The first citation in the article below, from Kapoor and Schaumbug, hits the nail on the head. This is one of the best articles that explains the whole issue of pay, and supply and demand of labor and productivity with the introduction of China and other Asian economies in the World Trade Organization over the last 10 years.
Overpopulation in Asia is the ultimate cause for all problems we have now. The overabundance of low-cost labor in Asia is behind almost every problem.
When we harangue on the incompetence of Washington or unbound greed of Wall Street and Greenspan’s policy of low interest rates as the causes of the current crisis, we are missing the forest for the trees well. The bad decisions of politicians are a reaction to the problems we face, but they are not the root causes of the crisis.
Allowing this global wage arbitrage to develop over the last 30 years has been the most critical mistake of Western politicians and policymakers.
In short, the elite has sold the middle class down the river to make quick money through globalization. This has been very good for business, where there has been a spectacular bull markets of the 80s and 90s, but it was very bad for the American middle class. The American elites no longer need a middle class to buy their products.
It should also be pointed out that it’s not only global labour arbitrage, but also regulatory and statutory and customary/cultural arbitrage that applied downward pressure on developed nations wages. One only has to walk through a few Chinese factories to understand this.
Total cost of employment net of tax effect remains lower in most developing nations, so this process will be ongoing. It’s a difficult outlook for the developed nations but partially offset by the availability of cheaper imported goods.
U.S. Wages Are Out of Balance, As We Well Know
By Jim Mahar of Seeking Alpha November 11, 2009
A friend of mine would claim that there are no coincidences. Maybe she is right, but it sure seems there are when two articles (one from the NY Times and an academic piece) both come across my laptop within minutes of each other, saying roughly the same thing: that the US work force (a group to which I am a part), better get ready for pay cuts 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….”
hen from the NY Times piece: Breakingviews.com – American Wages Are Out of Balance – NYTimes.com:
“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.
Some cool websites with more information about this: