Middle class: Union made Part IV
By Richard Levins 6 August 2006
|In spite of reassurances from our government that the economy is growing, the Census Bureau looked back at 2004 and saw a different picture: “Real median income of both men and women who worked full time declined between 2003 and 2004…The median income of men declined by 2.3 percent…The median income of women declined by 1.0 percent.”
The so-called growth in the economy benefited only those at the very top of the income ladder. Everyone else was left to live on lower wages and make do with reduced health and retirement benefits. Even a college degree lost its traditional power to increase middle-class earnings; adjusted for inflation, earnings for those with a bachelor’s degree fell for the fourth straight year.
The reason for this, as every working person knows, is globalization. Globalization is the evil twin of price-gouging. While price-gouging taxes us by over-charging for essential goods and services, wage cuts caused by globalization act as a private income tax by reducing our take-home pay.
At the same time consumers are faced with higher prices, globalization demands wage and benefit concessions so we can be “more competitive” with low-wage countries.
Not surprisingly, corporations and the think tanks they support consider globalization some sort of secular religion. But it is simply another way for the rich to get richer at everyone else’s expense.
Globalization keeps workers poor
Suppose someone is making $20 per hour working in the United States for a global corporation. The corporation moves the job to a far-less-developed country, now pays $2 per hour, and then ships the product back to the U.S., where people have enough money to pay for it.
What happened to the $18 per hour wage savings? Most obviously, it ended up as corporate profits. Increased corporate profits make the world’s wealthiest people even richer, while the net loss in wage income makes the world’s workers poorer.
To better understand the long-term problems of global wage cutting, let us go back to 18th-century England and the world of Adam Smith. Smith laid the foundations for free-market economics in “The Wealth of Nations,” a book that memorably describes a factory in which pins were made. Without the factory, Smith suspected that a person working alone could make no more than 20 pins in a day, perhaps as few as one. With the factory, workers were able to specialize in smaller tasks.
This specialization led to a remarkable increase in output per worker. Smith estimated that 10 people so employed could make 48,000 pins per day.
This increase in worker productivity was central to Smith’s optimism concerning the future of capitalist economies. He foresaw “a universal opulence which extends to the lowest ranks of the people.” Why? Through the application of labor-enhancing technology. each worker could make far more than was required for his or her own use.
A skewed measure of productivity
All of this, of course, happens only if someone invests in new technology and puts it to use. That made sense only if there were sufficient labor cost savings. Generally, we likely expect labor-saving technology to be adopted when wages are higher than when they are lower.
After World War II, the U.S. and Western Europe experienced an economy with powerful unions, closed borders and other factors that kept wages high. Consequently, there were equally powerful incentives for businesses to develop and adopt labor-saving technologies.
In so doing, those businesses further increased labor productivity in the usual sense: They made it possible for more to be done with a given number of workers. More-productive workers made more money, wages went up all the more and incentives to adopt labor-saving technology remained strong.
In the world of corporate accounting, labor productivity is not measured in physical terms, such as more product for a given number of workers. Rather, it is measured solely in dollar terms, that is, fewer dollars spent on labor for a given level of output. Paying workers less for the same job has the same positive impact on corporate profits as does making workers more productive in the classic sense.
There are some obvious advantages, at least in the short run, for businesses to pursue the reduced wage road to increased productivity. The risks of research, development, and adoption of expensive labor-saving equipment are avoided. One can leave technology as it is and increase profits by letting workers do what they are already doing, just for lower wages.
Globalization makes this possible by weakening the social contracts that keep wages high. Unions are less effective in a global context, labor moves more easily across borders, and products can be made in low-wage countries and sold in high-income countries without the annoyances of tariffs or other trade restrictions.
Corporate profits no cause for celebration
What difference does it make? Corporate profits should be the same with fewer workers making more, or more workers making less. That much is true, but we must return to the central importance of the pin factory. The pin factory was the key to the “universal opulence which extends to the lowest ranks of the people.” Without it, the benefits of capitalism as we usually know it are reduced because the very incentives to develop and employ capital are diminished in times of lower wages.
Exuberant accounts in the business press about higher corporate profits resulting from increased labor productivity must be read carefully. If labor productivity is gained through lower wages, what is really being touted is the growing economic power of global corporations.
The exercise of ownership power will, in the longer run, become a burden on the overall performance of the capitalist economy. It may reduce consumer purchasing power; it may retard innovation; or it may do both. But in no case is it cause for celebration.
Richard A. Levins is professor emeritus of applied economics at the University of Minnesota. This is the second in a series of excerpts adapted from his book “Middle Class/Union Made," available from Itasca Books at www.itascabooks.com or 1-800-901-3480. Reprinted with permission of the author.