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11/01/92

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FREE TRADE REQUIRES COMPLEMENTARY POLICIES

STANFORD -- Ensuring that all classes and ethnic groups benefit from the economic integration of the United States, Canada and Mexico will require more than the passage of the North American Free Trade Agreement, says Clark W. Reynolds, director of the Americas Program at Stanford University.

The major dilemma, he said, is that integrating the labor markets is to the long-run advantage of all three countries but is to the short-run disadvantage of lower-skilled workers in the United States and Canada, whose wages are above world labor-market rates.

Washington must change unemployment insurance and tax policies to encourage threatened workers to retrain as quickly as possible for jobs with a future, Reynolds said.

The challenge of the agreement is to develop a "compact between labor and capital" across the three nations that leads to "broad social participation" in the anticipated economic gains, said Reynolds, co-editor of a new book, U.S.-Mexico Relations: Labor Market Interdependence (Stanford University Press, 1992)

"As the case studies in the book suggest, this is a difficult balance to achieve, but there is no better alternative," the economist said.

"It's essential that lower-skilled U.S. workers share in the benefits of the free trade agreement not only for reasons of social justice, but in order to permit workers to improve their education and technical skills, broaden the scope for scale economies, and increase the rate of accumulation through expanded savings and investments."

If low-skilled U.S. workers don't acquire more skills, he said, projections indicate their wages will move downward toward those of Mexico, rather than Mexico's wages moving upward toward those of the United States and Canada.

That result doesn't hurt Mexico but is socially and politically unacceptable to the northern countries, where the work force is increasingly splitting into a predominantly white higher-skilled professional class and a low-skilled service sector dominated by younger ethnic minorities.

In the United States, those are approximately 12 million workers whose skills are about the same as those of 8 to 10 million Mexican workers.

Currently, because the pay is higher north of the border, Mexican laborers migrate in. Despite laws that attempt to limit immigration, they have accounted for about 10 percent of the growth in the American work force in recent years, Reynolds said.

Historically, the United States kept wages above average for low-skilled workers by "opening and closing the door to immigration depending upon where we were in our business cycles," he said. Chinese laborers were allowed in, for example, when needed to build infrastructure for western expansion; then, the Chinese Exclusion Act was passed to block more.

Now, however, laws can't protect wage rates "because if labor doesn't come in on two feet, it comes in as commodities," Reynolds said.

To help level the playing field on wages and costs, the three nations should "harmonize" their environmental and occupational health and safety standards so jobs relocate only for productive reasons, Reynolds said.

"Free trade means reallocating resources to their highest- value use," he said, but should not permit abuse of any category of workers or regional environments.

Internally, the United States must revamp unemployment insurance and tax policies to encourage quick retraining, Reynolds said.

Workers whose skills largely apply only to their company or industry are "ill served by the existing unemployment compensation system, which pays a substantial fraction of their prior wage for a short period, usually 26 weeks," he said. The policy needs "less emphasis on income maintenance and more on longer term rehabilitation and training."

Otherwise, he said, laid-off workers seek work in the same declining industry, rather than moving to a more promising field. Even income tax laws discourage workers from adjusting by allowing them to deduct job search costs only for jobs in the same field or level, he said.

"As some of my colleagues have said, we need a trampoline, rather than a safety net," Reynolds said.

Reynolds is among 25 Mexican and American scholars whose studies of labor-market interdependence are reported in the new book, which is published under the auspices of the U.S.-Mexico Project administered by Stanford's Americas Program and the Center for Economic Studies at El Colegio de Mexico.

Studies in the book cover the history and effectiveness of laws to control labor-market integration; changing patterns of labor supply and demand, and migration; the relationships among intracontinental flows of labor, commodities and capital; and changing labor competition in auto manufacturing, janitorial services, and agriculture production and food processing.

Funding was provided by the Hewlett Foundation and other non- profit foundations and universities. At Stanford, the research is supported by the Americas Program and the Center for Latin American Studies within the Institute for International Studies.

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