What effect is globalisation having on US labour markets? Is there a 'global glut of labour' alongside Bernanke's global savings glut? These issues were addressed in a paper given last month to a Boston Fed conference, Global Imbalances – As Giants Evolve by the NBER's Richard Freeman: Labor Market Imbalances: Shortages, or Surpluses, or Fish Stories? (PDF).
The paper got some attention at the time, but its worth another spin around the block. Freeman raises in his characteristically provocative way several fundamental issues for economists, pundits and politicians. He puts forward "two competing narratives about the how the labor market in the US will develop over the next decade or two":
The Impending Shortage narrative, which has attracted attention from business and policy groups, is that the retirement of baby boomers will create a great labor shortage. Slower growth of new entrants from colleges and universities, an increased proportion of young workers from minority groups, and inadequate training in science and math will produce a shortage of the skills the country needs to maintain itself as the leading economy in the world. The message to policy makers is to forget about the sluggish real wage growth of the past three decades, the deterioration in pensions and employer provided health care, and fears of job loss from offshoring or low wage imports. Instead policy should focus on helping business find workers in the coming shortage.
...The Globalization Surplus narrative, which has attracted attention as part of discussions of the current mode of globalization, takes the opposite tack. It holds that the spread of global capitalism around the world, particularly to China and India, has generated a labor surplus that threatens wages in advanced and higher wage developing countries. Trade, offshoring, global sourcing of jobs, and flows of capital to the low wage giants combine to reduce the demand for workers in manufacturing and tradable
services in advanced countries and in moderate income developing countries.
Freeman finds stronger support for the second thesis than the first.
I conclude that the forces of globalization associated with the doubling of the global work force will trump demographic developments associated with slower population growth in determining supply/demand balances in the labor market.
This process could take a long time:
How long might it take the global economy “absorb” the huge work forces of China, India, and potentially other developing countries? ...If China maintains its successful development and wages double every decade, as they did in the 1990s, Chinese wages would approach levels in the advanced countries today in about 30 years. India would take longer. My assessment is thus that the transition will take 40 to 50 years.
What about other workers? Freeman notes that although globalisation "has improved the economic position of workers in China and India", workers in many other developing countries "have not done well in the 1990s-early 2000s". And those of us working in the OECD countries?
How workers in the advanced countries will fare in the transition depends upon a race between the improvements in global productivity and reductions in prices that the new giants will bring to the world economy vs the labor market pressure for wage concessions to compete with them. Ideally, the increased number of scientists and engineers and spread of high tech worldwide will accelerate the rate of technological advance enough to raise living standards in all countries; the US and other advanced countries will retain comparative advantage in enough leading sectors to remain hubs in the global development of technology; and the world savings rate will rise so that the global capital labor ratio increases rapidly.
What are the implications for government policy? For Freeman, it is two-fold: to ensure a smooth transition, and tilt the balance more towards labour than capital:
If I am right, the overriding goal of labor market policy around the world in the next decade or so should be to assure that the absorption of China, India, and the ex Soviet bloc into world capitalism goes as smoothly as possible.
The bent of policy in the US and elsewhere should be in the direction of favoring labor rather than capital, which ought to be able to take care of itself in a global economy with twice as many workers, many available at low wages.
There should be sustained international pressure on developing countries to raise their labor standards and to distribute the benefits of growth to workers. And there should be efforts to maintain or improve living standards if not wages of all workers in the advanced countries so that even the less skilled gain some from the movement to a global labor market.
Unorthodox thinking from the head of the NBER Labor Studies programme! And there's more:
In the US, increased social services and social infrastructure – national health insurance, for instance – may be needed to improve living standards if workers cannot gain real wage increases. As GDP will continue to grow, a key policy issue should be to find ways to distribute that growth beyond the super wealthy who have benefited most from the past two or so decades of growth.
That sounds like classic redistributive policies to me, which no Republican government would contemplate. Of course, Wall Street Journal columnist David Wessell, who wrote about the paper in U.S. Wages Face Glut of Pressures, wasn't going to have that:
Resisting the rise of China and India is neither possible nor wise. Their evolution could lift millions of their people from poverty and raise living standards everywhere by accelerating the advance of technology and reducing prices Western consumers pay. But recognizing that competing with them could put downward pressure on wages of some, perhaps many, U.S. workers in the next few decades is a necessary first step toward equipping American workers for stiffer competition and cushion the blow on those whose livelihoods are threatened.
Mark Thoma at Economist's Views disagreed in his post, Will Wages Continue to Fall in the Future?
The faster China and India develop, the better. Wages won't begin to rise until worldwide demand for labor increases, and that will require further economic development in both countries. We can imagine erecting barriers to try and isolate U.S. labor from these influences, but markets have ways of overcoming such barriers and they are unlikely to be effective.
In the meantime, as I've said before, much more needs to be done domestically to cushion those caught up in the transition and it would be nice to see government policy focused much more intently on this problem rather than on matters unrelated to the future of American workers. Saying "I feel your pain" even if we don't truly believe they do is much better than denying that any pain exists as is implicit in all the commentary wondering why workers don't report satisfaction with economic conditions.
Andrew Samwick at Vox Baby was concerned about the next generation:
It is true that the consumption needs of a large retired population (approaching half the size of the working population) will tend to boost wages under the "shortage" view presented above. But it will boost them not just in the United States. Wages will rise around the globe, in proportion to the ability of those in overseas markets to actually deliver the goods and services. (So wages for barbers go up proportionately more than for computer programmers.) Retirees will be bribing younger cohorts around the world to give up more leisure to provide the products they desire.
But among those younger cohorts who do take the bribe, there will be an added dimension in the United States but not in those other countries that Freeman and Wessel are considering. The added dimension is the substantially higher income tax burden that they will face to pay for the entitlements of the older generations. Entitlement programs like Social Security and Medicare are funded by taxes on payroll and income. The same is largely true of our addiction to budget deficits in the General Fund. To a very large extent, the ones who pay those taxes are the ones who work. So why work, or at the very least, why work in the United States?
Clearly the jury is not yet in on this question. We are only now starting to grapple with the pace, likely impact and policy implications of these global labour market trends. You can expect this debate to heat up before long. Better data and more good quality research would certainly help; there is much we don't yet know.
UPDATE: Mark Thoma posted about this paper again on 30 July, and reproduces long excerpts - though curiously, he doesn't link to his 15 June post, cited above.
This debate reminds me of the great Mankiw debacle of 1989, when he (and his coauthor) quite reasonably predicted that house prices would collapse as the shrinking numbers of the baby bust cohorts would lead to reduced demand for homes.
As he revisited that paper a year later, Mankiw discovered that the immigration of very many young foreigners had more than compensated for the decrease in native births. Roll onwards, and more of the same.
The increasing trend to ever greater offshoring and immigration will change the balance of negotiating power between workers and owners even more, to the benefit of owners in rich countries, and to the benefits of workers in poor countries.
«That sounds like classic redistributive policies to me, which no Republican government would contemplate.»
That is quite absurd: the Republicans are very much in favour of redistribution and practice it extensively, in favour of their sponsors.
Just as they are against taxes on their sponsors, but in favour of taxes on the Democrat voting base, and similarly they are against big government when the beneficiaries are the Democrat voting base, but entirely support big government when it benefits their national and foreign sponsors.
Republicans are the party of class warfare even more so than the Democrats, to the benefit of their sponsoring class.
Posted by: Blissex | Sunday, July 30, 2006 at 04:50 PM
"Impending shortage: ... The message to policy makers is to forget about the sluggish real wage growth of the past three decades, the deterioration in pensions and employer provided health care, and fears of job loss from offshoring or low wage imports."
The deterioration in employer provided health care is a uniquely American experience, since most other countries in Europe (the only really demographically comparable economic system) finance this service out of taxes.
Why Americans continue to think that health car should be funded out of wages is beyond most. Health, like defense or education are fundamentally "social utilities" that underpin any economy. They should not be left to whimsy of "free enterprise", where they compete (in good times) to offer the best packages. Health is not an area that should be subject to competition. It is too important for the nation as a whole.
Ditto university education.
"Globalisation surplus" : Trade, offshoring, global sourcing of jobs, and flows of capital to the low wage giants combine to reduce the demand for workers in manufacturing and tradable services in advanced countries and in moderate income developing countries."
Outsourcing labor is a form of FDI and enhances purchasing power in the receiving countries. In part, these consumers then climb the consumption ladder and purchase goods (perfumes, computers, wines, cars) from abroad. This cycle is beneficial to all.
And, as the typical argument goes, outsourcing unskilled jobs DOES create unemployment, but such is the price to pay for a people to understand that not obtaining the requisite skills in developed western economies condemns them to lifelong job insecurity.
Is this "survival of the fittest"? In a word, yes. But, do low-wage earners in China not have just as fundamental right to work?
"I conclude that the forces of globalization associated with the doubling of the global work force will trump demographic developments associated with slower population growth in determining supply/demand balances in the labor market."
He's right. But, also, the lower birth-rate developed countries will tend towards educating better skilled workers, which (in theory) should obtain better wage jobs.
This will not happen, because both first and third world economies are engaged in a race up the skills ladder. Why are so many Chinese companies opening "design centers" in Germany. To obtain the skills necessary in machine tool design / development / manufacturing, which they will take back to China.
This tactic, observed not only in Germany, will inevitably compromise one of Germany's major and highly successful export sectors. Ditto America. If Germany and America are not prepared to see increased competition in traditionally "hegemonic" markets, then they both are in for great surprises.
Sic transit gloria mundi.
"If I am right, the overriding goal of labor market policy around the world in the next decade or so should be to assure that the absorption of China, India, and the ex Soviet bloc into world capitalism goes as smoothly as possible."
This is happening already, at least as regards China. The only sticking point remaining is the yuan's undervaluation with the dollar. China has mimicked the same strategy as Japan (after WW2). Namely, low cost labor and undervalued currency, both stimulants to exports.
The yuan must appreciate, so it will appreciate. The only question is when.
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