Comments on this analysis by Financial Times editor Richard Tomkins, partially excerpted here from Google, would be welcome. One of the trends the article does not focus about: is who is losing out in the developing world. For every worker gaining an increase in their very low wages, many farmers are loosing their land and livelyhoods. The situation in the countryside in China and India are both disastrous, and this is insufficiently stressed in this article, which only looks at the benefits to industrial workers.
“In theory, the deal between capital and labour is simple. Capitalists say to the workers: you help us lift profits and we will reward you with higher wages. That way, everyone wins.
But recently this tacit agreement has collapsed. If you are a humble wage-slave you may not be aware that, across the industrialised world, companies are enjoying an era of extraordinarily high profit growth. What you may be aware of, however – perhaps painfully – is that, except for those at the very top of the income scale, pay rises are barely keeping up with inflation.
In Britain, company profits were the highest last year since records began in 1965; yet median weekly earnings, adjusted for inflation, fell by 0.4 per cent. It is the same story in all the rich countries of the west. In a recent research note on the US economy, Goldman Sachs, the US investment bank, said: “As a share of GDP, profits reached an all-time high in the first quarter of 2006. Several factors have contributed to the rise in profit margins. The most important is a decline in labour’s share of national income.”
Naturally, investors and other members of the financial community welcome this as they have enjoyed the benefits of rising share prices, record levels of merger and acquisition activity and soaring bonuses. Company executives, too, have benefited through their stock options and performance-related bonuses. A survey last week showed directors’ pay at Britain’s biggest companies shot up by 28 per cent last year.
In fact, outside the populist media, most commentators regard high corporate profits as benign – rising corporate profitability normally translates into more investment, more jobs and higher pay.
But what about the ordinary, middle-class employees of the companies making these extraordinarily high profits? The sort of pay rises they are getting are the sort you would expect in a recession. Why are they not sharing in the boom?
One explanation might be that, at least in the private sector, trade unions have lost much of their power. But there is more to it than that. In the pre-globalisation era, western labour enjoyed near-monopoly access to western capital. That is to say, western capital was immobile, and had to treat with western labour because it had nowhere else to go.
That changed with globalisation, when the dismantling of barriers to world trade gave western capital access to vast amounts of low-cost labour in countries that were previously closed off.
Cheap labour, plus the opportunity to exploit new global markets, has brought a profit bonanza to western companies. But it has not been reflected in higher wages for employees at home because companies are no longer in thrall to employees at home. Instead, the gains have been split between capitalists, who have enjoyed higher returns; executives, whose emoluments go up with profits; and poor workers in the developing world, who have gained from the growth in jobs and rising wages that would once have gone to the west.
This is not quite how globalisation was supposed to work out. According to the principle of comparative advantage, rich countries with their skilled workforces would specialise in turning out advanced products while the poor countries with their unskilled labour would specialise in low-technology goods. Yes, there could be job losses in the rich countries among unskilled factory workers, but western workers overall would gain from the opening of new markets for their products and from cheaper imports.
With hindsight, this analysis massively underestimated the effects of globalisation on western workers. Too much of it was fixated on the threat to jobs and too little of it on the threat to wages.
In a paper he prepared for a recent Federal Reserve Bank of Boston conference, Richard Freeman, a Harvard labour economist, estimates that the entry of China, India and the former Soviet bloc roughly doubled the number of workers in the market economy, from 1.46 billion to 2.93 billion. Since those countries brought little capital with them, the number of workers in the system shot up while the amount of capital increased very little. As the law of supply and demand might suggest, when labour is abundant and capital scarce, the returns to labour tend to fall and those to capital rise.
In addition, the idea that only low-skilled factory workers have anything to fear from globalisation has turned out to be a myth. The former Soviet bloc already has many highly educated workers (the Soviets, remember, beat the Americans into space) and the less developed countries are pouring investment into higher education. “Indonesia, Brazil, China, India – name the country – have more than doubled university student enrolments in the 1980s and 1990s,” Freeman says. China is investing particularly heavily in science and engineering and “by 2010 it will graduate more PhDs in science and engineering than the US”.
In a similar vein, the developing world has inconveniently departed from the script that said it would specialise in low-tech goods. “China has moved rapidly up the technological ladder, has greatly increased its high-tech exports and has achieved a significant position in research in what is purported to be the next big industrial technology – nanotechnology,” Freeman says. “Over 750 multinational firms have set up R&D facilities in China.”
So globalisation is not just about a few blue-collar factory workers in the west losing their jobs and everyone else being better off. Because of plummeting telecom charges, all kinds of middle-class, white-collar jobs once thought of as non-tradable – not just in telemarketing and call centres but in accountancy, medical diagnostics and information technology – have started moving to the developing world.
Jeff Faux, founder of the labour-leaning Economic Policy Institute in Washington D.C. and author of The Global Class War: How America’s Bipartisan Elite Lost Our Future – and What It Will Take to Win it Back, says: “A few years ago the phenomenon was dismissed as: ‘Well, perhaps some people in the automobile industry or steel or electronics will lose their jobs, but their kids are going to be better off because they’ll go to college and become accountants and engineers and people like that.’ Now, of course, we’re offshoring those jobs as well, so offshoring has gone up the ladder.”
But it is not just the offshoring that counts. According to Andrew Glyn, an Oxford University economics lecturer and author of Capitalism Unleashed: Finance, Globalization, and Welfare, western companies are investing in the developing countries only 4 per cent of the sums they are investing in the west. “So although it’s quite a large proportion of the investment going into China, as a proportion of what’s going into North America or Britain or Germany, it’s really small potatoes so far.”
No; the force that is acting to suppress western wages is not so much offshoring as the threat of it. As Freeman says in his paper, by giving companies a new supply of low-wage labour, the doubling of the global labour force has weakened the bargaining position of workers – not, by the way, in the rich west alone, but in Latin America, South Africa and the more advanced economies of Asia, too.
“Firms threaten to move facilities to lower-wage settings or to import products made by low-wage workers if their current workforce does not accept lower wages or working conditions, to which there is no strong labour response,” Freeman says .