Globalization’s role in income inequality
Published: February 7, 2014
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The global economy is rapidly evolving, with the staggering changes fueled to a large degree by an abundance of cheap labor abroad. The subsequent relationships developing among low-wage foreign labor, the decline of American manufacturing and the ongoing stagnation of most Americans’ earnings demand attention from economic analysts.
Darlene Robbins, president of The Northeast Pennsylvania Manufacturers and Employers Association, explains that cheap wages overseas are not going away, but American manufacturing has been making real progress with competitiveness. She notes in 2003, structural costs of on-shore manufacturing made up 32 percent of costs, which has now declined to 20 percent.
“This metric indicates that the cost of doing business here has dropped,” says Robbins. “We still have problems with regulatory pressures, tort abuses, energy costs and the tax code, but conditions have improved.”
Robbins adds that several other metrics seem to indicate that Pennsylvania’s manufacturing sector is healthier than expected. More than 91 percent of the state’s exports are from manufacturing, and since 2009 Pennsylvania’s manufacturing exports increased 35.5 percent.
“It’s pretty obvious that global trade is vital to Pennsylvania.” says Robbins.
Free market by-product
Satyajit Ghosh, Ph.D., professor of economics and finance at the University of Scranton insists truly free markets must be prepared to compete with low foreign wages. He adds that government regulation also drives up the costs of goods, even though regulation that recognizes the value of labor and environmental protection can be helpful.
With all of these variables in mind, he advises American industry to capitalize on the nation’s renowned innovative spirit to create better goods than those from overseas competitors.
“Cheap wages will always be with us in a free global market,” says Dr. Ghosh. “We need higher levels of American efficiency to combat this, along with greater labor force productivity. This is the formula to create higher-skill jobs onshore that will be better paying and help to ease the growing income gap.”
Susan Shaffer, a workforce consultant based in Covington Township, has noticed that many segments of the American economy seem to be finally adjusting to the problem of cheap overseas labor. In addition, the Made in America label has become a selling point for some goods.
“Transportation costs overseas, limited skills with the foreign workforce and growing wage demands are all playing a role in the conditions off-shore commerce is facing,” says Shaffer.
She notes that foreign workers may be favored for low-skill jobs, but this is not the case with design and marketing aspects of manufacturing.
Hungry and competitive
Gene Barr, president of the Pennsylvania Chamber of Commerce, questions if American industry is simply not as competitive or hungry as many of its offshore counterparts. He believes that the American Post World War II boom from 1945 to 1973, when America was the only industrial power on the planet, was too quickly followed by an era of declining education, worker apathy and aggressive global advances in science, technology, engineering, and mathematics.
“Americans need to compete, educate and invest,” says Barr.
America’s low-wage earners are often still better off than their peers in many other parts of the world, according to Nate Benefield, director of policy analysis with the Commonwealth Foundation for Public Policy Alternatives. He points out that global wages often total only $1,000 annually. These lower wages have obviously resulted in a great deal of manufacturing leaving the United States. “However, this is not a zero-sum game,” says Benefield. “The economic pie around the world is growing, and most American workers are a part of it.”
Tim Kearney, Ph.D., chairman of business department at Misericordia University, agrees that global connectivity is one of the reasons international trade barriers have dropped.
He explains that free markets motivate lower skilled industries to migrate where rates of return are highest. This phenomenon is sure to continue, bring with it ongoing job losses for lower-skilled workers.
“The fix for these job losses is not to try and stop globalization,” says Dr. Kearney. “That horse is out of the barn. The real fix is for our workers to increase their skill levels for new high-tech jobs.”
Jeffrey Alves, Ph.D., dean of the Sidhu School of Business at Wilkes University, has personally visited the Third World and made a series of observations about the conditions there. In particular, he says the common American belief that the government is “taking control” of the nation’s commerce to its detriment is mistaken. “The truth is that in most other countries, such as the plentiful social democracies, there is much more government control than Americans have to deal with,” says Dr. Alves. “The Indian government, in particular, is very active and the South Korean government is a strong advocate for small business.”
Dr. Alves also says economic Darwinism is alive and well in the global economy. The fittest are surviving, markets are evolving, wages are rising in China and India, and some commodity manufacturing is returning to the United States.
Stuart Hoffman, chief economist with PNC Financial Services Group, says limited trade agreements openly negotiated by governments are usually good for the global economy. American exports and imports are now both rising, the trade balance is improving. He also says increased domestic energy production is destined to be a game changer. He specifically believes that the increased amounts of natural gas and oil now being harvested in the U.S. will some become a major positive for the manufacturing sector. This will accelerate re-shoring because of decreasing energy costs.
“These lower energy costs will help us compete with cheap wages overseas,” says Hoffman. “However, there will not be an immediate surge of re-shoring. Some industries and the jobs they offered, such as in the apparel industry, will not be returning any time soon.”