7 - Power Over Profits

Summary

Scholars have long recognized that international trade policy has important domestic distributional consequences. Free trade policies can contribute to soaring profits for export-oriented firms, just as protectionist policies can increase returns for industries shielded from the global market. As explained in Chapter 2, the neoclassical trade models suggest that trade policy influences wages through its effects on the marginal revenue product of labor. For example, a tariff that protects an import-competing steel industry increases the domestic price of steel, which increases the marginal revenue product of labor in the steel industry, which increases labor demand, which automatically increases steel workers’ wages. In contrast to the canonical wisdom in the field, this book argues that the benefits of such trade policies are not automatically shared with workers in these favored industries. Instead, workers’ ability to capture a share of increased profits depends on the balance of bargaining power between capital and labor.

In this way, the link between the marginal revenue product of labor and workers’ wages – what I call the “profit-sharing rate” – is a key causal mechanism of my theory. This chapter therefore tests this crucial aspect of my theory by analyzing quantitative data from 28 manufacturing industries, in 117 countries, from 1986 to 2002. Since it is difficult to observe workers’ bargaining power independent from its effect, the analysis uses a country's level of respect for labor rights as a proxy measure for workers’ bargaining power. When a state respects labor rights, it provides a permissive context in which workers can act collectively and therefore increase their bargaining power vis-à-vis their employers. Most importantly, the analysis demonstrates that when respect for labor rights is very low, the profit-sharing rate is statistically indistinguishable from zero. Put simply, when workers lack bargaining power they are right to believe that they will not share in the benefits of favorable trade policy reform.

Beyond testing the causal logic of my theory, this chapter's large-N analysis has four methodological advantages. First, examining the determinants of profit-sharing in over one hundred developed and developing countries helps to avoid the selection bias that may influence the qualitative case studies presented earlier in the book. Second, quantitative analysis easily controls for alternative explanations and avoids the inferential difficulties faced when studying a small number of cases.