Closing The Global Wage Gap

By Leslie Pratch and Raj Alur
December 29, 2009

In our first entry in this series, we wrote:

"If businesses in the U.S. cut salary and fringe costs by 35-65% (fringe costs consisting mostly of health care and dental, disability, life insurance), we will become a more competitive economy, especially compared to countries with an edge in information technology. We recognize we need to reflect on this issue and will do so in coming posts."

Edward Hadas, Martin Huchinson, and Antony Curry do some of the analysis for us in their post, dated Nov. 11, 2009. Their journalism indicates that although the global wage gap is shrinking, wages in the U.S. for comparable products exceed those of foreign workers.

We in the United States must find a way to compete with lower-cost producers in Eastern Europe, Asia, and elsewhere without eliminating our legal system and other mechanisms that allow the U.S. economy to function in a more or less transparent and fair way, and which protect workers' rights. We are not advocating slave labor, of which many readers accused us. We would all like to enjoy the prosperity of the 1980s and much of the 1990s. But we will not remain competitive in a global economy in which manufacturers can purchase equally safe, high quality, but less expensive components for parts used in manufacturing.

If workers in the United States leverage the higher productivity that makes our country richer, such as superior education and legal system, and access to capital markets, then their products will and should cost less in the long run. If the costs of sending goods overseas exceeds the savings, that is one factor that would reinforce the global wage gap. The other factor that might diminish global wage gap is the increased quality of such goods. As Hadas, Huchinson, and Currie point out, "Both measures point to a narrowing wage gap."

What are the forces that push up productivity in emerging countries? They include: rapid development cycles; cheaper capital (especially in light of the tight and for many months, frozen capital markets in the U.S. during the past two years); and greater efficiencies in transporting goods across borders. Communication through the internet is virtually free and reduces myriad expenses, facilitating the trade of goods and services.

Messrs. Hadas, Huchinson, and Currie conclude, rightly, we believe:

"The required cut may be smaller. But if US wages get stuck above the market-clearing levels, as in the 1930s, the result could well be something approaching 1930s levels of unemployment. Pretty well anything would be better than that. A combination of moderate inflation to reduce real wages and a further drop in the dollars real trade-weighted value might be an acceptable combination."

These are serious times and the U.S. faces serious threats. It is time to stick out heads out of the sand and get U.S. workers acclimated to the fact they may well have to tighten their belts on a permanent basis.