Wednesday, November 11, 2009

American Wages Are Out of Balance -

A friend of mine would claim that there are no coincidences. Maybe she is right, but it sure seems it when two articles (one from the NY Times and an academic piece both come across my laptop within minutes of each other and each saying roughly the same thing: that the US work force (a group to which I am a part), better get ready for paycuts since currently the world economy is out of whack.

First from the academic paper: Why are We in a Recession? The Financial Crisis is the Symptom Not the Disease! by Jaganathan, Kapoor, and Schaumburg
"Globalization has brought a sharp increase in the developed world's labor supply. Labor in developing countries – countries with vast pools of underemployed people – can now more easily augment labor in the developed world, without having to relocate, in ways not thought possible only a few decades ago. We argue that the large increase in the developed world's labor supply, triggered by geo-political events and technological innovations, is the major underlying cause of the global macro economic imbalances that led to the great recession. The inability of existing institutions in the US and the rest of the world to cope with this shock set the stage for the great recession...."

then from the NY Times piece: - American Wages Are Out of Balance -
"One explanation for the attractive prices of imported goods is that American workers are paid too much relative to their foreign peers.

Global wage convergence is great for the poor but tough on the overpaid. It’s possible to run the numbers to show that American manufacturing workers should take average real wage cuts of as much as 20 percent to get into global balance.

....if American wages get stuck above global market-clearing levels, as in the 1930s, the result could well be something approaching Depression-era levels of unemployment."
Two points on the NY Times piece: I do not claim to know the exact details (as in how exactly do we measure productivity) but empirically, if manufacturing jobs are going overseas, there is a simple economic fact that US workers must be being paid too much. Which obviously is not going to be popular, but it is something that we have all known for years. And yes when it points this price disadvantage out, is does so on a productivity standardized metric, which is to say that US wages are too high for relative productivity advantages.

Minimum wage laws and unions are two things that could force American wages to "get stuck" at such high levels.

Thanks to Robert Bruner for pointing the first one out.

Update: a reader over at SeekingAlpha (which picked up the blog post) correctly pointed out that the falling US dollar is cutting our wages (and standard) of living.


traineeinvestor said...

There are a few other reasons for jobs moving outside the US (and other high cost countries):

1. taxes may be lower elsewhere - not just the headline rate but the availability of tax holidays, and transfer pricing arrangements (which China is currently clamping down on)

2. access to local markets. In some emerging markets, if you want to sell in that market it is either mandatory or at least easier if you make your goods in the market

3. externalities. As anyone who drinks water or breathes air can testify, manufacturing operations in emerging markets are not subject to anywhere near the same level of environmental contraints as developed markets. Work palce safety regulations - ditto.

4. red tape. It is often a lot quicker to set up a new business in an emerging market than a developed one (in spite of the latter often being rated as offering greater economic freedom).

Anonymous said...

The idea that American wages are "out of balance" depends on a concept of how low workers' wages (and standard of living)can acceptably go. If competition is the only standard, there will always be people willing to work for less, which will then further depress wages across the globe--excuse me, "balance" them--down to the point of barest subsistence. So I guess that whole concept of the "middle class" was just a trend and now it's over?