U.S. Wages Are Out of Balance, As We Well Know

by: Jim Mahar

A friend of mine would claim that there are no coincidences. Maybe she is right, but it sure seems there are when two articles (one from the NY Times and an academic piece) both come across my laptop within minutes of each other, saying roughly the same thing: that the US work force (a group to which I am a part), better get ready for paycuts since currently the world economy is out of whack.

First from the academic paper: Why are We in a Recession? The Financial Crisis is the Symptom Not the Disease! by Jaganathan, Kapoor, and Schaumburg

Globalization has brought a sharp increase in the developed world's labor supply. Labor in developing countries – countries with vast pools of underemployed people – can now more easily augment labor in the developed world, without having to relocate, in ways not thought possible only a few decades ago. We argue that the large increase in the developed world's labor supply, triggered by geo-political events and technological innovations, is the major underlying cause of the global macro economic imbalances that led to the great recession. The inability of existing institutions in the US and the rest of the world to cope with this shock set the stage for the great recession....

then from the NY Times piece: Breakingviews.com - American Wages Are Out of Balance - NYTimes.com:

One explanation for the attractive prices of imported goods is that American workers are paid too much relative to their foreign peers.

Global wage convergence is great for the poor but tough on the overpaid. It’s possible to run the numbers to show that American manufacturing workers should take average real wage cuts of as much as 20 percent to get into global balance.

....if American wages get stuck above global market-clearing levels, as in the 1930s, the result could well be something approaching Depression-era levels of unemployment.

Two points on the NY Times piece: I do not claim to know the exact details (as in how exactly do we measure productivity) but empirically, if manufacturing jobs are going overseas, there is a simple economic fact that US workers must be being paid too much. Which obviously is not going to be popular, but it is something that we have all known for years. And yes when it points this price disadvantage out, is does so on a productivity standardized metric, which is to say that US wages are too high for relative productivity advantages.

Minimum wage laws and unions are two things that could force American wages to "get stuck" at such high levels.

Thanks to Robert Bruner for pointing the first one out.