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An Example of Why Chinese Competition Affects U.S. Wages

An industrialist told me about twenty-five years ago, "The average American worker can produce about seven times more (working with American equipment and knowhow, etc.) than the average worker in a Third World country (like China). Consequently, we can pay him seven times more."

What has happened since then is that the Chinese standard has moved up two notches, from one to three. The American standard has also moved up two notches, from seven to nine, to (only) three times the new Chinese standard, which is to say less than proportionally.

Problem is, Chinese wages have gone up only from one to two, with Chinese "capitalists" keeping the difference. Three times two is SIX, meaning that American wages (starting at seven), would have to FALL to make up the difference. Meaning that American capitalists can keep all the American workers' gains over that period, plus a little more.

The doubling of Chinese incomes is called the "income effect" in economics. That will eventually HELP American workers. But the transfer of the "third" unit of production to the capitalists is called the "substitution effect," which hurts. It will be a long time before positive income effects outweigh negative substitution effects.

This is just the downside of globalization (to workers) as discussed in a previous post: It's upside, to owners of the factors of production.