exports).
So most of the effect on wages mentioned for the whole economy seems to come from the non-manufacturing sectors. How can this be possible? Well, (adaptive) story telling is a prerequisite for any upstanding economist. And here is the one that seems most appropriate given the results: the increase in imports from China led to firing of the lower skilled workers in the manufacturing sector but had no effect on their average wages (note this could still involve a decrease in the wages of the ones that remained employed). Having no new paychecks, these newly unemployed decided to reduce spending and so decreased their purchases of services that have to be provided locally (like a haircut or a dentist). This reduced this local sector's revenue. Moreover, the newly unemployed also fled to other sectors looking for jobs. Having lower revenues and seeing lots of people of willing to work for less, other sectors reduced their wages.
Based on an article by David Autor and David Dorn (AER, 2013).
Most people (and particularly my mother) think that economics is only about money. That we economists are basically counting money and telling people where to invest. This post will be the first evidence that there is no boundary to economics. Today I will go as far as to fertility. Yes, we economists have a lot to say about fertility.
Fertility has interested economists for a long time. At least since Malthus' theory on population growth in 1798 economists have been interested in fertility. Malthus basically thought that as people became richer they would have more kids, which would mean less resources for everyone (he expected technological growth to be quite small), leading distress to knock on everyone's doors (though louder on the poorer doors). Fortunately, this is also an example of economists failure at predicting the future.
On top of human capacity to increase resources, which Malthus undervalued, the other assumption that does not hold in Malthus idea is that the higher your income, the more kids you have. But we will get to that later. Let's see the broad picture first. How has fertility evolved in the US in the last 200 years? Here is a plot of number of kids for (married) women born in different years (cohorts in the figure):
The dark blue line shows that the overall average of children born has decreased from a high 5.5. to an average of just below 2. More impressive is the fact that initial differences between groups (black vs. white, urban vs. rural) have narrowed substantially. Differences that used to be as high as 1.5 kids are now smaller than one-fifth of a child. Notice that this data is for married women, so hypothesis that are based on the reduction of marriage as a cause for the reduction in the number of kids are in trouble. It is also interesting to note that most of this compression is coming from the reduction of women having lots of children.
The number of women having either none or one kid has been quite stable around 10-20%, but the number of women having 4 or more children has diminished from almost 70% to below 10%. What seems to be behind this? There are many theories out there (see the paper cited below if interested), but I will stick here to the one of the most popular among economists: money, money, money...Here is a plot of number of kids for different levels of income for all the different cohorts.
The shocking thing about this picture is that all the women born from 1828 to 1958 seem to be gravitating around a constant relation between (real) income and number of kids had. In other words, in either century, women with incomes of around X apples (real income) would have in average a very similar number of kids. More impressively, there seems to be no difference in this relationship for either urban or rural areas. (Caveats aside) This suggests that the main difference between the average number of kids women have in the 1800s versus the 1900s (or in rural compared to urban areas) is mainly income. People are richer today and, for some reason, richer people tend to have less kids. The question is then why?
Charging taxes on income is hard. Worldwide experiences show that less developed countries have difficulties raising revenue from income taxes. Below I have plotted GDP per capita and Income (and capital) tax share of total government revenue for 2005. It is reasonable that most countries have a hard time making people and firms pay income taxes, but richer countries clearly tend to do it more.
Source: World Development Indicators.
The income tax has not been common throughout history. For example, a century ago the income tax almost did not exist in the US. Most government revenue was from trade tariffs and consumption taxes. These are much easier to collect. You just need someone at the port of trade, or some random controls at shops. Look at the sale value and take a share. But income tax is harder. You need people to be capable of keeping track of their income and sum it. And then you also need them to be honest and report it. Finally you need to enforce it, with a system potentially capable of checking every person. However, in spite of all these difficulties, income tax now account for over 55%. How did this happen?
Well, as usual, first came a government in financial trouble: wars are the starting point of most taxes. The idea first floated during the 1812 war with the UK, but it was unsuccessful. Later, the civil war was bad enough to ensure the introduction of the income tax (and the beloved IRS!), focusing on rich individuals. How did they enforce people to pay? By encouraging people to report their neighbors to the IRS if they were driving a Ferrari (or the horse equivalent of the time). Some people even claim that the income tax was key for the victory of the north. So the income tax might have even stopped slavery!
But this was not enough. The war ended and so did many of the pressing needs. You may think it would have been reasonable to keep the tax to build a safety fund? Wrong. As soon as the war ended, rich people didn't want to keep paying. Moreover, they could afford the lawyers and the Supreme Court agreed with them. Surprising, ha? But you can always count on new government deficits. They currency and stock market crisis of 1907 meant funds were needed. So just before the First World War the constitution was changed, allowing the government to collect income tax. But it was still focused just on the rich. Less than 2% of the people paid taxes.
Once the Second World War arrives to the American coast, more money is needed. So they decided to expand the income tax to the middle class. They needed someone beloved, with credibility, charming to promote the tax: Donald the Duck. Yes, you read correctly. Here is the video:
And this is how the income tax came to be in the US. With an approval rate usually above 80%, it surpasses any politician I know. As Walt Disney appropriately said: "If you can dream it, you can do it."
If you have ever shopped on eBay or Alibaba (a Chinese alternative that sells bulks of anything you can possibly imagine), you may have noticed that many Chinese sellers offer free worldwide shipping. This made me wonder how they could possibly afford this service...
Of course they could be covering the shipping costs with the price charged for their products. However, when you can buy a wireless mouse (this was how I noticed this) for 4 dollars including shipping this seems impossible. If it costs more than a dollar and is not very heavy or bulky, there are high chances some Chinese person on eBay is offering free shipping. Just mailing a letter within the US costs around 50 cents. And if you have to mail a 4oz (around 110g if you don't believe in this ridiculous imperial system) package it is more than $2.5 (or above $6 to China). Then you need to add the cost of production, the postage within China, the overseas postage, the two customs offices. And assuming that the Chinese seller needs to eat something to survive, we'd better have some profit left. "Do packages even arrive?" you might wonder. Yes, this is not Argentina's mail service my friends.
What is behind this low cost that worldwide buyers and Chinese sellers enjoy (but non-Chinese sellers hate!)? A few things came up after some research. First, lower living costs can account for lower prices. Secondly, the Chinese government subsidizes the shipping cost (although apparently it somehow still does break even). Finally, particularly for shipping to the US, the most important reason behind seems to be an agreement between eBay, USPS and China Post called ePacket. This gives the Chinese sellers bulk shipping rates (to individual packages as well) at a rate far below imaginable. According to an EcommerceBytes article, in 2011 almost 40% of them used this service with over 80% of items delivered in 5 to 10 days. Here is a list of the shipping prices the sellers pay.
Well, taking into account that the mouse I bought was around $4. The package was at least 4oz, so mailing costs were above $1.7. This leaves at most $2.3 to distribute between all the ones involved in the production and the seller (take into account a wireless mouse on Amazon is around $10 without shipping). Well, (as so often among economists) maybe my first assumption that Chinese people need to eat to survive is wrong...
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