unintended consequences: can the rise of the educated class...

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Introduction Trade Political economy Dynamics Conclusions Appendix

Unintended consequences:can the rise of the educated class explain the

revival of protectionism?

Paolo Giordani1 Fabio Mariani2,3

1LUISS, Rome

2IRES, Université Catholique de Louvain

3IZA, Bonn

ABCDE Conference, World Bank, 17-18 June 2019

Paolo Giordani Unintended consequences

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Motivation and research question

Protectionism is on the rise in Western democracies: Brexit, US,Italy, etc.

Tradehas distributive effects (winners and losers), butbrings about aggregate gains.

Why emptying the baby out with the bathwater?

Our politico-economic explanation:the (endogenous) rise of the educated class erodes the politicalsupport for redistribution, so that the losers from trade preferprotectionism

Fact 1 Fact 2 Fact 3


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Our model: overview

Our theory is articulated into three parts:

1 a simple specific-factor trade model à la Ricardo-Viner(Jones, 1971; Mussa, 1974; Mayer, 1974; Neary, 1978) withdistributive implications;

2 political economy: two-stage voting game on trade opennessand redistribution;

3 dynamics: taxes finance a public good, which promoteshuman capital accumulation.


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Our model: overview

Our theory is articulated into three parts:1 a simple specific-factor trade model à la Ricardo-Viner

(Jones, 1971; Mussa, 1974; Mayer, 1974; Neary, 1978) withdistributive implications;

2 political economy: two-stage voting game on trade opennessand redistribution;

3 dynamics: taxes finance a public good, which promoteshuman capital accumulation.


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Literature

Our research is related to several strands of literature, i.e.1 political attitudes towards globalization:

Colantone and Stanig (2018a, 2018b), Dippel et al. (2015), Beckeret al. (2016) Jensen et al. (2016), Autor et al. (2016), Rodrik(2018), Grossman and Helpman (2018), Pastor and Veronesi (2019)

2 determinants of populism:Guiso et al. (2017, 2018), Inglehart and Norris (2016)

3 distributive effects of trade:Grossman et al. (2017), Burstein and Vogel (2017),Vannoorenberghe and Janeba (2016)

4 human capital accumulation and inequality:Galor (2011), Benabou (1996), Zeira (2007)


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The economic environment: industries and agents

Two perfectly competitive industries:exporting (X ), andimporting (M).

Population of unit mass:λ ∈ (1/2, 1) workers, and1 − λ entrepreneurs.


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Industries and agents

Entrepreneurs are sector-specific:– γ (1 − λ) in sector X (denoted by x),– (1 − γ) (1 − λ) in sector M (denoted by m).

As far as workers are concerned,– σλ are skilled (s) and perfectly mobile across industries,– (1 − σ)λ are unskilled (u) and imperfectly mobile.


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Production

Production in the two sectors takes place according to

YX = AP [γ (1 − λ)]1−α−β [θsσλ]α [θu (1 − σ)λ]β (1)

and

YM = [(1 − γ) (1 − λ)]1−α−β [(1 − θs)σλ]α [(1 − θu) (1 − σ)λ]β ,

(2)where:

– θs and θu are (endogenous) labor shares (in X ),– A ∈ R+ is TFP in X ,– P ∈ [P,P] is the relative price in sector X (↪→ proxy for trade

openness, as in Grossman et al. (2017), etc.).


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Factor allocation

Factors are paid their marginal productivity (MP).The allocation of workers (θs , θu) is obtained from factor incomeequalization:

yM,i = yX ,i for i = s, u.

For the skilled, MPM,s = MPX ,s .Unskilled workers incur an access cost to sector X , so that

MPM,u =MPX ,uφP , (3)

with φ > 0.


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Factor allocation



For the skilled, MPM,s = MPX ,s .

Unskilled workers incur an access cost to sector X , so that


with φ > 0.


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Factor allocation



For the skilled, MPM,s = MPX ,s .Unskilled workers incur an access cost to sector X ,

so that


with φ > 0.


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Factor allocation



For the skilled, MPM,s = MPX ,s .Unskilled workers incur an access cost to sector X , so that


with φ > 0.


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Trade and factor incomes

After finding θ∗s and θ∗u, we can study how incomes depend ontrade openness

Lemma 1An increase in P (i) raises yx and ys , (ii) lowers ym, and (iii) lowersyu as long as φP > 1.


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Ranking of incomes

Assumption 1Parameters are such that:

1 σ <α

α+ β;

2 P >φ

β1−β

A1

1−β

(α (1 − λ) (1 − γ)

λσ (1 − α− β)− αγ (1 − λ)

) 1−α−β1−β

;

3 P <φ

β1−β

A1

1−β

(λσ (1 − α− β)− α (1 − γ) (1 − λ)

αγ (1 − λ)

) 1−α−β1−β

.

The above restrictions on the parameter space allow us to “freeze” theranking of incomes, thus simplifying the analysis.

Lemma 2Under Assumption 1, we have yx , ym > ys > yu.


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Setting up the problem

We consider a two-stage voting game, in which agents decide bymajority on

1 trade openness (P),2 taxation (τ).

Utility depends on consumption of private and public goods:

U (cX , cM ,G) = cµX c1−µ

M + δ lnG . (4)

with µ ∈ (0, 1) and δ > 0.The government budget constraint is

G = τY , (5)

with Y = PYX + YM .


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M + δ lnG . (4)

with µ ∈ (0, 1) and δ > 0.

The government budget constraint is

G = τY , (5)

with Y = PYX + YM .


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M + δ lnG . (4)

with µ ∈ (0, 1) and δ > 0.The government budget constraint is

G = τY , (5)

with Y = PYX + YM .Paolo Giordani Unintended consequences

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Political preferences over taxation

The preferred tax rate by agent i = {s, u, x ,m} is

τ∗i =δ(

P1−µ

)1−µ ( 1µ

)µ

yi. (6)

Given Lemma 1, political preferences on taxation can be ranked asfollowsLemma 3Under Assumption 1, we have τ∗u > τ∗s > τ∗m, τ

∗x .


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Voting on taxation

Political preferences are aggregated by majority voting, where τM

is the preferred tax rate of the median voter.

Proposition 1The median voter on τ is always a worker, unskilled ifλ (1 − σ) ≥ 1/2 and skilled otherwise, i.e.

τM =

τ∗u if σ ≤ 1 − 1

2λτ∗s if σ > 1 − 1

2λ.(7)

Let us defineσ′ ≡ 1 − 1

2λ.


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Political preferences over trade openness

Individual attitudes towards P are formed by taking into accountthe outcome of the vote on τ .

Lemma 4We have the following ranking of preferences over trade openness(across types):

P∗x (τ

M) > P∗s (τ

M) > P∗u(τ

M) > P∗m(τ

M).

In the absence of adequate redistribution, the losers from tradewould like to reduce trade openness.

Lemma 5Unskilled workers become more hostile to trade when the medianvoter on τ becomes a skilled worker, i.e. P∗

u (τ∗s ) < P∗u (τ∗u ) .


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Voting on trade openness

Preferences on trade openness are also aggregated by majorityvoting.

Proposition 2The median voter on P is always a worker, unskilled ifλ (1 − σ) + (1 − λ) (1 − γ) ≥ 1/2 and skilled otherwise, i.e.

PM =

P∗

u if σ ≤ 12λ − γ (1 − λ)

λ

P∗s if σ >

12λ − γ (1 − λ)

λ

(8)

Let us defineσ′′ ≡ 1

2λ − γ (1 − λ)

λ.


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The political equilibrium

(1) If σ ≤ σ′, u is median voter onboth τ and P;

(2) If σ′ < σ ≤ σ′′, u is medianvoter on P, s is median voter on τ ;(3) If σ > σ′′, s is median voter onboth τ and P.

1σ

λ

(1) (2) (3)

1/2

1

0

Proposition 3The political equilibrium is such that

(PM , τM) =

(P∗

u (τ∗u ) , τ∗u ) if σ ≤ σ′ (reg. 1)

(P∗u (τ∗s ) , τ

∗s ) if σ′ < σ ≤ σ′′ (reg. 2)

(P∗s (τ∗s ) , τ

∗s ) if σ > σ′′ (reg. 3)

(9)


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(1) If σ ≤ σ′, u is median voter onboth τ and P;(2) If σ′ < σ ≤ σ′′, u is medianvoter on P, s is median voter on τ ;

(3) If σ > σ′′, s is median voter onboth τ and P.

1σ

λ

(1) (2) (3)

1/2

1

0


(PM , τM) =

(P∗

u (τ∗u ) , τ∗u ) if σ ≤ σ′ (reg. 1)

(P∗u (τ∗s ) , τ

∗s ) if σ′ < σ ≤ σ′′ (reg. 2)

(P∗s (τ∗s ) , τ

∗s ) if σ > σ′′ (reg. 3)

(9)


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(1) If σ ≤ σ′, u is median voter onboth τ and P;(2) If σ′ < σ ≤ σ′′, u is medianvoter on P, s is median voter on τ ;(3) If σ > σ′′, s is median voter onboth τ and P.

1σ

λ

(1) (2) (3)

1/2

1

0


(PM , τM) =

(P∗

u (τ∗u ) , τ∗u ) if σ ≤ σ′ (reg. 1)

(P∗u (τ∗s ) , τ

∗s ) if σ′ < σ ≤ σ′′ (reg. 2)

(P∗s (τ∗s ) , τ

∗s ) if σ > σ′′ (reg. 3)

(9)


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Human capital accumulation (social mobility)

We now endogenize the proportion of skilled agents, σ.

The evolution of σ is described by

σt+1 = πSSσt + πUS (1 − σt) , (10)

where πSS (πUS) is the probability that a skilled (unskilled) workerhas a skilled offspring.Social mobility is driven by G (e.g. public education):

πSS = (1 − ζ)χSS + ζηGt

1 + Gt, (11)

andπUS = (1 − ζ)χUS + ζ

ηGt1 + Gt

, (12)

where ζ ∈ (0, 1), η ∈ R+ and χSS > χUS .


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We now endogenize the proportion of skilled agents, σ.The evolution of σ is described by

σt+1 = πSSσt + πUS (1 − σt) , (10)

where πSS (πUS) is the probability that a skilled (unskilled) workerhas a skilled offspring.

Social mobility is driven by G (e.g. public education):


1 + Gt, (11)


ηGt1 + Gt

, (12)



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σt+1 = πSSσt + πUS (1 − σt) , (10)



1 + Gt, (11)


ηGt1 + Gt

, (12)



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σt+1 = πSSσt + πUS (1 − σt) , (10)



1 + Gt, (11)


ηGt1 + Gt

, (12)

where ζ ∈ (0, 1), η ∈ R+ and χSS > χUS .Paolo Giordani Unintended consequences

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The transition function

For simplicity, we restrict trade policy to a binary choice, so thatP ∈

{P,P

}.

The transition function for σ is given by

σt+1 =

f1 (σt) if σt ≤ σ′

f2 (σt) if σ′ < σt ≤ σ′′

f3 (σt) if σt > σ′′(13)

where fi (σt) depends on the specific political equilibrium prevailingat time t.


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Example: protectionist SS

σt

σt+1

(1) (2) (3)σt+1=σt

σt+1=f(σt)

σ' σ''


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Example: free-trade SS

σt

σt+1

(1) (2) (3)σt+1=σt

σt+1=f(σt)

σ' σ''


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Conclusions

We have analyzed an economy in which citizens vote onredistribution and trade openness

Protectionism arises endogenously as a by-product of the lowerlevel of redistribution commanded by an ever more educatedworking populationIn our model, globalization breeds its decline

because it helps the emergence of the educated class,which in turn weakens the political support for redistribution,thus increasing the demand for protectionism.


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Conclusions

We have analyzed an economy in which citizens vote onredistribution and trade opennessProtectionism arises endogenously as a by-product of the lowerlevel of redistribution commanded by an ever more educatedworking population

In our model, globalization breeds its declinebecause it helps the emergence of the educated class,which in turn weakens the political support for redistribution,thus increasing the demand for protectionism.


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Conclusions

We have analyzed an economy in which citizens vote onredistribution and trade opennessProtectionism arises endogenously as a by-product of the lowerlevel of redistribution commanded by an ever more educatedworking populationIn our model, globalization breeds its decline



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Conclusions


because it helps the emergence of the educated class,

which in turn weakens the political support for redistribution,thus increasing the demand for protectionism.


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Conclusions


because it helps the emergence of the educated class,which in turn weakens the political support for redistribution,

thus increasing the demand for protectionism.


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Conclusions




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The rise of the educated class (OECD)

BackSource: own elaborations on OECD data

6

7

8

9

10

11

12

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Rise of the educated class

Totale


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Trade Openness and Social Expenditure (OECD)

BackSource: own elaborations on OECD data


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Globalization and redistribution (or the lack thereof)

OECD countries: trade openness and social expenditureBack

Source: own elaborations on OECD data

AUS

AUTBEL

CAN

CHECZE

DEUDNK

ESP

FINFRA

GBRGRC

IRLITA

JPN

NLD

NORNZL

POL

PRT

SWE

USA

0

5

10

15

20

25

30

0 20 40 60 80 100 120 140

Soci

al e

xpen

dit

ure

Openness

Openness and social expenditure (1985-90)

AUS

AUT BEL

CAN

CHECZE

DEU DNK

ESP

FINFRA

GBRGRC IRLISL

ITA

JPN

NLDNOR

NZLPOL

PRT

SVN

SWE

USA

0

5

10

15

20

25

30

35

0 20 40 60 80 100 120 140

Soci

al e

xpen

dit

ure

Openness


AUS

AUTBEL

CAN

CHE

CZE

DEU DNK

ESP

EST

FINFRA

GBRGRCHUN

IRLISL

ITA

JPN

NLDNOR

NZL

POL

PRT

SVN

SWE

USA

0

5

10

15

20

25

30

35

0 20 40 60 80 100 120 140 160

Soci

al e

xpen

dit

ure

Openness


AUS

AUTBEL

CANCHE

CZE

DEUDNK

ESP

EST

FIN

FRA

GBRGRC

HUN

IRLISL

ITA

JPN

NLDNORNZL

POLPRTSVN

SWE

USA

0

5

10

15

20

25

30

0 20 40 60 80 100 120 140 160 180

Soci

al e

xpen

dit

ure

Openness


AUS

AUT BEL

CANCHE

CZE

DEU DNK

ESP

EST

FIN

FRA

GBRGRC HUN

IRL

ISL

ITA

JPN NLDNOR

NZLPOL

PRT SVN

SWE

USA

0

5

10

15

20

25

30

35

0 20 40 60 80 100 120 140 160 180

Soci

al e

xpen

dit

ure

Openness


AUS

AUT BEL

CANCHE

CZE

DEU

DNK

ESP

EST

FINFRA

GBR

GRC

HUNIRL

ISL

ITA

JPN

NLD

NOR

NZL POL

PRT SVN

SWE

USA

0

5

10

15

20

25

30

35

0 50 100 150 200 250

Soci

al e

xpen

dit

ure

Openness



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Inequality before and after redistribution (Europe Vs. US)Source: Blanchet et al. (2019)


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Inequality before and after redistribution (OECD)Source: own elaborations on OECD data

20

25

30

35

40

45

50

55

1990 1995 2000 2005 2010 2015

Gini market and Gini disposable (1990-2014)

Serie1 Serie2


unintended consequences: can the rise of the educated class...

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