Article by Deepanshu Mohan on "An Economic Rationale for the Trump Effect" - The Wire

December 12, 2016 | Deepanshu Mohan

Stagnation of wages for low-skilled persons can be a possible economic variable shaping the pattern of voting behaviour that led to Donald Trump’s victory.

The year 2016 seems to be a game changer by redefining the global political and economic landscape. Rivers of ink are being spilled over in trying to both politically and behaviourally analyse Donald Trump’s recent victory in the US presidential election. The mainstream media, through all its polls and sampling techniques, somehow failed to monitor or realistically depict the pattern or depth of discontent amongst people who voted in majority for Trump over Hillary Clinton. In the words of Pratap Bhanu Mehta, perhaps “the bias of the supposed liberal establishment is now so deep that it has warped its cognitive ability to understand the world”.

What seems to have become clearer, though, is that there remains a limited cognitive ability amongst mainstream political scientists or psephologists to gauge the different degree of motivations underlying voting behaviour amongst today’s voters. While there is a tendency to assume all individual voters are “rational agents” (who, as per the rational choice theory, take decisions in trying to maximise their own self-interest) in Western discourse, recent political events (Trump’s election victory in the US, Brexit in the EU) indicate that individuals may not always vote by acting rationally in promoting their own interest but may do so under a level of bounded rationality, due to a lack or constraint of proper information channels (or misled by a driven propaganda).
Increasing productivity with stagnating wages
In the recent context, the rise in levels of economic and political nationalism in countries like the US and the UK (apart from many other countries seeing a rise in right-wing politics) is largely reflected by persistent levels of stagnation reached by these economies in areas of productivity levels, wage growth and employment opportunities.
As a result of stagnating wages (reference made to real wages here), higher social mobility (that globalisation promised) has largely circumscribed low-skilled people, who constitute the major part of the formal labour force in these countries. In elucidating “the dark side of globalisation”, the Economist explains how rising labour costs from bouts of foreign investment and increased globalisation across some of the Eastern European countries over time decreased upward social mobility, making the low-skilled people of these countries actually worse off over time. And this remains true for these countries from before the 2007 crisis period.
Theoretically, the deductive explanation on stagnation of wages as a result of increasing openness and capital mobility is not a recent phenomenon; the basic intuitive idea behind this formulation was provided by the Stopler-Samuelson model in the early 1990s.
The model explained how an increase in the price of labour-intensive goods increases more than proportionately to the level of rent after crossing a threshold level in the economy or due to a sudden policy measure to liberalise trade barriers. This ultimately causes the cost benefits from cheap labour to stagnate over time (mostly applicable for non-farm, low-skilled workers) and stagnate their productivity levels and wages. If we actually look at the American story (also applicable for other large manufacturing countries), this narrative seems to fit well.
US non-farm sector labour productivity vs US non-farm payrolls. Source: Trading Economics database
Post the crisis of 2007, there was a sharp dip in both the levels of labour productivity and wages (non-farm low-skilled sector). While labour productivity (equals real total output divided by total hours worked) picked up in the quarters following the crisis, labour compensation or wages (equals real total labour wages divided by total hours worked) grew much slowly. A recent study explains how, real labour wages per hour in the non-farm business sector were 0.5% lower 20 quarters after the start of the recovery.
Labour compensation and productivity after the 2007 recession. Source: BLS Labor Productivity and Costs dataset for the non-farm business sector
If we break down the composition of the labour force over the last decade (under Barack Obama’s tenure as president), with the rise in labour productivity, the level of non-farm low skilled sector real wages which constitutes wages for most in the US labour force have been diminishing. One can contrast the US non-farm labour productivity levels with the overall wages and salaries growth levels and observe a similar trend.
US non-farm labour productivity vs US wages and salaries growth. Source: Trading Economics database
In a series of research articles the Economist also analysed in depth the freeze in wage structure and composition seen in the US over the last decade and a half. Scholars like Dani Rodrik, Ha Joon Chang, Joseph Stiglitz, Raghuram Rajan, Kaushik Basu and others have been talking about these aspects as well.
The real wage stagnation for the low-skilled (non-farm sector) base can strongly be related to the reducing trends seen in public spending on education (both at a primary and university level) in the US over the last few decades. This has drastically impacted the upward social and income mobility process for the low-skilled labour base, which with a limited education level faces a lack in the level of alternative employment opportunities. The level of increased automation in manufacturing services is already having a significant impact in this regard as well.
What remains surprising, though, is how the electoral campaign of Clinton in particular (in its economic plans) didn’t do enough to gauge the level of discontent amongst the low-skilled non-farm labour base (a usual reference made recently to the white male population who voted for Trump).
Among the non-college educated whites (constituting for most of the non-farm low-skilled labour base), 67% voted for Trump (72% men and 62% women). Overall, white voters who make 69% of the total population voted in majority for Trump in the hope that the US under Trump will become “great again” going back to an unchartered economic territory in a state of manufacturing revolution; a revolutionary economic boom that somehow will stay indigenous to the American story with high-paying jobs. All this achieved at a time when the same political leader (Trump) promises to raise overall tariff levels on goods imported from the US’s largest importer, China.
While the Democrats seemed quite conscious of the limited economic possibilities of such an aberration, Clinton’s own campaign still couldn’t do enough to convince most people (particularly from the non-farm low-skilled labour force base) of the possible economic options available to increase wage opportunities for them; or perhaps even make them realise how a persistent increase in public spending on primary and university education (linked with skill developmental processes) will also allow an increase in levels of upward income and social mobility.
Under a Trump era with a new world order setting and in times of looming political and economic uncertainty, there remains an urgent need for both academic scholars and policymakers to skew their thinking by revisiting pre-existing theoretical and conceptual economic frameworks for better policy designing. A more empirically tested, field-based, validated method for policy assessment will be most useful in at least depicting the ground realities, where exacerbating socio-economic problems of people can be better realised and eventually addressed. Albeit, in such transformative times; where leaders like Trump are shifting the tectonic plates of politics, it will be hard to stay even cautiously optimistic for this to happen anytime soon.
Deepanshu Mohan is Assistant Professor of Economics, Jindal School of International Affairs, O.P Global Jindal University.