Tuesday, November 10, 2009

Might higher wages in China and India Hurt US Workers?

Found this interesting summary of a paper by Gavin Wright on Free Exchange:

What broke the south's isolation? According to Mr Wright, it was the labour policies of the early 20th century and the New Deal, which served to increase southern labour costs. That's right—policies which pushed southern wages above the market rate saved the southern economy. And what's fascinating to note is that northern industrialists favoured many wage-increasing policies specifically because they believed that those policies would limit job growth in the south, and low-wage southern industrial competition. As Mr Wright notes, the 1939 minimum wage increase affected only 6% of northern workers, but 44% of southern workers.

How could this have benefitted the south? Well, the region's isolation was in no small part self-chosen. Southern leaders wanted to maintain a certain way of life and culture, and they resisted any policy out of Washington which would lead to increased interdependence with the rest of the nation. Suddenly high southern wages broke this world open. Farmers and other producers rushed to trim labour forces and adopt labour saving technologies, which led to high unemployment and waves of migration to the north. This meant, first, that there was finally significant cross-regional labour movement involving the south and, second, that southern leaders had to begin attracting investment or face total depopulation.
FE offers another interesting parallel from East Germany:

Of course, everyone knows the argument in favour of rapid wage convergence, i.e. the danger of migration, time and again castigated by politics. If wages lagged, there might be west-migration of many people and that had to be prevented. But why? ... Even under favourable conditions, it would take at least one decade for the necessary investments to restore an industrial base. ... In the end, East Germany would have grown faster without the push for higher wages, and most people would meantime have returned home again when a flourishing economy would have developed. 

Mass unemployment, caused by aggressive wage politics, probably resulted in much more emigration [emphasis mine] (and much less immigration) than would have been the case with lagging wage convergence. The wage push became a program for “deconstruction of the east” and, if at all, “reconstruction of the west“, i.e. the opposite of what had been intended.

So, might imposing "higher labor standards" in the rest of the world (India and China being the usual scapegoats) actually lead to technological innovation in China, increased emigration pressure from South and East Asia, and ultimately hurt workers in the US? We'll see. Oh, and by the way the net direction of capital flow for china is OUT.

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