Trade In The Nontradables

Prettier than Phoenix!

A very interesting article by Michael Spence and Sandile Hlatshwayo on “The Evolving Structure of the American Economy and the Employment Challenge” divides the US economy into two sectors. One is the tradable (manufacturing, financial services, pharmaceuticals, etc.) and the other is the non-tradable (health care, education, construction, food service, etc.). Spence and Hlatshwayo show that employment in the US has shifted out of the tradable sector and into the non-tradable sector, and that this has left behind an increasingly high-wage tradable residual and a low wage non-tradable economy.

Daniel Gross has a good summary of the implications they draw:

Looking back on the period from 1990 to 2008, the co-authors found that 97 percent of the 27.3 million U.S. jobs created were in the non-tradable sector. (The five largest non-tradable sectors, mentioned above, contributed 65 percent of the 1990-2008 jobs growth.) “The employment creation occurred mostly in non-tradable sectors — where we don’t have international competition,” Spence said.

On the one hand, that’s good news. It means the overwhelming majority of the new jobs created can’t be offshored easily. But the report notes that powerful forces may inhibit further growth in these areas. The two leading employment sectors, after all, are government and health care, which accounted for 40 percent of the incremental jobs created between 1990 and 2008. Due to high deficits and rising pressure on health care spending, those areas aren’t likely to be huge sources of job growth going forward. What’s more, construction and retailing, two other large sources of nontradable jobs, are sectors that relied on debt-fueled consumption. In an age of tight credit and continual deleveraging, those areas aren’t likely to be big jobs generators. Finally, these jobs tend to add less value and pay lower salaries than jobs in the tradable sector.

This analysis seems kind of limited to me in a number of ways. For one thing, it’s true that we’re not “likely” to engage in massive public sector job creation in part because of “high deficits” but that’s a policy choice. I don’t see any data in the article to indicate that it would be a bad idea to increase taxation of the high-wage financial services sector and use the money to hire the people we would need to hire to get safer, cleaner streets, a new generation of transportation infrastructure, etc. If the alternative to hiring people to do that work is for them to do exciting and rewarding things in the private sector, then a sparse public sector makes sense. But if the alternative to hiring people to do that work is for them to be depressed, broke, and unemployed then we should pay them to do something.

The other thing that’s interesting to me is that it’s not just “international” competition that doesn’t exist in the non-tradable sector. A hairstylist in Marin County doesn’t really compete with a hairstylist in Miami anymore than she competes with one in Mexico. Of course people can move. And they do move from Mexico to the United States because the United States is a richer country so they have more economic opportunities there. And immigration controversies aside, we generally all acknowledge that this is beneficial to the people doing the moving. But what’s curious is that more people are moving to the Miami area than to the Bay Area, even though the Bay Area is richer and presumably economic opportunities there would be better. This is the “Moving Toward Stagnation” issue and it’s much more significant than people realize.