Third World Wages Undercut the First World’s Way of Life

The shift of basic industry from advanced countries to low-wage, low-regulation Third World environments is no longer simply a problem. The move has become a basic fact of life, casting its shadow over virtually every aspect of politics and economics in both the First and the Third Worlds.

The effects have been dramatic. From 1975 to 1983--the most recent year for which complete statistics are available, 3.7 million manufacturing jobs were lost in a group of high-wage countries, including the United States, Canada, Great Britain, France and West Germany. During that same period, 3.67 million manufacturing jobs were added in Asia. Even Japan, where hourly compensation costs for manufacturing employees are half those in America, began to lose manufacturing jobs in 1983--and expects to lose 800,000 by the year 2000.

The world’s wage differentials are huge. In 1983 the hourly average “compensation cost” (including direct wages, benefits and payroll taxes) for industrial workers was $1.29 in Korea, $1.40 in Hong Kong, and $1.45 in Mexico. By comparison, the compensation cost for a U.S. industrial worker in 1983 was $12.26; in West Germany, $10.41 and in Canada, $11.44.

The effects on Europe and the United States have been dramatic. Unemployment in European countries has skyrocketed, tripling and quadrupling in many countries and--particularly among younger workers--reaching levels not seen since the 1930s.

In the United States, real wages are down. The average earnings for non-supervisory employees in the United States peaked during 1973 at $201 per week (using constant 1977 dollars). Since then, they have fallen 15% to $171 at the end of 1986. In constant, inflation-adjusted dollars, retail sales workers in 1986 earned no more than they did in 1955. The living standard of the American middle class stopped rising; this was the great economic fact of the last 15 years. The median household income fell; the poverty level rose. This trend, unless stopped, will transform American politics.

Call it liberal capitalism or modern industrial democracy, the compromise between the working classes and the controlling classes represents the underlying basis for political and economic life in the West and to some extent in Japan; now it has been overtaken by events.

That 20th-Century compromise made its appearance in virtually every advanced industrial economy of Europe and North America. It balanced two interests that most 19th-Century social thinkers had believed to be irreconcilable. Sooner in some countries, later in others, every major political party adopted the idea, competing to offer economic programs that would best ensure a growing economy with higher wages for workers and higher profits for capital. What all parties had in common was the belief that the politics of social compromise could deliver a rising standard of living for the masses.

If Karl Marx was the theorist of social conflict, John Maynard Keynes was the theorist of social compromise. It was Keynes who demonstrated that a high standard of living for the masses was necessary to the functioning of a modern capitalist economy. If the masses could not afford the goods produced by the factories, a vicious circle would begin. Layoffs and wage cuts would reduce purchasing power more and the economy would sink toward a new, and much less favorable, equilibrium. Programs designed to raise consumption and to cushion individual workers from the shock of change were therefore in the interest of both capitalist and worker.

This domestic compromise was secured by an analogous international system. The United States, supreme in the non-communist world after World War II, promoted it. Colonial and imperial rivalries of the past were replaced by a system of international free trade. Multilateral treaties and agencies provided a framework for the resolution of economic questions; multilateral security treaties ensured that military and political questions among Western states were addressed within a common framework.

The Great Compromise of the 20th Century was arguably the most enlightened and farsighted social bargain ever negotiated. Advanced Western countries enjoyed decades, in some cases generations, of rapid economic and social development. Under the “Pax Americana,” age-old national rivalries were sublimated into cooperative ventures and structures. While fascism believed that international diplomacy was an unending struggle for supremacy in which no lasting compromise was possible, and communism believed that the struggle among classes was similarly uncompromisable, neither one could undo this exasperating milksop of a social system based on reason and accommodation.

Now this system is endangered--not because of its enemies, but because of the consequences of its own successes.

International stability and economic growth were the two greatest achievements of the Great Compromise; today, these are the forces that have begun to undermine it. Economic growth gave an impetus to the industrialization of the Third World, and the stability of the world’s political and economic structure in the postwar era made the spread of industry easier than ever before.

Manufacturing was not mobile at the dawn of the industrial age. Land transport was expensive and slow; communication over great distances was uncertain. Industry often depended on local sources of raw materials and power. Furthermore, in the early days of technology, factory operations required more skills than they do now. An old-fashioned steel mill required hundreds of workers skilled in dozens of trades.

This all began to change after World War II. Population growth and the mechanization of agriculture in the Third World were creating an enormous potential work force of impoverished slum dwellers, while advances in communications, transportation and management made it possible for more and more industries to relocate freely throughout the world. One country after another learned to follow the trail blazed by recovering Japan--from light industry to heavy industry to sophisticated high-tech production. The process of development--from textiles to steel to automobiles to computers--that took a century or more in the West was compressed into a generation in Korea and Taiwan.

In the West, industrialization went hand in hand with the development of the social agreement. Workers and capitalists learned that through intelligent compromise, productivity, wages and profits could all rise together. That process was never simple or smooth; every major Western country experienced its share of riots and strikes in the 19th and 20th centuries. Yet those societies gradually learned to settle their internal conflicts through compromise and, after World War II, to settle international disagreements among the advanced countries in the same way.

Coming to a similar compromise in newly industrializing countries would be more difficult. The pace of industrial development has been so rapid that social institutions are lagging. Worse, any country that, by itself, attempts a Western-style process of social compromise will lose its competitive labor-cost advantage to other developing countries. Already some companies have moved manufacturing capability from Korea to the Philippines in search of cheaper labor.

Besides creating instability in much of the Third World, the current situation has profoundly destabilizing effects on advanced countries as well. When jobs move from high-wage countries to low-wage countries, the total world demand for the products of industry falls--but the total supply stays constant or even rises.

When a Detroit auto plant closes, having paid workers $20 an hour, to reopen in Mexico paying $1.50, the new-car demand drops. Unemployed workers in Detroit can’t buy cars any more and Mexican workers earn too little to take up the slack.

The result on a world scale is increasing overcapacity and a constant, downward pressure on consumer demand. With prices level or falling, pressure rises on manufacturers in high-wage countries to cut labor costs by joining the movement to the Third World. Such movement results in still lower consumer demand, with more intensification of competitive pressure--followed by even more industry shifts.

Keynes warned 50 years ago that the worst of all policies was to decrease money wages; no other action was more likely to bring on a depression. In Keynes’ time it was still possible, although more and more difficult, to regulate wages at the national level. Today wages are set by international markets, but economies are still regulated by national authorities. The minimum-wage laws and other policies of the world’s advanced countries no longer provide an effective floor under labor prices.

The resulting glut shows up in three ways: unemployment in the advanced world, even during expansions, remains at levels once reached only in recessions; so does factory utilization, and countries in both the advanced and developing world attempt to run trade surpluses with as many of their partners as possible.

Even the feverish financial boom of the last three years--with all its overtones of the late 1920s--can be traced to the consequences of falling wages. When wages fall, income is transferred from workers, who spend a relatively high proportion of their pay, to investors who, with larger incomes to begin with, have higher savings rates. The medium-term result is an increase in investor income, and therefore in more money available for investment.

The overproduction of so many basic goods makes investment in new productive capacity relatively unattractive, especially so in the high-wage countries. As a result, investors in First World economies are increasingly attracted to speculative investments and financial instruments.

Historically this kind of market usually ends in a crash. But we have developed such effective means of crash-prevention, through central bank interventions and deficit spending, that a violent one may never occur. The speculative boom could end in a drawn-out whimper, rather than with a big bang. Even so, as long as the aggregate purchasing power of the world’s workers continues to fall relative to the goods they produce, there can be no return to the rising standard of living and stable employment outlook that long cemented social peace in the West.

The last 15 years have been increasingly dominated by the politics of industrial decline. The U.S. economy has been unable to generate the growth by which the Democrats, since New Deal days, satisfied constituents with government programs. The Democrats’ coalition, based around Samuel Gompers’ summary of labor’s demands--”More”--has been wracked by an environment only offering less.

The Republicans have also been defeated by reality. Their ambitious plan to restore U.S. competitiveness through tax cuts and other incentives for capital formation did not produce increased investment in American industrial capacity. Instead, new capital went overseas or into dubious financial investments.

By early 1987 the competitive weakness of the U.S. economy, and the unpleasant consequences of this for the American people, have moved to the center of political debate. Yet the true seriousness of the nation’s position is not yet universally realized, and the political and economic consequences of the breakdown of the old social compromise are only beginning to make themselves felt.

“Work harder and earn less.” Behind the rhetoric about productivity and competitiveness, this is the discouraging message that both parties have for the American people. Millions of Americans have watched their purchasing power fall, learned to live with a new insecurity about job tenure, watched paid medical benefits yield to more expensive and less adequate alternatives and seen public services--mass transit, education, police protection--decline in quality, grow more expensive--or both.

Neither party has yet put forward a program capable of reversing or even halting this slide; economics has once more become the “dismal science,” and politics is likely to become the dismal art.

The first political victims of the crisis of liberal capitalism have been the parties that stood most obviously for the welfare state. In Britain, the United States, West Germany and France, exponents of social democracy have been defeated by “conservative” forces that more or less openly disavow what Reagan Republicans like to call “the failed policies of the past.” The major parties in leading Western countries become more polarized internally. The moderate forces in each party experience increasing difficulty in controlling their more ideological elements--a portentous reversal of what was once a trend toward the center throughout the advanced world.

Since the immediate consequence has been the weakening of labor-oriented parties, it is easy to miss the significance of the shift to a politics of class conflict. But assuming no economic solution can be found to the decline of the middle class, the long-term political beneficiaries of any new “angry proletariat” in the West will not be parties of the democratic right.

For any lasting improvement in the world economy, Third World wages and social spending must rise. However difficult to achieve, the Great Compromise of liberal capitalism must take hold in the Third World, or it will fall apart in the First. Without a form of minimum wage in the Third World, jobs will continue to move to low-wage havens and demand will continue to leak out of the economy.

Raising wages in the Third World will require the active involvement of First World governments and multilateral institutions. A combination of carrots and sticks would close markets to products made without such minimum wages, and would provide financing and free trade where countries and firms comply with international guidelines. Essentially, wages must be tied to productivity--which is not the same as saying wages must be equal around the world. In Korea, where workers are about one-fourth as productive as their American counterparts, wage levels should equal roughly one-fourth ours.

By maintaining a relationship between productivity and pay, we can ensure that consumers everywhere could purchase goods more nearly equal to their own production. Under current conditions, world trade depends on imbalances. Third World countries must run huge export surpluses because they lack internal markets. In self-defense, advanced countries are forced into competition to increase their own exports. Any action taken to reduce this basic imbalance will greatly improve the climate for international economic cooperation.

Moving toward equal pay for equal productivity will not only put the world economy on a sounder footing; as a policy it has the kind of general appeal around which a political consensus can form in the United States and the other advanced countries.

As a “feel good” issue, raising the wages of super-exploited Third World labor provides an enlightened framework for American foreign policy.

As a “bread and butter” issue, defending the living standards of the American people can win solid support from organized labor and the general public. Farmers and miners will support the effect of this policy on commodity prices; manufacturers will welcome an approach that protects them from low-wage labor without setting off trade wars among other advanced economies. Banks with large loans to developing countries will appreciate a policy that offers concrete support for credit to overseas borrowers. By including the “social wage”--government services and benefits--in the labor costs to be compared from country to country, we will also find a framework to discuss a critical international issue which, so far, has not enjoyed the full attention it merits: environmental protection.

Our major trading partners will find it easier and more rational to work together on such an approach rather than continuing the drift toward trade wars that help no one.

Linking access to international markets to international standards--for pay, working conditions and benefits--is a policy that can avert a potential U.S. depression, protect the living standard of the middle class, give coherence to foreign policy and promote economic cooperation among advanced industrial democracies. Candidates looking for “new ideas” in 1988 and beyond will be well-advised to consider such policies. For those who believe in economic growth, social harmony and international cooperation, there are not many alternatives.