Drive to Close Pay Gap Misguided
The corporate campaign against employees is heating up. It is not enough that the real hourly earnings of U.S. production workers declined by more than 6% from 1978 through the first quarter of 1987. Smelling blood, many corporations want to place even tighter caps on workers’ wages.
“For the first time,” a New York Times survey recently reported, “American manufacturers are talking openly about a new and startling wage goal: They want to greatly narrow the gap between what they pay their factory workers and the earnings of workers in South Korea, Brazil and a handful of other Third World countries.”
A Goodyear Tire & Rubber executive was quoted as saying: “Wages overseas will come up, but one way or another, the gap will have to close.” And a General Electric economist added: “Let’s talk about the differences in living standards rather than wages. What in the Bible says we should have a better living standard than others? We have to give back a bit of it.”
The reasons for this intensifying campaign seem fairly self-evident. First, the survey reported, “it underscores a determination by business to hold onto the wage and benefit concessions won in the early and mid-1980s--and not give them back to labor.” By focusing on the wage gap, “United States manufacturers are shifting the pressures they (feel) to bear on the labor movement.”
American manufacturers, in short, have grown tired of corpulent U.S. workers and plan to cut even closer to the bone in future bargaining sessions. The principal problem with this campaign--and the obviously intimidating effect it has on millions of workers--is that it is based on seriously misplaced conceptions about the competitive threat from the newly industrializing countries, or NICs.
To begin with, wages in the Asian and Latin American NICs are by no means the lowest in the Third World and have increased relatively rapidly since the mid-1960s. If wages were as important in determining market shares as some of the prevailing perceptions seem to indicate, one would have expected a significant shift recently in production and trade away from the NICs toward other Third World countries.
This, however, has not happened. True, low wages have been crucial in the rapid expansion of a few labor-intensive industries in less-developed economies, notably the garment and textile industries. But these have not been the industries in which the NICs have gained advantage most rapidly.
Since the mid-1960s, the greatest NIC gains have come in heavily capital-intensive industries such as steel, shipbuilding, chemicals and, very recently, autos. And the key to these great strides has been massive state investment in capital and infrastructure, promoting rapid modernization of plants and equipment and, consequently, dramatic growth in labor productivity.
In Mexico and, in particular, Brazil, many of the key companies are directly state-owned. In South Korea, Taiwan and Singapore, the state has not directly owned expanding enterprises but has nonetheless played a central role in industrial development, often taking great risks and always commanding huge portions of available capital.
The basis for the NICs’ growth, in short, has been their productivity gains, not their wage advantages. A Bureau of Labor Statistics index shows that, between 1960 and 1984, Japanese manufacturing wages rose in excess of 700% more than wages did in their leading competitors’ economies. So how did the Japanese expand their share of international trade? Through comparable gains in productivity.
But haven’t investors in the NICs been able to have their cake and eat it too--pushing their productivity growth while at the same time enjoying bargain-basement wages? The semiconductor industry has been cited as an example of this supposed phenomenon. Multinational corporations have been reported as racing to low-wage havens in Southeast Asian export-promotion zones, investing feverishly in highly productive and profitable chip assembly operations.
This example, however, has been misinterpreted badly. One problem is that the industry features a wide diversity of strategies, structures and locations, hardly reducible to the stereotype of the exporter of standardized chips produced in low-wage East Asian NICs. Many producers of computer chips have located their industry at home in the advanced countries, British economist Andrew Sayer reported in an excellent recent study, relying on much more intensive investment in automated assembly to compensate for relatively higher wages.
Even more important, it appears that intensive competition and technological change, far from enhancing the attractiveness of the low-wage havens, is beginning to erode it even for the firms that flocked to their sanctuaries. Sayer noted that with rapid technological improvements in the industry “the relative amount of assembly work to be done becomes smaller . . . These changes reduce the significance of labor costs and hence the attractiveness of Third World locations.”
Once again, the Japanese have pursued a model different from U.S. corporations. From the start, a United Nations study of the semiconductor industry found, the Japanese “relied to a greater extent than their United States counterparts on the introduction of labor-saving automated assembly equipment in their domestic facilities.” As a result, Sayer concludes, “they have made much less use of Far East cheap labor locations than the Americans.”
It appears that we face a choice. We can turn back the clock, continuing the assault on U.S. workers’ wages and living standards. Or, we can push the clock forward, beginning to concentrate our attention, energies and massive wealth on the kinds of productive investments and innovations that have allowed our competitors to play catch-up. “Don’t look back,” warned baseball great Satchel Paige. But we should look back--to understand why the competition is gaining on us. We should worry less about the wage gap and much, much more about the gap in productivity growth. Boosting productivity is something everyone can support.
