Compensating the Precariat

By Matson Boyd

In her recent post, Devika Dutt asks what is to be done about globalization. The benefits of trade and globalization are real, so how do we balance them with the costs to marginalized workers? How do we assure the dislocated workers, many of whom are unfortunately gravitating to Donald Trump and nativist causes like Brexit, that their interests are being taken into account when globalization and trade agreements are signed? And how can we persuade them that the flows of immigrants are not going to damage their livelihoods? I have one suggestion.


Abandoned factory in Cleveland

Economists do purport to take into account the costs and the benefits of trade agreements – cost-benefit analysis, of course. Economists tally up the costs and the benefits, put it all in terms of money, and voice their support if the benefits outweigh the costs. One problem with this cost-benefit method is that a dollar to a rich person is obviously not as valuable as a dollar to a poor person, so how do we know whether we’re not just redistributing funds upward and making people unhappier? This is a very old observation, and it was part of an epistemological problem that plagued Economics until the 1940’s. The way out was a simple work-around, the Kaldor-Hicks compensation principle. The original formulations of the principle are more complex, but in practice it is invoked in a simple form: a proposal is good if the benefits and costs are such that the gainers can theoretically compensate the losers and still have benefits leftover.


Problem solved? Well, no. The compensation doesn’t actually happen, it’s entirely theoretical. The laid-off workers, the abandoned towns the fact that they could be compensated satisfies the principle*. And the old concern, that a rich man’s dollar is not as valuable as a poor man’s dollar, is entirely skirted around. So my suggestion, to answer the original question of this post, is that we make the compensation actually happen. Agreements are good if the benefits outweigh the costs and the gainers actually compensate the losers.


Dislocated workers are sort-of compensated now – often with retraining for lower paid jobs. But that’s peanuts compared to the costs to the workers and their communities. If an agreement is good then there are more than enough benefits to fully compensate dislocated workers.


I don’t pretend that such a simple solution would be simple politically. Trade advocates will not like it. Perhaps the principle of actual compensation would be merely rhetorical, something unions and worker advocates can put forward to show that they’re not the enemies of progressive globalization. But it puts the burden where it should be. If trade advocates claim the benefits outweigh the costs, then they should have no trouble making the compensation happen.