It seems there is constant discussion surrounding income inequality and what it means for the economy. In the U.S. the Gini coefficient, a measure of wealth distribution, has continually increased over the past several decades, signifying an ever-increasing disparity between the rich and the poor. In addition, we are still reeling from the recent global recession and unemployment remains relatively high.
Companies seeking lower operating costs have hired substantially lower-wage employees in developing countries than they could in the developed world. This draws valuable jobs away from qualified potential employees.
Over the past 20 years, the U.S. has lost approximately 5 million manufacturing jobs. Lower wages overseas draw companies to relocate jobs to developing countries, seemingly exacerbating the income inequality in America. However, this process inevitably creates a trade-off between fewer jobs in the U.S. and cheaper goods available to consumers. I know that many will not value the cheaper goods argument. But, mathematically, the advantages to our country do net out. Less-expensive products coming into the country are an equal counterbalance to lost manufacturing jobs as long as we can produce sustainable service jobs that are “knowledge-based.”
I am sensitive to the individuals whose lost jobs negatively influence their families and devastate their communities. But we have to accept that many high-wage manufacturing jobs are not coming back to the U.S. It will continue to be a great challenge to create quality jobs for as many Americans as possible. The focus has to be on preparing people for the knowledge jobs that we can provide that have technical skills attached to them.
A recent New York Times editorial discussing globalization and potential trade agreements points out that the relative cost of clothing in the U.S. is down 8.2 percent since 1993, a definite byproduct of companies seeking lower production costs abroad. Clothes manufacturing is not coming back to the U.S. in a big way anytime soon.
What is fascinating is to watch wages in some countries, such as China, which have begun to rise. Many hope that this change will enable the Chinese to transition from investment-led and export-dependent growth to a more balanced, consumption-based economy. With higher wages, the laborers of the developing world will be able to consume more of the goods and service provided both from within and outside their countries.
More purchasing power is a good thing for the Chinese. According to China’s National Bureau of Statistics, wages grew at 14 percent from 2011 to 2012 as cited in a Wall Street Journal article from last year.
This wage increase enables the development of a potentially robust middle class with growing purchasing power and thus improved quality of economic life. There has never, in the history of the world, been such a rapid decrease in poverty as we have seen in China since Mao died in 1976.
Increased wages and available jobs eliminate the necessity for those seeking employment to relocate or emigrate from developing economies. When local jobs are available with decent wages, families are more likely to remain intact and communities are strengthened by stability.
However, what comes next is still uncertain. Across the globe, so-called developing economies have reached a “cooling” period. GDP growth has leveled off and even fallen in some instances.
Some believe this new rate of growth is more sustainable. Others feel that if it does not increase soon that social unrest will erupt in several countries.
It is important for the U.S. to continually evaluate its role in the global labor market. The U.S. will likely fail to compete for the low-cost labor that global companies are seeking. Given that a certain level of inequality will persist, the challenge to successfully educate and innovate will be important to continued prosperity.
John Hoffmire is director of the Impact Bond Fund at Saïd Business School at Oxford University and directs the School of Business and Poverty at the Wisconsin School of Business at UW-Madison. He runs Progress Through Business, a nonprofit group promoting economic development. Adam Turville, Hoffmire’s colleague at Progress Through Business, did the research for this article.