Political Economy of Trump’s “jobs” policy — A scenario.

17 Nov

President elect Trump says he wishes to “Prioritize the jobs, wages and security of the American people” (https://www.donaldjtrump.com/policies/immigration). But what would his restrictive immigration policy do for jobs? The question is complex but the most obvious analysis suggests that it would not help unskilled workers or workers with outdated skills.

Let’s start in the labor market. Immigration restrictions will reduce the supply of labor. That should raise wages for American workers. However, that wage rise will also impact how American businesses hire workers. A higher wage might make labor relatively more expensive than capital. Businesses would then substitute capital for labor where they can. Such substitutions may be harder in agriculture (machines have a harder time picking fruit without bruising them) than in say automobile manufacturing (already quite capital intensive). Nevertheless that kind of substitution would be incentivized by the rise in the price of labor relative to capital. Of course, these higher wage jobs would also require specific skills since employers will pay higher wages only to more productive workers. Thus workers with low or outdated skills may continue to be unemployed.

A President Trump has also promised higher infrastructure spending. So that will also spur the growth of construction and construction jobs. But here too higher wages (increase in the demand for labor) will also require higher productivity. In short these jobs will require specific skills since these jobs will be part of a capital intensive production process. Once again, folks with low or outdated skills may not see the benefit they hoped for.

In fact President elect Trump’s  desire to reduce the trade deficit could further complicate matters. Reducing the trade deficit through high tariff barriers would of course have long term negative effects on innovation and growth. But even in the short term a reduction in the trade deficit would imply a reduction in foreign investment into the US and foreign lending in the US’s capital account. Keep in mind the US’s national accounts have to balance so a reduction in the trade deficit will also result in a reduction in the capital account surplus. This process will be correlated with a stronger dollar and higher US interest rates. This also suggests less investment in the future, lower exports, and generally a higher cost of capital.

To conclude, as both wages and the cost of capital rise in a US protected from both foreign workers and foreign capital, US economic growth and power will diminish in the medium to long term. Of course, the reader will note that there are many moving parts to this scenario. It assumes for example that other countries will not react to US policy changes or that there will be no internal changes in the skill distribution in the US. Nevertheless, the analysis above is pretty straightforward and seems loaded against unskilled workers or workers with outdated skills.



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