Analysis: More pressure on global wages could backfire

This:

But as they’ll get little or no help from easy credit today, driving wages down even more risks a cratering of household consumption and a severe test of social cohesion.

A world at the mercy of the rich and powerful is the system that’s been entrenched. Governements, western especially, have played enabler. A failure of ‘elites’ across the board. Corporate intellectual capture on a widescale.

Sure, wages are going “down” when one looks at specific countries.

But what about the world labor market? Workers in India, China and other lesser developed economies have been enjoying unprecedented wage hikes over the same period that wages in developing economies have stagnated.

This is globalization at work. I’d suspect that the global share of wages has not changed significantly.

“driving wages down even more risks a cratering of household consumption and a severe test of social cohesion.”

This is what the rich wall streeters, and the banks just do not get… If you drive wages down so far that people cannot buy products, and are constantly scrapping by at subsistence levels, then soon (much faster than before), they will revolt… and the outcomes will not be pretty for the rich bankers… The French Revolution against Louis XIV and his ‘let them eat cake’ wife, the rise of the Khan’s of central asia, the revolt against King John in England, even the rise of Adolph in Germany can all be traced to rich bankers trying to enslave the masses…
If they don’t get a clue soon, it may happen again… History does tend to repeat itself often, since greedy men cannot seem to learn from it….

There were only the first three comment when I wrote this.
Two out of three comments above are still “National” in their perspective, and one is “Global” in perspective. All developed and emerging economic nations agree that globalization is the direction they are heading. Corporations that were recently “National”, became “International” and now happily proclaim themselves “Global”.
I want to believe that if the politicians of the world explained what was happening to the people and their lives in this new age, that “we the people” would understand and help move into the future together, peacefully. But I doubt very much that will happen. History says that rapid changes in a society are violent and ugly. But this time it is different as never before in history have ALL the societies changed at the same time, with instant “HD” communications so we can all watch each other go through it together. I hope this new difference mitigates the usual violence. That all being said, applying a global perspective to global wages one would think that wages must even out across the economies including the 3rd world or struggling economies. It has been happening for the last decade and will continue. High wage countries reduced and stagnated wages, and are beginning to add inflation to further reduce them. Emerging economies are increasing their wages and fighting inflation. The struggling economies are now aware of their position in the world and are demanding equality instead of servitude. You can see all of this happening right here on Reuters.
When I read an article like this one and I see two “Global” comments to one “National”, then I’ll know we made it into the new age. But being fifty years old, I don’t think I’ll live to see that. But I’m ok with that as I believe my children will live to see it and many more wondrous things.

Today’s “job creators” forget the lesson taught by Henry Ford, in order to make money the working class has to be able to afford your product.

Pressure on global wages will always backfire as long as the global population continues to skyrocket. Young people indoctrinated into the ‘progressive’ mindset always speak of fairness and economic justice, outraged that government does not redistribute other people’s money more to their liking, but what is really at play here is the good old law of supply and demand. Hungry people will always do more for less than contented people. As long as impoverished people who cannot even feed themselves continue to pump out babies and the west continues to subsidize them, the global labor market and thus wages will remain severely undercut.

I think most of you miss the point of wealth. It is not the absolute value of it that the wealthy seek, rather it is clear and measurable difference between themselves (the royalty of money) and the serfs. So if they can’t increase their own wealth faster then at least driving everyone else down brings some joy to them. They just want confirmation that they are the masters, and quite frankly, most of you confirm that for them so as to earn special favors from the masters.

Giving people credit just kicks the can down the road if they do not have enough money. It’s not the big problem. RudyF points to the root cause. So the rich countries need to increase minimum wages and tax goods coming from countries that have a too low minimum wage, maybe based upon the labor hours required to produce the goods and the wages in the producing country. This has to be at the expense of corporate profits. Without this first world countries are dragged down to India/China levels and risk massive civil unrest at a minimum. Both the EU financial system and free trade are not working out too well for low income people in places like France, Britain, and the USA. It’s working out great for the people behind global corporations and financial institutions.

@BillDexter you should check out Hans Rosling’s Ted Talks on Global Population growth. You will see, with real scientific data, that your viewpoint is a few years out of date, and that no one is “subsidizing” anything.

tmc maybe we need to define ‘subsidy’ but the UN trucks in food and medicine. Western philanthropy and the UN facilitate population growth in the most appalling conditions. Our efforts haven’t stopped, they are just spread thinly over a much, much larger poor population now. If we stopped inoculating the kids and bridging the gaps in the food supply the rate of increase would level off fast. I’m not advocating that, but population control is and has been the missing element is these humanitarian efforts all along. Sitting in a tent city with shallow open sewers waiting for a rice truck is no way for human beings to live. To me the world’s current increasing population is the biggest mistake human beings have ever made. It won’t end well.

In the topic of global wages, no I don’t see the U.N. and other humanitarian aid as a subsidy. I think you see some of the bigger picture, but angst is clouding your statements. Happens to me too. You should really watch Hans Rosling’s “Stats that reshape your worldview” on Ted or youtube. I think you would really enjoy it. Societies take decades to change even now. There are up-sides, and down-sides of all social changes. Globalization has some real doozies. Particularly wages. Yes, there are greedy people taking advantage of the social changes. But then there always have been. We just didn’t know the scale of it then as we do now.

tmc I have not seen that but will when I have time. Years ago Hans did one called 200 countries, 200 years, 4 minutes. This clever piece used dynamic circles on a relative wealth scale to demonstrate that with a ‘little’ wealth redistribution, everyone in the world can live well, or at least with some decency. The trick was the circles only represented RELATVE population, and hid (deliberately?) the recent population explosion is the poorest regions of the world.

Anyway, yes, angst can cloud judgment but as we begin a transformation to a smarter world armed with regulation and redistribution to make everything right, remember that it has been tried countless times in the past and has only ever ended in poverty and violence, with black market thugs quickly taking the place of the financial elite.

supply and demand……..more people today, competing for the same jobs

technology is reducing the need for workers in all fields

the benefits of productivity increases, go to owners, not workers

This is a simple to understand phenomenon: during the Cold War international trade overwhelmingly consisted of trade between the “First World” countries who were essentially an economic island unto themselves, productivity growth translated directly into wage growth because the demand for labor was relatively higher than the supply (labor was relatively more scarce than capital); by the 1980s the Cold War began winding down with the opening of China (1970s malaise caused primarily by energy shocks and wage indexing causing an inflation spiral); by the 1990s the Cold War abruptly ended and there was suddenly no longer a wall to trade; international trade has accelerated, including “outsourcing”: the movement of relatively labor intensive jobs to lower wage locations (a similar trend benefited the U.S. in the 1800s when textile manufacturing moved to New England due to lower costs). Basically, we went from having about 500 million workers in the rich world competing with each other for jobs and enjoying high wages, to suddenly having to compete with another 3-4 billion people for many of those jobs. Wage growth has stagnated most in rich countries in the labor intensive tradable manufacturing sector (textiles, toys, etc…), while high skilled jobs (think doctors, lawyers, engineers, computer programmers, etc…) have seen wages increase because now they have billions of more customers to serve but relatively few new competitors for their jobs. This is why income inequality is rising.

Another even easier way to look at it is to see that the opening of the entire world as a (mostly) unified market has resulted in an increase in the return to capital and a lowering of the return to labor. The supply of low skill labor has massively increased by including developing countries into the equation. These countries have relatively little capital compared to rich countries (all forms too: physical capital like machines and buildings and infrastructure; financial capital; and human capital as in educated, skilled labor). Meaning that the marginal gain from a unit of capital is higher now than it was when trade was limited, while the marginal return to another unit of unskilled labor has declined because of the huge surplus of it from “Third World” countries. This means those who own the capital (businesses; owners of financial assets, i.e. the 1%; and those with high human capital such as those with tertiary education and many years experience) are experiencing a higher income from their capital at the same time wages for those with the least skills and education are flatlining. Prior to the opening of the world to increased trade the rich world was swimming in excess capital thus increasing the relative return (wages) to labor. Only by increasing capital accumulation (education, construction, investment, savings, etc…) can we bring the capital to labor ratio back to what it was during the Cold War.

The remedy is not to go back to protectionism and anti-trade policies. Counter-intuitively the best solution (along with improving access to human capital to those most afflicted by the low skilled competition, i.e. improved training and education for the poor) is to INCREASE trade and thus speed up the transition to a balanced growth world where capital intensity is evenly spread across the globe. Keep in mind that as Chinese wages are rising they are importing more goods from the U.S. at a rate of about 6% more each year, three times the average 2% annual growth of the economy, meaning a growing number of jobs in the U.S. go to exporting goods or services to China. My motto is this: ‘A person who makes less than a dollar a day cannot afford to buy a Ford.’ In other words, the more we trade with poor countries the faster the citizens of poor countries incomes will rise (due to capital accumulation), and the faster the incomes in poor countries catch up to those in the rich the less downward pressure there will be on rich country wages, and the more goods and services citizens in poor countries can buy from those in the rich. Future generations would be much better off if we continued pushing for more free trade because it will amount to more customers for their goods and services 20-30 years from now, and thus higher wages from the higher demand for labor.

It remains to be seen if current generations are capable of putting their self-interest aside long enough to allow the transition to finish for the benefit of all future generations.

I see we are very close on this, thanks for conversation. I agree that in the past it always ended poorly. This time I hope it will be different. The amount of direct military conflicts continues to drop, and world poverty to decline. In the short term thugs will benefit. My pet peeve right now are the Banksters enjoying their very own justice system. But it will end. And our inflation, once the fed gets it going, will help to even out the global wage issue. It will take a few more years and the John Corzine’s and Bernard Madoff’s of the world will get rich, but my kids may have a chance to compete fairly in a real global economy.

Well said Hindumuninc!