The global labour arbitrage phenomenon

Bill Bonner - Mon 06 Mar, 2006

...First in manufacturing, now in services, the global labour arbitrage has been unrelenting in pushing US pay rates down to international norms...

“The Earth is Flat,” says Thomas L. Friedman.
 
Every time we check, Friedman’s book is way ahead of our Empire of Debt in the rankings. We see people reading it numbly on airplanes. We see it stacked up like waffles at the entrance of B. Dalton’s and Barnes and Noble (we have to rummage around to find our book!). And what earnest business executive has failed to read at least enough of it so he can talk about “globalization” unintelligently?

We have been following Friedman’s work in the press now for several years. It is so appallingly empty-headed that for a long time we couldn’t bring ourselves to buy his book; we were afraid we’d feel obliged to read it.

Well, last week, we found it on sale, 15% discount, and picked up a copy. As expected, the book is only suitable for children...and only for them to sit on or club each other over the head with.

But what do we know?

The global labour arbitrage phenomenon: Friedman vs Columbus

Friedman claims to have made a discovery equal and opposite to that of Christopher Columbus. While Columbus found that the earth was round; Friedman notices that it is now flattened out. Thanks to modern technology and the spread of robust Western-style capitalism (to say nothing of the protection racket run by the empire’s military forces), we all play on the same level field of global commerce. We also wear the same clothes (business suits for adults, Che t-shirts for the young), talk the same language (English), share the same political ideology (humbug democracy), and worship the same God (mammon).

We are all one. One people. One world. With one idea to get rich. And in this new flat earth, we can all get rich, too. Because, now the entire world can compete, share technology, share information and share opportunities. It is as if the world had been flattened into a kind of United States of Earth, where people in Mississippi can live as well as those in New Hampshire – competing for the same jobs, trading, cooperating, schlepping their way towards a New World Order that is better for everyone.

The global labour arbitrage phenomenon: globalization

Globalization takes the wrinkles and creases out of the planet. You can now eat the same Chinese food in Newport News as in New Delhi. You can buy the same clothes in Toronto as in Quangzshou. You can live in the same apartment, designed by the same architect, and built of the same materials in Buenos Aires as in Belfast. And of course, you can watch CNN everywhere.

The only thing threatening this brave, new ironed-out world, according to Friedman, is that some people don’t want to go along with it – backward-looking losers who think religion is more important than material progress, insurgents who defy the imperial authority and protectionists who want to push a stick into the wheels of history.

If those were the only threats, Friedman may have a decent point. But Friedman is like a geologist who has his head stuck in the clouds. Rain, wind, sun, storms: all of it seems to wash down and wear down the surface of the earth he notices astutely. Ah ha, he concludes, the mountains will keep on eroding. Pretty soon, the whole world will be as flat as Kansas.

Of course, if he had any imagination or curiosity - or even remembered to look down at the ground under his feet - he would have wondered how it was possible that after so many millions of years of levelling, the earth was not flat already. And if he had bothered to look beneath the surface he would see why: there are new volcanoes bubbling up all the time, new mountain ranges welling up, and eruptions waiting to explode.

The global labour arbitrage phenomenon: US pay rates

Geologist Stephen Roach sees his seismograph twitching:
“First in manufacturing, now in services, the global labour arbitrage has been unrelenting in pushing US pay rates down to international norms. But the real wage compression in the US has not been uniform across the income spectrum. In large part, that has occurred because increasingly broad segments of the American labour market are now exposed to a uniquely powerful competitive force - the IT-enabled arbitrage.

“Courtesy of the hyper-speed of sharply accelerating Internet penetration, the global labour arbitrage has pushed into areas that historically have been unaccustomed to wage competition. In earlier research I found that the disconnect between compensation and productivity growth during the current economic expansion has been much greater in services than in manufacturing. This once nontradable segment of the US economy is now feeling the increasingly powerful forces of the global labour arbitrage for the first time ever.
 
“The Internet has forever changed the competitive climate for most white-collar knowledge workers.
Courtesy of near-ubiquitous connectivity, the output of the knowledge worker can now be e-mailed to a desktop from anywhere in the world. That brings low-cost, well- trained, highly-educated workers in Bangalore, Shanghai, and Eastern and Central Europe into the global knowledge-worker pool. That’s now true of software programmers, engineers, designers, as well as a broad array of professionals toiling in legal, accounting, medical, actuarial, consulting, and financial-analyst positions. Within this global pool of like-quality workers, a powerful arbitrage acts to narrow wage disparities. As a result, real wage compression in open economies like the US and UK has moved rapidly up the value chain - sparing an increasingly small portion of those at the very top of the occupational hierarchy. In short, the IT-enabled global labour arbitrage is a guaranteed recipe for mounting income inequality.”

Income inequality has been growing the West for the last
35 years, says Roach. We have explained why many times.
Per capita income is $1,700 in China. It is $38,000 in America and $29,600 in the UK. As the Chinese compete with Anglo-American workers, the low end of the wage scale in the West is held down.

Since the wage difference is so great, this process has a long way to go. While he goes deeper and deeper into debt, the average Anglo-American employee may not enjoy any real income growth for the next two decades. The rich, on the other hand, continue to make rapid financial progress. They are the ones who own the companies that benefit from lower wages and globalized markets.

The global labour arbitrage phenomenon: low earners 

Economists measure wage equality with way they call a Gini Index. At zero, people all earn the same thing. At 100, the rich get all the income. Currently, in Japan the Gini Index is 25. In Europe, it is 32. In the UK the index is at 36.8, in America it's at 40, and in China, it's at 45.

In America and the UK, low-level earners can’t get ahead because they have no bargaining power. They are competing with a billion workers in Asia willing to do the same work for less than one-tenth the cost. And in China, there is also growing income inequality, between those who have joined the global economy and those who have not. Some 500 million people live in coastal cities in China and participate in modern commerce. But there are another 700 million who still live in the countryside. While the cities grow richer, the poor in China are left behind, like America’s industrial workers.
 
In short, the world is not getting flatter at all. It is getting flatter in some areas and steeper in others.
There is less difference between China’s industrial workers and those here and in the US, but the difference between these globalized wage slaves and the capitalists who employ them is growing.

Beneath the surface of Friedman’s flat earth, the pressure is growing. Either in China or in America sooner or later, it is bound to explode.

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