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RESULTS OF PRODUCT-PRICE STUDIES: Robustness to Industry Selection and Weighting 11

Posted by Connie R. Aponte on June 30, 2014 in RESULTS OF PRODUCT-PRICE STUDIES |

Granted, decomposing product-price changes requires more data. But as HB demonstrate, at least some progress could be made here. For example, perhaps sensible use could be made of net-export patterns among countries. Ideally there would be sufficient data on all forces affecting product prices–both trade-related and otherwise–to account for price movements similar to how FH (1997) account for tfp movements in terms of outsourcing and computerization.

Having a clearer decomposition of product-price changes could contribute greatly to understanding both of what has caused past price changes and what might cause future price changes. To illustrate this consider the relative prices of textiles and apparel, two of the most unskilled-labor-intensive industries in U.S. manufacturing. In his descriptive facts, Leamer documents that the relative producer prices of these unskilled-labor-intensive sectors declined dramatically during the 1970s but stabilized during the 1980s. There are at least two alternative trade-related explanations for why the decline halted. One is that these sectors enjoyed more protection in the 1980s thanks to a more-binding Multi-Fiber Agreement (MFA). Another is that the price declines of the 1970s forced domestic producers to eliminate the very unskilled-laborintensive sectors within textiles and apparel and to focus on the relatively skilled-labor-intensive sectors. With the rest of the world continuing to produce the very unskilled-labor-intensive sectors, this second story implies the United States moved to a different cone of diversification.

These two stories carry very different implications for future U.S. product prices and thus factor prices. In the first case, the 1980s price stabilization is temporary lull that will disappear as the MFA is phased out and/or as countries like China with comparative advantages in unskilled-labor-intensive products continue to integrate into the world economy. Thus, this first case foreshadows further trade-induced rises in U.S. inequality. The second case, however, looks much rosier. It suggests that the U.S. has already incurred the pain of losing some of its unskilled-labor-intensive industries. As countries like China continue to expand production and thus lower the relative prices of these products no downward pressure is put on U.S. unskilled wages. Instead all U.S. factors enjoy a consumption real-wage increase. Clearly, a better understanding of the relative causes of U.S. domestic price changes would help distinguish which of these very different futures seems more likely.

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