This is the way globalization is supposed to work, isn't it? Over time the difference in wages between one country and another for the same work should diminish.
Yup. I'd expect exactly what's happening at the moment - richer countries to stagnate, poorer countries to see rocketing wage inflation, and eventual stability.
It'll take a couple of generations though, what with differences in education, training, etc. to work through.
Yup, I don't actually have a problem with this - if only it meant domestic production would be more viable but that is unlikely. However won't a wage increase for thay many workers just mean their local inflation will also rise?
I still want to know we can buy 50 cent items from China off ebay and have them mailed individually for free. How on earth does their postal service (and our local country's) mail something that cheaply? Cannot quite grasp the logic.
Not exactly, minimum wage laws aren't actually market forces and I think two things are likely a) further inflation in essential goods, seeing how China already has inflation problems this is probably a response to that but will only add fuel to the fire b) fewer jobs, especially considering the part of their economy based on construction - and that bubble is bursting ATM. China has to compete with India, the rest of Asia, and automation on top of that.
They may or may not come out of it on top, but China's government does have some pretty solid technocrats running the numbers when they do these sorts of things. One guess is that they're worried that without the lower-end workers getting somewhat more money, there will be unrest that the government will have to do something about, for example by subsidizing housing if a typical worker in the area can't afford housing on the minimum-wage salary. If that were the case, this would be basically a way of internalizing the externality--- baking the social-unrest-reduction fee into the wages, rather than using taxes (on the same companies) to spend out of a separate pot for welfare.
Chinese "technocrats" created probably the largest real-estate bubble yet by focusing on short term GDP growth numbers. Look up china ghost cities. People bought in to these as retirement/savings to avoid their constant inflation (which is increasing). They are in a situation where they can't inflate that bubble anymore because the inflation would get out of hand, and are willing to risk economic downturn to slow it down (that should tell you how serious it is).
Local governments make a lot of money (both formal revenue and informal bribes) off real estate development. The states / cities can't balance the budget without selling housing plots to developers. And the banks have low interest, while inflation is insane (due to both government monetary policy, and the good inflation of wage growth - both of which encourage development at the cost of encouraging bubbles). Then there's the cultural preference for boys and the one child policy leading to more boys than girls, so the girls only want to marry boys with houses, encouraging parents to buy a house for their son.
On the other hand, China's deposit requirements for houses are draconian. Think 40% down. And the national government has been screaming bloody murder at house prices for quite some time, trying to ram all sorts of measures through to control house prices.
Also, some of the ghost cities are kind of fictitious. I know one which was built on edge of a growing city, which rapidly filled up. There were some more developments in cheaper locations that looked a little iffy, but the one on the international news sites wasn't really a ghost city.
What they really need to do is widen their tax base. Income taxes are a joke, because people lie on their tax returns. Taxing the sale of houses creates perverse incentives. One option (which fits in well with their Marxism and focus on productivity) is to tax land. That would keep house prices down, and create a fair tax base - no more millionaires living in mansions paying no tax because they have better accountants. They also need to reform government spending, and make the local governments more honest, but that's easier said than done - they are already executing bad eggs left right and center.
>On the other hand, China's deposit requirements for houses are draconian. Think 40% down.
Think about that, it's even worse. In the US if your mortgage goes bust your bank takes more loss than in China where it's the home owner. And the home owners were regular middle class people trying to save their money from inflation AFAIK. Now it's likely to lose >30% value overnight because of the bubble. They had real-estate prices comparable to Europe and US with income nowhere near that so the IMO bottom is very deep. You don't think that's going to cause unrest ? There are already protests about this. Add to that protests about inflation and other social problems China faces.
I don't think it's going to end well, and that's going to have huge implications for the world economy. And potential unrest are just going to accelerate flight of capital caused by increasing production costs.
Social unrest is an externality that harms third parties; heck, social unrest (e.g. a new factory bringing increased crime) is one of the classic externalities, along with pollution. The government can of course choose to bear the cost separately, dealing with social unrest via some mixture of policing / welfare state / propaganda, paid for out of normal tax money, but it isn't free.
Which approach is best depends partly on the elasticity in the labor market. China is implicitly betting that demand for Chinese labor is not very elastic, at least if we're talking about wage hikes that aren't orders-of-magnitude, so they can extract some extra money for low-paid workers via a minimum wage, thereby reducing the burden of the government having to do something about those workers separately.
Although it's also quite possible, as one of the other replies suggests, that this has more to do with economic policy, e.g. trying to slow down an overheating economy.
Crime is a classic externality, but it is a separate transaction from paying workers. If I rob you, that's a transaction between me and myself - the third party harmed is you.
That's why forcing criminals to pay for their bad acts is generally considered a good economic policy.
Further, even supposing paying workers a low wage intrinsically causes them to commit crimes, it's still not clear that this is an externality created by the employer. Would the (non)-worker commit fewer crimes if they had no job at all?
From the analysts I've been listening to from the clothing retail industry in Europe, it seems like China still have plenty of room for cheap labour just further inland and along the coast. Minimum wage laws will improve productivity in the more developed areas, even though it could be painful for them to adopt and innovate but it seems to not have been a disaster in the West. That said, this is also giving opportunities to India and Vietnam.
I haven't, but that's not really relevant, India has a caste system; money doesn't change that. Money provides economic status, sure, but it doesn't change your social class in a caste system. They are independent.
Bangladesh and Pakistan are already huge in clothing. Vietnam is also atracting many producers of cheap/easy to make products. China is moving to mote complex products. That's just how it is supposed to work.
If this is going to reduce consumption globally, then this is good news IMO. One of the best things we can do for the planet is consume and import less crap.
On a kind of unrelated note, I'm hoping that the digital economy starts to really placate our need to buy useless physical stuff.
It is flatter. Poorer countries are getting richer, richer countries are stagnating, we're moving closer to equality.
The only question is whether richer countries will actually collapse down to a lower level, or if they will just stagnate until the poorer countries catch up.
As long as we keep printing money, raising taxes and increasing government budgets, stagnation will remain with us. As long as we're price-fixing money, taxing, regulating, over-legislating and having overblown government budgets, we'll never never see enough increase in productivity for the average person/job to see real, sustained growth.
There is a third possibility, namely that the richer countries will continue having about 2% long term growth a year while the countries with lower development have higher growth until they have caught up. So far, this is how it has looked for the last ~150 years.
I honestly think most companies keep production out of North America simply because factory workers have a tendency to go Union, and factory workers will always get the backing of other unionised factory workers.
This is like the Walmart Union situation in which the workers don't realise that Walmart makes money because these people are willing to work at minimum wage so walmart can undercut local competition. If walmart starts paying above-market-rate for wages, then it can no longer undercut local competition, meaning a lot of stores will close because they don't have a high enough profit margin, meaning mass lay offs.
IMO unionising isn't worth it if I have a 1 in 5 chance of getting laid off, especially if it means I won't have luck at finding another job.
No, people in 21st century US should not live in misery and fear of losing their job.
Walmart obviously has many other advantages over smaller competition other than the wages. It won't close because of say 20% wages increase.
If a Walmart store closes, local people obviously will continue to buy food. I.e. there will be many new stores open, ex-Walmart employees will be in a good position to take advantage of that, as they know the local customers.
IMO unionizing is the only sensible strategy for any employee, that is easy to replace. Especially for employees of not so ethical corporations like Walmart and Zynda.
I don't think anyone is really talking about 20% wage increases. Unionize Walmart/living wage types are usualy talking somewhere around $15 per hour which would be closer to 100% wage increase. Even if we're talking about moving workers from 8 to 12 thats a 50% increase.
Some back of the envelope math shows that if Walmart gave an across the board 50% raise to every employee it would consume it's entire operating profit.
If they were forced to pay $15 per hour I think they would make a few changes.
1. They would accelerate the deployment of rfid inventory control, vastly reducing the number of stockers, and
completely eliminating cashiers--all those employees would now be unemployed.
2. They would squeeze their suppliers even more, and the suppliers would be forced to cut their employees salaries.
Yeah, exactly what we need to remain competitive is a bunch of people with anti-corporate sentiment who can't be laid off or fired. That will turn out great.
You contradict yourself in your statement:
"IMO unionizing is the only sensible strategy for any employee, that is easy to replace."
So what about that person who wants to replace that other worker? He doesn't get to have a job, I guess, because there are no openings. Unless you create more by decree. Eventually you're Greece.
As an entrepreneur (and I thought this site was full of them), these kind of laws and regulations hinder what products and services you can bring to market. Costs are too high. So what do I do? I'll either shelf the idea, or figure out how to build a machine that's cheaper than labour. Both result in more unemployment.
Thanks, I could say something complimentary about you too.
As for the rest, the two other commenter's have illustrated you're naive on the issue.
Unions have been bad for business since labour laws took their place some thirty years ago. Way too many workers here in Canada are union, and it isn't helping the US Steel workers who got themselves out of jobs for a year cause they were stupid enough to strike for a wage hike in a recession.
China's minimum wage reduced prices around the world. For some simple products like clothes, other places with lower wages like Pakistan, Bangladesh and Vietnam are already taking over a big part of production. Great. Because eventually their wages will be too high as well.
“I think there’s quite a good argument now that the global race to the bottom has been concluded,” said Geoffrey Crothall of the China Labour Bulletin, a Hong Kong-based labor-rights group. “There’s nowhere else to go.”
I don't know about this. My globe shows an entire continent yet untouched, complete with good ports and hundreds of millions of potential cheap laborers who I imagine would be more than happy to find a Walmart factory in their neighborhood.
If you are referring to Africa, there's a good reason multinational corporations aren't opening up shop.
Namely, the multinational corporations of the 1880's and on made such a mess of things that many of the countries now have very little infrastructure and spigot economies where multiple parties jockey for control of the natural resource(s) and hence power in the country.
Barring some sort of radical change, this situation isn't changing any time soon for most places.
The irony is (excepting south Africa and Egypt which have their own histories), the only stable countries where companies might be able to set up shop are the ones with no natural resources, because there's not much to fight over.
True enough at the moment but you'd be surprised how quickly (using "quickly" on a historical scale, we're still talking years or decades) that can change when economic forces start pushing.
If you had told most Americans just 30 years ago that China would be a land of millionaires and gleaming cities and high-skill factories, they'd be flabbergasted, not least because the country was run by an incompetent Communist dictatorship that had starved millions of its own people for no good reason.
This doesn't cause inflation. It just shifts money from everywhere else to the poorer people who remain employed on the new minimum wage.
Inflation is caused by increasing the monetary base and having that new money circulate through the economy. Both the US Fed and the Chinese central bank have been doing this.
When money printing can be translated into wages (such as raising the minimum wage), then this sets the stage for consumer price inflation. When the CPI goes up, people demand higher wages, etc.
This is why in the US we probably* don't need to fear hyperinflation: we're not seeing a translation of Fed printing to wages.
*When the Weimar Republic hyperinflated, it was made possible by the fact that large numbers of people were employed by the state, whose wages increased with inflation. I've heard some statistics that place a substantial portion of the US population on government inflation-index income (be it something like social security or something more indirect like Medicare). As to whether it's to a great enough extent to create a Weimar type situation, I don't know.
Capitalism only works if someone is the toilet. China refuses to be the toilet. Other countries with large populations are also becoming industrialised, as such, will refuse to be used as our toilet.
Sarcastically speaking, this couldn't come at a better time.
Yes, a very large part of it comes from Ricardo. However, theory before Krugman was mostly limited to belief that the main gain from globalization was from trade between countries with capital and those with cheap labour.
Krugman took it one step (actually there was even more people in between pushing the theory forward, as Hecksher and Ohlin) further and his point was that economies of scale will make it beneficial also for economies of similar development level to trade with each other.
Around 80% earn at or below the minimum wage currently.
Most state figures, which indicate a higher rate above the minimum wage, are either made up and/or only include urban working residents, usually those in state owned/controlled enterprises or large "privately" owned enterprises.
This isn't really news. Minimum wage in China is set per province, and different coastal provinces at different times have been posting significant minimum wage hikes, even competing with each other's wage hikes, for quite a while now.
But more importantly, the government policy actions haven't been the most important factor at work; many employers have been raising wages ahead of and above the minimum wage hikes, and have been actively sending out recruiters for the first time. Many of them have started having a hard time finding enough workers for the first time, after spending the past couple decades seeing long lines form for any job posting. The Chinese labor market has been tilting toward workers' favor on its own, with workers having a lot more options. This will keep pressuring wages up in the coastal provinces, keep redistributing production and domestic spending power to the inland provinces and other countries in southeast and south Asia, and keep spreading domestic demand throughout, all of which is overall good for all of them, and good for the rest of us.
> “I think there’s quite a good argument now that the global race to the bottom has been concluded,” said Geoffrey Crothall of the China Labour Bulletin, a Hong Kong-based labor-rights group. “There’s nowhere else to go.”
60 comments
[ 2.9 ms ] story [ 136 ms ] threadIt'll take a couple of generations though, what with differences in education, training, etc. to work through.
I still want to know we can buy 50 cent items from China off ebay and have them mailed individually for free. How on earth does their postal service (and our local country's) mail something that cheaply? Cannot quite grasp the logic.
It's stuff like 99-cents-for-ten-gallons shampoo that is most profitably produced in China, and that will probably remain the case.
What would probably happen first is other countries will be targeted for low wage labor, I am thinking Vietnam.
This doesn't look like it's going to end well.
On the other hand, China's deposit requirements for houses are draconian. Think 40% down. And the national government has been screaming bloody murder at house prices for quite some time, trying to ram all sorts of measures through to control house prices.
Also, some of the ghost cities are kind of fictitious. I know one which was built on edge of a growing city, which rapidly filled up. There were some more developments in cheaper locations that looked a little iffy, but the one on the international news sites wasn't really a ghost city.
What they really need to do is widen their tax base. Income taxes are a joke, because people lie on their tax returns. Taxing the sale of houses creates perverse incentives. One option (which fits in well with their Marxism and focus on productivity) is to tax land. That would keep house prices down, and create a fair tax base - no more millionaires living in mansions paying no tax because they have better accountants. They also need to reform government spending, and make the local governments more honest, but that's easier said than done - they are already executing bad eggs left right and center.
Think about that, it's even worse. In the US if your mortgage goes bust your bank takes more loss than in China where it's the home owner. And the home owners were regular middle class people trying to save their money from inflation AFAIK. Now it's likely to lose >30% value overnight because of the bubble. They had real-estate prices comparable to Europe and US with income nowhere near that so the IMO bottom is very deep. You don't think that's going to cause unrest ? There are already protests about this. Add to that protests about inflation and other social problems China faces.
I don't think it's going to end well, and that's going to have huge implications for the world economy. And potential unrest are just going to accelerate flight of capital caused by increasing production costs.
There is no externality here. I pay a worker a small amount of money, he performs labor for me. Can you point me to a third party that is harmed?
If not, there is no externality to the employment transaction.
Which approach is best depends partly on the elasticity in the labor market. China is implicitly betting that demand for Chinese labor is not very elastic, at least if we're talking about wage hikes that aren't orders-of-magnitude, so they can extract some extra money for low-paid workers via a minimum wage, thereby reducing the burden of the government having to do something about those workers separately.
Although it's also quite possible, as one of the other replies suggests, that this has more to do with economic policy, e.g. trying to slow down an overheating economy.
That's why forcing criminals to pay for their bad acts is generally considered a good economic policy.
Further, even supposing paying workers a low wage intrinsically causes them to commit crimes, it's still not clear that this is an externality created by the employer. Would the (non)-worker commit fewer crimes if they had no job at all?
I also see more UPS batteries that are made in Vietnam instead of China.
On a kind of unrelated note, I'm hoping that the digital economy starts to really placate our need to buy useless physical stuff.
It is probably naive, but I still have some hope for technology to be an empowering, equalizing force that will make the world a "flatter" place.
The only question is whether richer countries will actually collapse down to a lower level, or if they will just stagnate until the poorer countries catch up.
(Personally, I hope the latter.)
This is like the Walmart Union situation in which the workers don't realise that Walmart makes money because these people are willing to work at minimum wage so walmart can undercut local competition. If walmart starts paying above-market-rate for wages, then it can no longer undercut local competition, meaning a lot of stores will close because they don't have a high enough profit margin, meaning mass lay offs.
IMO unionising isn't worth it if I have a 1 in 5 chance of getting laid off, especially if it means I won't have luck at finding another job.
No, people in 21st century US should not live in misery and fear of losing their job.
Walmart obviously has many other advantages over smaller competition other than the wages. It won't close because of say 20% wages increase.
If a Walmart store closes, local people obviously will continue to buy food. I.e. there will be many new stores open, ex-Walmart employees will be in a good position to take advantage of that, as they know the local customers.
IMO unionizing is the only sensible strategy for any employee, that is easy to replace. Especially for employees of not so ethical corporations like Walmart and Zynda.
Some back of the envelope math shows that if Walmart gave an across the board 50% raise to every employee it would consume it's entire operating profit.
If they were forced to pay $15 per hour I think they would make a few changes.
1. They would accelerate the deployment of rfid inventory control, vastly reducing the number of stockers, and completely eliminating cashiers--all those employees would now be unemployed.
2. They would squeeze their suppliers even more, and the suppliers would be forced to cut their employees salaries.
You contradict yourself in your statement: "IMO unionizing is the only sensible strategy for any employee, that is easy to replace."
So what about that person who wants to replace that other worker? He doesn't get to have a job, I guess, because there are no openings. Unless you create more by decree. Eventually you're Greece.
As an entrepreneur (and I thought this site was full of them), these kind of laws and regulations hinder what products and services you can bring to market. Costs are too high. So what do I do? I'll either shelf the idea, or figure out how to build a machine that's cheaper than labour. Both result in more unemployment.
Thanks, I could say something complimentary about you too.
As for the rest, the two other commenter's have illustrated you're naive on the issue.
Unions have been bad for business since labour laws took their place some thirty years ago. Way too many workers here in Canada are union, and it isn't helping the US Steel workers who got themselves out of jobs for a year cause they were stupid enough to strike for a wage hike in a recession.
http://research.stlouisfed.org/fred2/series/INDPRO
I don't know about this. My globe shows an entire continent yet untouched, complete with good ports and hundreds of millions of potential cheap laborers who I imagine would be more than happy to find a Walmart factory in their neighborhood.
Namely, the multinational corporations of the 1880's and on made such a mess of things that many of the countries now have very little infrastructure and spigot economies where multiple parties jockey for control of the natural resource(s) and hence power in the country.
Barring some sort of radical change, this situation isn't changing any time soon for most places.
The irony is (excepting south Africa and Egypt which have their own histories), the only stable countries where companies might be able to set up shop are the ones with no natural resources, because there's not much to fight over.
If you had told most Americans just 30 years ago that China would be a land of millionaires and gleaming cities and high-skill factories, they'd be flabbergasted, not least because the country was run by an incompetent Communist dictatorship that had starved millions of its own people for no good reason.
Inflation is caused by increasing the monetary base and having that new money circulate through the economy. Both the US Fed and the Chinese central bank have been doing this.
This is why in the US we probably* don't need to fear hyperinflation: we're not seeing a translation of Fed printing to wages.
*When the Weimar Republic hyperinflated, it was made possible by the fact that large numbers of people were employed by the state, whose wages increased with inflation. I've heard some statistics that place a substantial portion of the US population on government inflation-index income (be it something like social security or something more indirect like Medicare). As to whether it's to a great enough extent to create a Weimar type situation, I don't know.
Sarcastically speaking, this couldn't come at a better time.
Krugman took it one step (actually there was even more people in between pushing the theory forward, as Hecksher and Ohlin) further and his point was that economies of scale will make it beneficial also for economies of similar development level to trade with each other.
Most state figures, which indicate a higher rate above the minimum wage, are either made up and/or only include urban working residents, usually those in state owned/controlled enterprises or large "privately" owned enterprises.
But more importantly, the government policy actions haven't been the most important factor at work; many employers have been raising wages ahead of and above the minimum wage hikes, and have been actively sending out recruiters for the first time. Many of them have started having a hard time finding enough workers for the first time, after spending the past couple decades seeing long lines form for any job posting. The Chinese labor market has been tilting toward workers' favor on its own, with workers having a lot more options. This will keep pressuring wages up in the coastal provinces, keep redistributing production and domestic spending power to the inland provinces and other countries in southeast and south Asia, and keep spreading domestic demand throughout, all of which is overall good for all of them, and good for the rest of us.
Africa?