Saturday, February 27, 2010

"The Great Doubling:" New Global Labor Market v2

A huge increase workers is having a disastrous effect on US wages and jobs for low-skilled workers.

The University of Wisconsin-Madison's Institute for Research on Poverty had an interesting article about globalization's effect on US low wage workers. The article was written by Ricard B. Freeman. Freeman discusses' the global increase of workers from China, India and Russia. The number of workers available to global markets has increase from approximately 1.5 Billion to about 3 Billion. However, the capital available for production has stayed about the same. So the ratio of capital to labor per unit of output has fallen by 50%. This gives capital a tremendous advantage in the new global environment. Production can take place almost anywhere labor is cheap.

The entry of China and India into the global market place has also had a devastating impact on other low and medium wage countries. Countries that used to export to the US and EU are being replaced by China.

The author also defends Paul Samuelson's view that globalization may not always be good especially for low skilled workers. Mr. Samuelson had been attacked by some economists for "opposing" free trade. The author points out that China and India, besides just exporting low wage products, are also producing highly educated workforces to challenge high skilled products from the US and Europe. These new competitors are adding supply and competition, and reducing prices, profits and wages.

Mr. Freedman then highlight two scenarios the US could take given the effects of globalization.

One: China and India produce products at lower prices which increases global standards of living. The US retains some of it technological lead to continue to produce high valued products and services. A high world savings rate leads to an increase in the capital / labor ratio. The US puts some money into a stronger social safety net including healthcare to support high living standards for workers who's wages are limited by low-wage competition.

A second scenario is capital formation fails to match labor growth. The Chinese and Indian economies only benefit "elites" leading to instability. The US develops a backlash against globalization and limits free trade.

Professor Freeman proposes some solutions.
1) Continued investments in science, technology and education.
2) Continued immigration of scientists and engineers.
3) Government support for low wage workers such as:
Earned Income Tax Credit
Higher wages and higher minimum wage
Support for unions and collective bargining
Profit sharing with employees
4) Support for government programs such as healthcare which reduce the cost to hire new employees


A huge increase workers is having a disastrous effect on US wages and jobs for low-skilled workers.

You can read the report here.

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