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Globalization, Jobs, and Wages: Some Additional Perspectives

by Edward Alden
September 4, 2012

Michael Hill works on the track of a Caterpillar bulldozer at Holt Caterpillar, the largest Caterpillar dealer in the United States, in San Antonio, Texas on March 19, 2012 (Richard Carson/Courtesy Reuters). Michael Hill works on the track of a Caterpillar bulldozer at Holt Caterpillar, the largest Caterpillar dealer in the United States, in San Antonio, Texas on March 19, 2012 (Richard Carson/Courtesy Reuters).

My post last week on the New York Times’ Economix blog, which looked at how economists’ views are changing regarding the impact of globalization on the American jobs and wages, drew some very interesting responses. Most were of the “what took so long?” variety.

Indeed, the idea that a growing global market for labor would put downward pressure on U.S. wages is rather obvious. As one commenter put it: “Doesn’t economics suggest a commodity that can be purchased at different areas in the world will tend toward the same price after frictional effects such as transportation, duties and time delays are accounted for?”

The most critical comments chided me for not endorsing import restrictions to respond to these trends. But as I suggested in the article, there is plenty of historical evidence that such a response only makes things worse. While targeted tariff protection can make sense for limited periods in sectors faced with a flood of low-cost imports (the scenario that WTO-legal “safeguard” measures are meant to address), or for dumped or subsidized goods (which U.S. trade laws are meant to address), broader measures are almost always counter-productive. Import protection raises costs, which makes the U.S. economy less competitive across the board, and invites retaliation that closes export markets. The challenge for the United States is to figure out how to compete more effectively in a global market, not to close itself to competition.

The most interesting comment, however, was one I got from far outside the United States. It came in an email from Lincoln Faruque, a lecturer in the Department of Development Studies at the University of Dhaka in Bangladesh. He suggests that many of the negative impacts of globalization on U.S. wages and job creation are likely to prove transitional, and that as wages rise in the developing world the competitive dynamics could change quickly. With his permission, I quote it here at length.

I strongly appreciate your perspective in the article. However, I felt that sharing my understanding on the subject might produce a fruitful conversation between us.

A careful look in the history of trade depicts that a symbiotic trade relationship between two countries which are strikingly different in terms of per capita income and labor force availability (not size) produces three different outcomes at three time periods – short term (roughly 10-15 years), medium term (15-35 years), and long term. In the short term, the country having higher wages will start losing manufacturing jobs to the other country. This happens because sophisticated machines have made manufacturing jobs easily transferrable (only a short period of training on how to operate these machines is enough!). This does not take place in the service sector for two reasons – a) in the service sector, output is largely dependent on men not machines, and b) the service sector has a large non-tradable part. This export of manufacturing jobs accelerates for a few years and then slows down sharply as the pool of available labor become scarce. This is the end of short term impact.

The findings of the studies that you have quoted in your article largely covered the short-term period and therefore have reached a similar conclusion. But as the short term ends and the medium term begins, this framework of transfer of manufacturing jobs just doesn’t hold up. With labor scarce, companies soon feel the pressure of rising wages, which is also an indication of rising purchasing power in the relatively lower income country. So their decision where to create more jobs (whether in the high income country or low income country) depends on two questions: a) Where will the company enjoy lower input costs (raw material, electricity, land) and other related operating costs such as tax rates? The cost of labor drops from the equation. And b) In which country is the size of the market for the concerned product is bigger? Companies tend to locate in the larger market size country and export from there to other countries when other costs are similar.

Though the shaping of this new transformation starts at a snail’s speed, it can shift quickly. You have cited the case of Caterpillar. Please be happy that Caterpillar closed one of its factories in Canada in February 2012 and shifted the jobs to the state of Indiana. They are also abandoning production of some models in Japan and have started to build a new factory in Georgia, where they will produce these models. In both cases they offered the same explanation: “being close to the customer base.” So, the transformation in the medium term depends on economies of scale, not on wage rates. As more companies focus on this proposition and act accordingly, this turns into a wave and re-industrialization take place.

However, it’s worthwhile to mention that in the long term, companies’ decisions on where to manufacture largely depends on a) Where they can build new technology, and b) Where they can retain the right of using the new technology exclusively or keeping the exclusiveness of the technology secret. Be assured that the United States will get highest mark in both of these cases. Only Germany and Japan can be a close competitor but they, in aggregate, will lose more than two million working age people in the next decade.

This is one of the better arguments I have read for why the United States, despite its many challenges, retains enormous advantages as a location for multinational business. Sometimes these things look clearer from abroad than they do from home.

Post a Comment 5 Comments

  • Posted by Philip Weldon

    This article on globalization has got me thinking with regards to the deepening Eurozone crisis, as well as on the position of the economy of the United States. Both sides of the Atlantic have a large labour and consumer base and have, for a number of years, as I am aware, been talking of a so called ‘Free Trade Agreement’ between the European Union and United States. This has not yet made any substantial ground to be taken seriously. However I believe now is the time to encourage our state and non-state actors to push for this kind of agreement.

    A free trade agreement would allow new markets to emerge. This move would encourage the growth of services based industry in Europe and America, a key component of worldwide recovery. The larger markets of mass production in the East, have shifted the balance of power – however I envisage that this kind of mass production is not in keeping with the new Western way life – where, as we have seen with the emergence of social networks, a kind of social individuality service. The individual human hero is a force in our politics, our media and our daily lives. A connection on both sides of the Atlantic will open new markets and remove the barriers to trade. New ideas will flow, capital will come and business will grow. The services focused industry will tailor products to the individual, it will make trade and custom more personal. The individual will know they are contributing to something special and feel as if they belong to something special.

    In short – as the world moves forward, a more united stance is needed. We need to push for closer coordination in our politics as every individual, every family, every country becomes more and more connected.

  • Posted by Bill Reinsch

    I was also intrigued by Prof. Faruque’s comment, but I wonder if his analysis is too narrow. His analysis of the transition from short term to medium term and the resulting reindustrialization of the higher wage country seems to be based on a binary model where the company can only choose between the higher wage and lower wage country. In the real world, however, the company has a range of choices. If faced with rising wages in a country where it has a presence, it can choose to transfer production to another low wage country that is not as far along in its transition rather than return production to the original high wage country. Even now, as anecdotal evidence grows of companies pulling back from China for various reasons (IP issues being at least as popular as rising wage rates), it appears that not all of those leaving are returning to the US. Some are just going elsewhere, sometimes in Asia, sometimes Mexico, sometimes other locations.

  • Posted by amir

    This is based on the assumption that time and progress remains static as if other nations will do nothing except producing poor low wage people. With the change of time IP can be provided by other countries and demography shift makes bigger markets and customers where according to the idea companies would like to remain closer. The idea that Rome will stay Rome and no sun set in British empire is not supported by history.

  • Posted by Steve Moscoe

    With respect to my fellow commenters they are not taking into account the big picture, even as they consider the big picture. This truly is a case of a rising tide floating all boats. As markets mature in each stable region companies that started in our country may indeed never come back.

    However this does not mean that our needs will go unfulfilled. If they are exporting from Mongolia, and someone fills the market space from Texas, basic economics tells us the company in Texas will have the advantage, providing jobs here. This works with Mexico as well, because the Central American and South American economies will be affected in the same manner. A company in Mexico will have more trade advantage to the south due to language and culture, while the Texan company will gain the trade advantage in the US for the same reasons.

    We may not be Rome in the future, and our sun may set, but the world economy will tend towards balance.

  • Posted by Tim Williamson

    This is a great article. Particularly the section written from abroad looking into the US and global economic trends in general. These statements parallel many such articles and comments I’ve made over the past 10 years in some of my blogs and posts here and around the world.

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