Can’t Get There from Here: Globalization and (un)Employment

In the July 2011 edition of Foreign Affairs Nobel Prize Winning Economist and Ivy-league Professor Michael Spence sets out the grim statistics behind the inter-relation of US jobless figures and the WTO reforms to world trade.

Globalization has helped many countries to long periods of sustained growth – 13, inc. China, have see +7% growth for more than 25 years ‘a century-long process in which income levels in developing countries have been converging towards those in developed countries’. Until the last 1o years developed countries were still growing and so was employment in those countries. That has changed: ‘for the first time growth and employment are starting to diverge’. At the same time job opportunities are moving away from growth sectors (tradables) to those where there is not only less growth but no reason to assume any future growth. This exacerbates income inequality.

1990-2008 – US employment increase 122m – 149m. 98% of the 27m new jobs were in non-tradables (can’t be exported) – mainly government & healthcare (as well as retail, construction and hospitality) ‘Employment barely grew in the tradable sector of the US economy.. manufacturing, engineering and consulting. Estimate total growth over the 18 years was 2% of total jobs growth – @600,000 jobs.  In the tradable sector the loss of low-end jobs (less skilled) has been compensated for by very-high end skills – meaning employment opportunities for the educated at the expense of the less educated. These workers have been absorbed by the non-tradable sector but the economic problems post-crash means this no-longer will happen.  If the nontradable sector continues to lose its capacity to absorb labour, as it has in recent years, and the tradable sector does not become an employment engine, the US should brace itself for a long period of high unemployment’.

Jobs grew but we got poorer – how? The answer is the different value-added figures in the tradable and nontradable sectors. Value-added is the difference between the cost of the inputs and the price of the output. The value-added of all industries in an economy equates to a nations GDP. Value-added in both tradeable and nontradable sectors increased at a similar rate however when the employment growth of each sector is analysed the consequence for lower wages emerges.

NONTRADABLES: rapid employment growth means value-added grew slightly faster than employment – value added per employee only saw modest growth 0.7%.  Value-added per employee grew from $72,000 to $80,000 (12%)

TRADABLES: little employment growth means value-added grew much more than employment and so value added per employee shot up. Value-added per employee grew from $79,000 to $120,000 (52%).

The incomes of workers are closely related to the value-added per employee. Since it didn’t rise much in the nontradable sector nor did wages. With increasing value-added in the tradable sector – and those sectors tendency to move the lower value-added jobs to other countries – those employed in those sectors took higher wages. And since most new jobs were created in the nontradable part of the economy, in which wages grew little, the distribution of income in the US economy become more uneven.

This trend will be continued with ever more elements of the tradable jobs able to be completed overseas so more jobs will go from that sector and the very-high end employees will continue to see increasing value-added, increasing wages. Its more money for very few people. Whereas with the domestic tradable section not requiring workers they will flood the nontradable sector and further depress wages with oversupply.

This is NOT ”Market Failure’ its is a clear consequence of the global trading regime’s efficiencies, but it is a ’cause for concern’ causing distributional problems for the advanced economies. Nor is this a sole consequence of labour-saving from automation and IT. These last two factors have cut jobs in both tradables and nontradables so cannot be blamed from employment decline in one sector alone. Spence says that ‘blame’ on Multi-national corporations (MNC’s) is overstated – its correct they take low value-added jobs out of the domestic economy by moving production chains overseas but he balances this effect, without statistics, by saying this process creates the high-value added end of employment in the tradable sector and have helped growth and competitiveness. He conceeds that companies private interests (profit) and the public’s interest (employment) ‘do not align perfectly’ and that even if wages rise in developing countires it will be many decades before they stop having the impact on domestic jobs that they currently have. He doesn’t note that not only would developing countries wages rise but that domestic wages will fall and that any future meeting will not necessarily be at the zenith of current domestic remuneration levels.

Is there a solution? Spence is good on generalities but his optimism doesn’t convince. He readily states that manufacturing jobs must be retained by productivity-enhancing technology and ‘competitive wage levels’ – however what competitive wage levels are he doesn’t admit.  International labour comparisons are tricky and the general assumption is that as the high-value added jobs get added to the developing countries resume then their own labour costs will rise. Looking for a direct comparison between two nations also neglects sectoral difference within those nations however for all these problems the wage differential is still stark. The US Dept. of Labor’s Statistics Bureau noted that a 2004 study put manufacturing labor costs in China at 3% of US costs. Its own recent statistics on comparative wages it noted the Philippines wage rates are 4% of US rates while a recent China News article shows that Chinese manufacturing wages haven’t yet reached the giddy highs of the Philippines. So Spence’s prescription for a ‘competitive’ wage level seems pretty grim in terms of the take-home dollar. Spence may counter he is talking about the remaining manufacturing jobs – abandoning sectors that companies like American Apparel gamely preserve a domestic presence in – but then he is also abandoning a pretence of an employment policy per se. The economy needs jobs for all, not just the preservation of niche manufacturing for the highly trained and skilled.

Spence does note that Germany has ‘managed to retain its advanced manufacturing activities in industrial machinery by removing rigidities in the labor market and making a conscious effort to privilege employment over rapid rises in income’ and wants the USA to do the same.  He notes that, while desirable, it is unlikely that public-sector demand stimulus will be politically possible – he tries to provide ammunition for those willing to advocate it however by noting that without public-sector stimulus there will be no private-sector renewal as investment in the private sector relies on demand and there is no sign of demand in the US economy unless the Government kick starts it.

His proscriptive analysis can be seen as

  • 1) making employment opportunities for all Americans, regardless of educational attainment,  a fundamental goal.
  • 2) increasing competitiveness and inclusiveness of the US economy (‘uncharted territory‘ – requiring correcting outcomes on the global market without doing too much damage to efficiency and openness (protectionism)).
  • 3) Boost education as a societal good – reverse the lack of commitment to education in large areas of the US and among different cultural groups. This takes time and ‘moral leadership‘.
  • 4) Invest in technology that will increase competitiveness in the tradable sector via public-private partnerships. Govt. investment in Sci-tech should have job creation as a goal, not a side-effect.
  • 5) tax-structures should be reformed – cutting company tax and encouraging overseas-profits to be brought back into the economy.

Its a vague and somewhat depressingly naive list. Points 1 and 3 are hopes that clash with the culture of the post-Reagan years. As for Point 2; Spence has shown how competitiveness has been directly attained by the sacrifice of inclusiveness.  His own work shows that the sector that didn’t ship out the jobs saw little growth and negligible wage increases. Tradables have seen high gains in value-added because, in part, only the high-value-added positions remain and they have made their gains by cutting the low-value jobs and shipping them out. The Value-Added per Employee is bound to have grown when the costly-labour-intensive part of the job has been taken off the balance-sheet. Competitiveness and inclusivness are antithetical while one is attained by the sacrifice of the other. Point 4 is hard to envisage in an economy where the private sector loathes the public-sector and has been taught to see it as a place to extract profits from, such as with Private Finance Initiative build projects. Decades of encouraging the wage-depressed worker to berate the public sector means support for ‘partnerships’ will be in short supply. Finally point 5 is the zero-sum game that all countries are now engaged in, its the tax-rush to the bottom that puts short-term one-upmanship over a sensible examination of the relationship between Trade Law and Taxation.
Spence is rightly concerned with income inequality in the USA, he cities the top 20% in the USA as earning 8 times what the bottom 20% earns. He compares that to Germany where the difference is a mere 4 times. Income inequality and unequal wealth accumulation are hotly contested fields however the work of Michael Norton of Harvard Business School shows clearly that not only are Americans mistaken as to how unequal their country has become but also that they would like it a lot less unequal. Spence’s analysis shows that unless something is done they are heading in the wrong direction and no correction seems to be coming.

Spence is a good man, a man who’s goals are admirable and whose analytical skills has been commended by the highest academic authorities. He’s right to trumpet an employment policy as vital to America’s future and to say that without it the pressure of dissatisfaction with  the global trading regime will ignite in other less desirable ways. His endorsement of applying Paul Samuelson‘s quote that ‘every good cause is worth some inefficiency‘ to equity and social cohesion shouldn’t cause public scheisters to shriek ‘socialism’ but it doubtless will. Sadly with his vague prescriptions and unlikely aspirations of hope Michael Spence is a man on a down-bound train.

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