Sunday, August 15, 2010

Do China’s low wages explain job destruction in high wages countries?

Here is a crystal clear explanation from Scott Sumner (The Money Illusion):

« Suppose someone argued that rich country workers can’t compete with low wage countries like China. The counterargument would be that Germany has led the world in exports for most of the past decade, and they have some of the highest wages in the world. Bangladesh has a much bigger population, but puny exports. The counter-counterargument is that Germany’s high wages are caused by their high productivity, and that high wages are still a disadvantage in trade, holding other things constant. In the end, the debate is sterile unless we understand all of the underlying fundamentals, in which case wages are superfluous.

Here’s better analogy. Massachusetts saw a big loss in jobs in industries like shoes and textiles during the 1980s. Was the job loss due to high wages? If so, then why didn’t Massachusetts see a higher unemployment rate? Economists would use the good old comparative advantage model. The booming high tech, health care, and finance sectors created lots of high paying jobs. This raised the cost of living here, and drove out the low paying jobs. Thus our low wage jobs weren’t stolen by cheaper labor in Mexico or China, they were literally pushed out (or crowded out) by higher paying jobs in other industries. That’s creative destruction.

Now let’s consider the role of wages. Although they weren’t the root cause, it is true that high wages were a sort of transmission mechanism between the high tech boom and the loss of low wage jobs. So why do I object to people saying high wages drove out those older industries? Because wages change for many different reasons. They might change because the shoe industry became highly unionized and drove up wages, despite weakness in other areas of the economy. Or they might change because of the creative destruction process I just described—a high tech boom pushing up the overall wage rate around here. It makes a big difference which factor is behind the wage change. You haven’t really described the reason why shoe-making jobs left the state unless you can explain why wages rose. »

The whole post is about interest rates, and why they are not a reliable indicator of monetary policy. But I found this comparison with the various underlying factors of wage competition especially interesting. Read the complete post here .

No comments: