Saturday, September 24, 2011

Falling wages in the US

I reported earlier this month on new data showing that the median wage for men in the US has fallen since 1973.

Laura Wood has a story which helps to explain why. General Motors has decided to reopen a factory in Tennessee, instead of shifting the plant to Mexico. That's good news but it has come at a cost. Many of the workers at the factory will be re-employed on a new contract. They will be on a second-tier pay scale of only $15.00 per hour.

That is unlikely to be a living wage for a male employee. The wage would have to be supplemented by the wife also doing paid work.

I can't say I'm enthused by the idea that workers in the US have to have their wages pushed down to compete with wage levels in Mexico. It's especially problematic if the resulting wages mean that a man isn't able to support a family.

Around the time that Australia became a nation there were debates about whether there should be large scale immigration from low wage countries or whether such immigration should be restricted in favour of a high wage economy. As part of the Australian Settlement it was decided to limit such immigration and to provide industry support so that men could be paid a basic wage, sufficient to support a wife and three children.

It was a policy that was retained for the most part until the 1980s. And it seems to have worked, at least compared to elsewhere:

In the 1977 Eliot Janeway Lectures on Historical Economics at Princeton University, the Nobel Prize winning economist W Arthur Lewis pointed out that at the turn of the twentieth century the world's two leading prosperous countries at the time, Australia and Argentina, chose different paths to development. Argentina chose the laissez faire approach involving specialisation in agricultural products in line with its comparative and natural advantages; Australia opted for a broadly based economy which would spread the benefits of economic growth.

History shows we made the right choice.

But have we now made the Argentinian choice? The Australian economy seems very dependent now on mineral exports (and selling university places and some agricultural products).

I'm not an economist, so I'm open to other opinions on this subject. But it seems to me that it's unlikely to be in the interests of workers in countries like the USA and Australia to have to compete with workers in low wage economies through open borders and globalised free trade. The end result of that process is likely to be stagnant or even falling wages, as well as a loss of the economy's industrial base.


  1. I am on principle a free market austrian economics guy, but let's be real. The rest of the world isn't and will do anything to screw american products over. That doesn't work when one two three countries use agricultural protectionism and devaluation to cheat.
    I have no problem with some kind of protectionism and a stronger currency to discourage (not ban) companies from taking their money outside the country.

  2. This was planned years ago. As regards the economic conditions making it necessary that both the husband & wife work; they did the same thing in the Soviet Union. Those who run things figure that allowing the proles to have a decent life is like feeding horses too many oats. It makes them harder to control, & control is the name of the game. They couldn't care less about money. To them money is only a means to the long sought end of absolute power over their fellow beings. Expect the situation to keep deteriorating. Inflation is certainly doing its work of destroying whatever savings the detested proles had managed to accumulate. We shall quite likely soon see something as bad as Weimar Germany & the Inflation of 1923. As Lenin wrote, debauching the currency is the surest way to bring down a capitalist country. Those who think they can change any of it by voting are like small children who believe that if only they wish for something with all their might, it will be just so. As Stalin said those who vote decide nothing, those who count the votes decide everything. Those who are wise enough to perceive the evil will prepare for the inevitable as best they can. The majority unfortunately will go on glutting themselves with pleasure until it is time for the slaughter. They will discover too late that ball games, beer & McDonald's hamburgers are not the entire purpose of their existence.

  3. I haven't gotten a raise in two years, while my costs (fuel, food, & energy) have gone up...

  4. Argentina's a Latin-American basket case. They haven't been anything like remotely laissez-faire since Juan Peron's rule in the 1950s. Peron wrecked the economy and was followed by juntas and thugs -- the usual Latin American story.

    It might be valid to compare the two up through the 50s -- I don't know much about Argentine history before Peron -- but Peron was a classic case of the Austrians being right, and he utterly derailed the country just in time to miss out completely on a massive worldwide economic boom.

    Of course, Peron was a case of extreme and reckless government interference. A lot of first-world economies have done very well with more sane and restrained interference (though more generous welfare states do appear to involve unsustainable debt). I'm just saying you can't use Argentina as an example of a laissez-faire disaster, because their disaster began with a government that was anything but. And Peron was surely a disaster.

  5. Anon,

    I've just now read the wikipedia article on the Argentine economy. It seems that they followed a laissez-faire model until 1932. They did well when commodity prices were high but suffered when they fell. So in 1932 they switched to an import substitution model and did well until 1947 when Peron came to power.

  6. I don't think globalization is reversible at this stage, really. What could be done could be to blunt the impacts somewhat (what is being done by the EU's trade policy, for example, or by China with its currency manipulation), but the general trajectory towards increasingly globalized markets for goods and services seems an irreversible one.

    This means different things for different people -- there are winners and losers. The winners are generally the people with skills which are in demand, because they can now sell to the highest bidder in a global market. You're no longer just stuck with what the Australian economy will pay for your skills, for example -- if LA or London or Beijing will pay you more for them, off you go, and you personally benefit from that. Those are the "winners", personally, from globalization: the highly skilled.

    For the non-highly skilled, whether you are a winner or a loser depends on where you live. Low skilled workers in China and India are huge winners under globalization, while low skilled workers in the US are massive losers. This is because, as with the highly skilled, globalization moves towards a global market for labor: something which is moving non-skilled labor costs towards an equilibrium point that is substantially higher than it previously was in poor countries like Mexico and India but substantially lower than it previously was in rich countries like the US.

    This is what pro-globalization economists are talking about when they crow about how many people have been lifted out of poverty by globalization: that's true, but they have been lifted out of poverty at the expense of the lower-skilled workers in the advanced countries, who have experienced a decline in living standards (on a real basis) over the same period. When confronted with that fact, the typical response is: "I am interested in global poverty levels, not relative living standards based pon artificial borders" or some such nonsense. They know well what is really happening: low skiled work is being commoditized on a global basis -- something which benefits the undeveloped countries' low-skilled workers, but hurts the developed countries low-skilled workers. In this respect, globalization is akin to socialism, as it steals from the relatively more well-off and redistributes it to the relatively less well-off by means of open trade policies which rob the lower-skilled workers of jobs by means of express government policy.

  7. To date the "official" response to this has been (1) we need more educated workers and (2) we need more "smart industries". Neither is sufficient for the problem. The first is insufficient because it basically has the utopian idea of eliminating low-skilled workers by means of education -- that is based on the fallacy that everyone is capable of being high-skilled if they are educated enough -- a falsehood that doesn't take into account real and persistent differences in aptitude. The reality is that the masses will always feature a lot of low-skilled workers, and the economy will either have jobs for them or it won't -- educating them formally won't make most of them high-skilled workers. The second approach fails for a similar reason: it is too small, and it requires relatively highly-skilled workers - something which is not a solution for the moderately-skilled masses. A nation of 350m is going to have a lot of also-rans, modestly-skilled folks who are not going to ever be globally-competitive knowledge workers or members of the newly-emerging global "creative class". To date, there are no good answers as to what to do about the future of these masses, and in the meantime the standard of living for them continues to deteriorate due to the increasingly global market for the kinds of labor they are suited to providing.

    Stopping up trade appears to be the obvious solution, but doing so unilaterally would create tremendous economic upheaval. A more considered approach would be to selectively use certain instruments to blunt certain aspects of globalization where it has hurt the most, and to come up with a real industrial policy. Fat chance of that happening any time soon in the US, really, to be honest.

  8. "I don't think globalization is reversible at this stage, really."

    Rubbish. "Globalization" was not an inevitable, impersonal process. It was something the elites deliberately inflicted on us. It can just as easily be un-inflicted.

  9. You can support a family in Tennessee on $15/hour. It's not an expensive place to live. I'd be interested in what medical coverage comes with the job though, that's the real killer.

  10. There are downsides to protectionism, but you just labelled all the positives Mark.

    In truth I think the best economic model is the one that led the US to become a superpower and is now leading China to do the same:

    Economic protectionism with a strong focus on the family combined with low public spending and an expectation that citizens themselves [with their families or their communities to help] will provide for their own welfare.

    That [with some other things] is pretty much what put the USA on top and is similar to China's strategy now.

  11. Good points James and a good article. There is no way that the US can expect to go on with massive central planning and entitlements and keep businesses there. The US has become hostile not only to business because of excessive regulation and taxes, but in addition, social policies - which create a hostile business climate in order to pay for themselves - have wreaked havoc on the family; and these policies then lead to more dependency on government for those unable to acquire marketable skills when jobs go overseas.

  12. I fail to see what's wrong in the competition? When you go to the supermarket, you take the cheapest product among the various competing brands, don't you? Do you care about which of the producer is paying more handsomely to its labors and tilt your favor for them while making your purchase decision?