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Thursday, June 15, 2006

Will Wages Continue to Fall in the Future?

Where are wages headed in the future, up due to a shortage of workers arising from the retirement of the baby boom generation, or down due to the expansion of labor markets from globalization and information technology? Unfortunately, according to Richard Freeman, the prognosis does not favor rising wages:

U.S. Wages Face Glut of Pressures, by David Wessel, WSJ: There are two strikingly different ways of looking at prospects for American workers.

One view, often heard from business organizations, is that the looming retirement of the huge baby-boom generation will create a great labor shortage. So don't worry about recent distressing trends in wages and benefits; the market will cure that. Worry about where America is going to get the workers, particularly skilled workers...

The counter view is that the emergence of China, India and the former Soviet bloc as modern capitalist economies changes everything. It ... tilts the global balance between labor and capital in favor of capital. So worry -- and worry particularly that China and India are interested not only in low-skilled, low-wage jobs, but are training platoons of scientists, engineers and researchers.

Harvard University labor economist Richard Freeman examines the facts underlying these contrasting stories in a paper to be discussed today at a Federal Reserve Bank of Boston conference. His conclusion, to skip ahead a bit, is that the second case is stronger. ...

It's true that America's work force is projected to grow more slowly in the next 50 years (about 36%) than it has in the past 50 years (about 127%) as baby boomers retire, Mr. Freeman notes. It's true that growth will be concentrated in minority groups that historically have had less education and fewer skills. But demography isn't always destiny. When U.S. firms run short of domestic scientists and engineers, they rely on foreign talent...

A bigger fact, Mr. Freeman argues, is that the doubling of the global work force ... When labor is abundant and capital relatively scarce, wages tend to fall and returns on capital tend to rise.

The conventional economist's story was that the clearest losers from this new competition wouldn't be workers in the U.S., which has already lost factory jobs to places like Mexico. ...  Mexican workers would be displaced by low-cost Asian labor. But China and India didn't follow that script. They are investing in educating workers and creating a cadre of scientists and engineers. .. Mr. Freeman ... predicts that "will undo some of the advanced countries' monopoly in high-tech innovation and production," threatening U.S. wages.

Such arguments once were dismissed by mainstream academics. But that's changing. In a recent Foreign Affairs essay, Princeton economist Alan Blinder ... said his peers "are greatly underestimating" both the "importance and disruptive impact" of offshoring. "The societies of rich countries seem to be completely unprepared for the coming industrial transformation," he wrote.

Mr. Freeman says all this argues that "the overriding goal of labor-market policy around the world in the next decade or so should be to assure that the absorption of China, India and the ex-Soviet bloc into world capitalism goes as smoothly as possible...

Resisting the rise of China and India is neither possible nor wise. Their evolution could lift millions of their people from poverty and raise living standards everywhere by accelerating the advance of technology and reducing prices Western consumers pay. But recognizing that competing with them could put downward pressure on wages of some, perhaps many, U.S. workers in the next few decades is a necessary first step toward equipping American workers for stiffer competition and cushion the blow on those whose livelihoods are threatened.

The faster China and India develop, the better. Wages won't begin to rise until worldwide demand for labor increases, and that will require further economic development in both countries. We can imagine erecting barriers to try and isolate U.S. labor from these influences, but markets have ways of overcoming such barriers and they are unlikely to be effective.

In the meantime, as I've said before, much more needs to be done domestically to cushion those caught up in the transition and it would be nice to see government policy focused much more intently on this problem rather than on matters unrelated to the future of American workers. Saying "I feel your pain" even if we don't truly believe they do is much better than denying that any pain exists as is implicit in all the commentary wondering why workers don't report satisfaction with economic conditions.

Update: Vox Baby also discusses this article.

    Posted by on Thursday, June 15, 2006 at 10:42 AM in Economics, International Trade, Unemployment | Permalink  TrackBack (2)  Comments (35)


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    » Will Wages Continue to Fall in the Future? from EconWatch.com

    [Source: Economist's View] quoted: It's true that America's work force is projected to grow more slowly in the next 50 years (about 36%) than it has in the past 50 years (about 127%) as baby boomers retire, Mr. Freeman notes. [Read More]

    Tracked on Friday, June 16, 2006 at 09:59 PM

    » Global labour market imbalances? from New Economist

    What effect is globalisation having on US labour markets? Is there a 'global glut of labour' alongside Bernanke's global savings glut? These issues were addressed in a paper given last month to a Boston Fed conference, Global Imbalances – As Giants Evo... [Read More]

    Tracked on Sunday, July 30, 2006 at 04:47 PM


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