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Globalisation and pay in the west Samuel Brittan Financial Times 20/10/06 There is a long standing US debate on whether the middle income US employee has suffered a fall in living standards or merely achieved modest gains. But at best he has had a very meagre share of the rise in US output not merely under the George Bush Administration but since 1966. On February 10 I summarised a paper by a leading US authority, Robert J Gordon, who concluded that the pressures on the ordinary citizen came from a vast increase in the share of the top 10pc of earners in the national pay bill. I would hesitate to take issue with Prof. Gordon's numbers; but even the best of econometric studies is inevitably backward looking. But there is surely a case for a more speculative analysis of what may lie ahead. The best way to regard globalisation is that a large part of the world starts to behave like a single economy. There are some legal, institutional and psychological barriers to movement even inside a large national economy like the United States. But behind these differences there is at work a tendency towards equalisation of pay for each kind of work and on the return to capital - a hypothesis put forward by Adam Smith two and a third centuries ago. There has been an excellent analysis of current prospects by the well known labour economist, Professor Richard Freeman of Harvard*, to which my colleague Richard Tomkins referred in last Saturday's Financial Times. Freeman estimates that the entry of China, India and the ex-Soviet bloc into the world economy resulted by 2000 to an effective doubling the number of workers in the global economy to nearly 3 billion. As a result the ratio of capital to labour fell to 60 pc of what it would otherwise have been. Moreover the newcomers have rapidly rising technological skills, but much lower wages than their Western counterparts. The effects can already be seen in the wage cuts which some German workers have accepted to discourage their employers from moving to the Far East, or for that matter to their former Communist neighbours in Central and Eastern Europe. Not all is gloom and doom for Western workers. Eventually the labour surpluses in the emerging countries will be used up and competition for workers will drive wages higher again. The question that now faces the rich countries is "When?". There is a comparison to be made with England in the Industrial Revolution. There is still a controversy about whether real wages went up or down in the first half of the 19th century. But in any case the main gains to labour arrived in the second half of that century when, despite occasional slumps, labour became scarcer and investment took on a "capital deepening" rather than "widening" form. In plain English this was a shift from just increasing the number of industrial units to investment in high-tech activities which could afford to pay more to labour. Freeman estimates that Chinese wages doubled in the 1990's and at that rate would approach Western levels in about 30 years. For the emerging countries as a whole the process might take 40 to 50 years. In between there will be a downward pressure on many kinds of wage earners in the West - not merely the unskilled but even on some with technological skills that are rapidly being acquired in countries like India and China. As the globalisation process almost certainly increases world wealth per head, there surely ought to be a way of transferring some of this gain to Western workers who would otherwise lose out. A difficulty is how to do this without killing the goose that lays the golden eggs - in other words discouraging investment or innovation in those Western countries that attempt the transfer. The above is obviously the roughest of rough sketches but I should be honest about some unsolved problems in my own analysis. The first is that we do not know how far up the skill chain the pressure on wage levels will reach. This is one of the many difficulties in a wage subsidy approach and is an argument for tackling it from the other end - that is providing some revenue source from which Western government can draw when they see more clearly who is feeling the pinch. The second difficulty is more theoretical. If the shift in favour of profits in the world economy is structural and not merely cyclical, why is there a potential worldwide savings glut which results in the depressed long term real rate of interest which has taken the financial world by surprise? Optimists may say that this glut of savings relative to investment opportunities is temporary but it is better to admit that we do not know. The response of the global political and business establishment is to urge Western citizens to acquire more and more high-tech skills, so that they remain one step ahead of their Asian competitors. We will thus always be working and learning with very little time to enjoy its fruits. A slightly more realistic response among some economists is to tax what they call the immobile fraction of production which cannot easily move elsewhere. But these are not easy to find. Even the most expensive capital equipment wears out and has to compete on a worldwide basis.. The number of occupations, safe from world competition, is rapidly diminishing as we see from the flow of doctors, nurses and IT workers either offering their services in the West or undertaking outsourcing in their own countries. There is only one factor of production that is genuinely immobile and can be taxed without discouraging business enterprise. This is land, by which I do not mean business or residential structures which are normally treated together as one lump of capital and land. I have in mind pure space which is by definition immobile but is commanding higher and higher returns because there is so little of it in favoured locations. A land levy has long been a favourite of otherwise not very left-wing market economists, but has never really been understood by businessmen, lawyers or politicians. What is needed now is a shift of the discussion from just finding means of raising revenue for local authorities to the gradual use of land levies to enable the mass of workers to protect their living standards and if possible transfer to them some of the gains from a single world economy. *Labor Market Imbalances, Harvard University Paper
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