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Income Lag? Blame China

Posted By Barry Ritholtz On July 30, 2005 @ 12:30 pm In Economy | Comments Disabled

Interesting article in The Economist [1] about China and its growing economic (and therefore political) influence. I was particularly struck by these comments on the global wage arbitrage:

Csf302In America, Europe and Japan, the pace of growth in real wages has been
unusually weak in recent years. Indeed, measured by the growth in
income from employment, this is America’s weakest recovery for decades.
According to Stephen Roach, an economist at Morgan Stanley, American
private-sector workers’ total compensation (wages plus benefits) has
risen by only 11% in real terms since November 2001, the trough of the
recession, compared with an average gain of 17% over the equivalent
period of the five previous recoveries (see chart 3). In most developed
countries, average real wages have lagged well behind productivity

The entry of China’s vast army of cheap workers into the international system of production and trade has reduced the bargaining power of workers in developed economies. Although the absolute number of jobs outsourced from developed countries to China remains small, the threat that firms could produce offshore helps to keep a lid on wages. In most developed countries, wages as a proportion of total national income are currently close to their lowest level for decades.

Csf301The flip side is that profits are grabbing a bigger slice of the cake (see chart 4). Last year, America’s after-tax profits rose to their highest as a proportion of GDP for 75 years; the shares of profit in the euro area and Japan are also close to their highest for at least 25 years. This is exactly what economic theory would predict. China’s emergence into the world economy has made labour relatively abundant and capital relatively scarce, and so the relative return to capital has risen. It is ironic that western capitalists can thank the world’s biggest communist country for their good fortune.

Hat tip: New Economist [2]


China and the world economy: From T-shirts to T-bonds [1]
The Economist, July 28th 2005


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URLs in this post:

[1] The Economist: http://www.economist.com/displaystory.cfm?story_id=4221685

[2] New Economist: http://neweconomist.blogs.com/new_economist/

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