A week ago I commented on the problems free trade agreements create in the labor market. This is an addendum of sorts to that post.
I tried to draw an analogy that describe the value of labor wage as content in a barrel — like water in a rain barrel — and each country had its own barrel of wage value reflecting how its workers are paid. So the United States, generally a well-paying nation, would have a very full barrel compared to Vietnam which would have a barrel holding much less value in wages.
If we think of these barrels stacked together in a pool and if we punched a series of holes in all the barrels, in some cases value would drain out and in others value would drain in. The laws governing the flow of water is the analogy here and I know it is not anything more than an illustration. (Confusing, too, right?)
That brings me to an analysis of our labor problems written by Steven Rattner in the New York Times. Ge us writing about “The Myth of Industrial Rebound” and in his article is a simple graphic comparing the average hourly compensation of automobile workers in several countries. The countries which have historically been leaders in the auto industry — Britain, France, Germany, Japan, and the United States — have the highest, by far, compensation. Countries in emerging markets — China, India, and Brazil, for example — have much lower levels of compensation.
In particular the United States shows an average hourly compensation of $45.34 per hour while China posts $4.10. As trade opens without market controls, these wages will find a new average value based on the global market, not local or regional. Some of this is inevitable. Some countries will have inherent advantages in some industries and markets.
In this case China has an advantage by a factor of 10 or more. It’s labor is cheaper. Natural resources are cheaper. Regulation is cheaper. Everything is cheaper. It is simply less costly to manufacture cars in China compared with the United States. Open free trade to these markets might make sense for the manufacturers of automobiles, but the outcome is what no one is talking about. There will be long term balance of trade issues here that will have an impact on global labor markets, most notably in countries like the United States.
And it could be a very prolonged decline if the United States does not come up with products or services that spur demand from growing wealth in our trading countries. We’ll be hard pressed to manufacture Fords in Detroit — or even Geelys — and sell them in China at a profit with a work force that is ten times more expensive. So what else have we got? Well, not much. In fact what we do have gets outsourced or offshored to lower cost nations already. We really don’t expect American brands to be made in America anymore. Wealth is trickling out of our barrel.
In the labor markets we have a supply and demand issue that will settle on an equilibrium defined by a much broader global market. That $45.34 average hourly compensation has a long way to fall unless we compensate for our manufacturing losses with industry that sustains our labor markets. But how is that going to happen when we continue to enter into agreements that make just the opposite less complicated to do?
In the end, the free trade agreements are good for American manufacturers, but not so good if you work for the manufacturer. Goods and resources will move to maximize profits and it is hard to see how that will favor high-cost markets like the United States. Again, some of this might be inevitable, but all of it? And what justifies a rush to punch more holes in our markets? It is an especially interesting question when the amount of wealth generated in recent decades is taken into account. This is not the “trickle down” wealth promised over 30 years ago, but more like the sort of wealth that gets hoarded under a mattress or in a tin can buried in the back yard.
Follow the money.