Economic Competition on a Global Scale

What are some of the main economic forces driving down the wages of unskilled workers, and causing middle-class worker’s wages to stagnate? One argument that has found a lot of credence in both the United States and Europe is that competition from low-wage countries is driving down the wages of unskilled workers, and the wages of white-collar workers who do repetitive tasks, in economically advanced countries.

In the United States and Europe there are warnings being issued by many in policymaking positions and academic circles that the countries of the first-world are entering a new, highly competitive global economy, and only the nations that compete successfully will see economic growth and well-paying jobs for its workers. In 1991, Robert Reich lauded George Bush for identifying the right problem when President Bush told Congress that increased economic strength is…fundamental to success in the global competition with rising economic superpowers. (Reich, p. 261) President Clinton has remarked in the past that each nation is like a big corporation competing in the global marketplace. (Krugman, p. 4) In June 1993, Jacques Delors made a special presentation to the leaders of the nations of the European Community, meeting in Copenhagen, on the growing problem of European unemployment…He explained that the root cause of European unemployment was a lack of competitiveness with the United States and Japan and that the solution was a program of investment in infrastructure and high technology. (Krugman, pp. 1-2) In Germany, some of the biggest companies are expanding their production abroad and the small and medium-sized companies that are Germany’smanufacturing backbone are following suit, lured especially across the border in central Europe, where wages are around a tenth of domestic levels. (The Economist, (May 4, 1996), p. 18)

In the United States, the concept of the American worker against the world has become a populist cause. This has become evident in the political rise of Pat Buchanan and Ross Perot. President Clinton’sproposed solution to this competition is to equip the Americans, through federally supported education and job-training programs, to ‘compete and win’ in the global economy. (Michael J. Sandel, The Atlantic Monthly (March 1996), p. 57) The CEO and President of the Intel Corporation, Andrew S. Grove, recently wrote that if the world operates as one big market, every employee will compete with every person who is capable of doing the same job. There are lots of them and many of them are hungry. (Clay Chandler, The Washington Post, 3/10/96) Lester Thurow, in his book The Future of Capitalism asks why should anyone pay an American high school graduate $20,000 per year, when it is possible to get a better-educated Chinese for $35 a month who will work 29 days each month and 11 hours a day in China? (Thurow, p. 46)

Many in the United States are arguing that the wages of routine production workers and service sector workers are merging with the wages of other countries’ workers. (Reich, p. 240) Thurow has developed a Theory of Factor Price Equalization to explain why wages of American production workers are converging with wages of South Korean production workers. He argues that the US worker does not work with more natural resources than a South Korean (the world-market has one price for raw materials), access to capital is the same (everyone borrows from the same global capital markets in New York, London and Tokyo), the skill levels are the same because multinational corporations train and share skills, and everyone has the same technologies because transfers happen very quickly – with these factors being equal – the South Koreans’ wages will rise and the Americans fall until they are equal. (Thurow, p. 77) Some in Congress, and many who represent labor unions, agree with Thurow. The wages of American workers are inevitably driven down when they are forced to compete with workers in other countries who toil for pennies an hour, with few benefits and no workplace or environmental safety protections. Whatever benefit American workers gain in the form of cheaper shorts when Fruit of the Loom moves to Mexico is more than offset by the loss of purchasing power as real hourly wages drop. (Congressman Byron Dorgan, The Washington Post (4/12/96)

Thurow’s Theory of Factor Price Equalizationî has come under considerable attack. In fact, the World Bank wrote in its annual world development report that it would be foolish to predict that the differences between rich and poor countries will rapidly disappear through convergence, either upward (of poorer countries’ wages and living standards towards those in the rich countries) or downward (the reverse). (Reginald Dale, The International Herald Tribune (8/8/95) Thurow counters that if factor price equalization did not occur, there would be a major economic mystery. How could a global economy be developing, which it surely is, without factor price equalization? Factor price equalization is almost the definition of the world economy. If it did not exist, capitalists would be ignoring opportunities to raise profits. But there is no mystery that needs to be explained. Capitalists aren’t missing many opportunities to make more money. (Thurow, p. 167)

In contrast, there is a group of economists, led by Paul Krugman, who argue that American workers are not in competition with workers from other countries for well-paying jobs. Krugman argues that it is simply not the case that the world’sleading nations are to any important degree in economic competition with each other, or that any of their major economic problems can be attributed to failures to compete on world markets. (Clay Chandler, The Washington Post (3/10/96)

Krugman insists the evidence shows that increased wage inequality, like the decline of manufacturing and the slowdown in real income growth, is overwhelmingly the consequences of domestic causes. (Krugman, p. 47) He has developed a complex and sophisticated argument to show why this has to be the case. Krugman argues that the theory that low-wage nations are now able to attract capital and technology from the advanced world – achieving first world productivity levels while paying much lower wages – thus allowing low-wage countries to run huge trade surpluses, which then create either large-scale unemployment or sharply falling wages in the erstwhile high-wage nationsî is flat wrong. (Krugman, p. 75) The reason lies in a basic fact of accounting, perhaps the most essential equation in international economics:

Saving – Investment = Exports – Imports

This is not a hypothetical theory: it is an unavoidable accounting identity, a statement of an adding up constraint that any consistent story about any economy must honor. (Krugman, p. 76) Krugman explains that if the amount of investment is greater than a nations savings, which it would be because these low-wage nations would be able to invest more than their domestic savings because foreign capital will also be investing there, then you have a negative on the left side; while at the same time, in order to take the jobs of the advanced nations, the low-wage countries will export much more than they import. The right side of the equation would come up a positive. Krugman points out that it is impossible for a negative to equal a positive. (Krugman, p. 76)

If Krugman is correct, and the problems facing unskilled workers in the first-world is not foreign competition, then what is the problem? Krugman believes that no one can say with certainty what has reduced the relative demand for less skilled workers throughout the economy…but the concern widely voiced during the 1950’sand 1960’s, that industrial workers would lose their jobs because of automation is closer to the truth than the current preoccupation with a presumed loss of manufacturing jobs because of foreign competition…Technological change, especially the increased use of computers, is a likely candidate. (Krugman, p. 47 and 40)