Is the USA lucky to have job wages staying more or less even?

[Firethorn]

I've heard all sorts of moaning about wage stagnation.  Loss of earning power, etc...

Yet I still see all sorts of new, very expensive home construction, new toys and games coming out, etc...

Many people are buying hybrids when they don't make perfect economic sense right now.

Still, the market is globalizing.  A boat ride for cargo from India/China to the United States is extremely cheap, actually cheaper than the final delivery to stores.

As a person who understands macroeconomics fairly well, I know that resources, to include labor, will tend to shift towards the most cost effective solution.  I say cost effective because 'cheapest' doesn't always make the cut.

Now, with India and China employing workers for an amount of money per day that many americans in the same position would earn per hour, my theories would have labor users tending to move to the less expensive areas.  This will eventually drive the price up there due to a shortening of available workers, and a lowering of the price of laber in the expensive areas due to a surplus of workers.

End result?  More or less even wages.

Thus, I'd tend to expect American wages to be dropping on average, at least until China/India and such catch up in labor costs with the United States.  Minus some for the costs of dealing with foreign countries and different languages on the other side of the planet of course.

Basically, I predict that the current generation will see the end of major outsourcing as China and India develop enough that the expense of doing business there ends up costing the same as doing it at home.

Perhaps leading to the 'Great American Industrial Renaissance'?

[The Rabbi]

Theoretically yes, you are right.
Practically there is a problem.  People said this about Mexico, that all our jobs were going there.  But the Chinese labor cost is less than the Mexican so manufacturing (of some things) goes there.
But Chinese labor costs have been increasing.  So now the next market is Vietnam, where labor costs are less than China's.  After that it is anyone guess.  Africa?

It is not necessarily an issue of wages.  It is an issue of unit labor costs, which is not the same thing.  If you have a highly machined item that would take 5 Chinese workers 2 hours to produce or you could have an American worker do it in 15 minutes, producing it in America makes more sense.  I will bet this is one reason you don't see lots of AR parts made overseas.  There will probably be others as well of course.

[Standing Wolf]

What percentage of American workers are involved in manufacturing?

[Guest]

Transport costs are raising the price of goods from LCC, too.

I think you're right about Africa, Rabbi. Maybe 20 years from now, but eventually, there will be a lot of commerce there..in coastal areas anyway.

[Monkeyleg]

Not being all that well-versed in international commerce, I can only relate what I've been told by company owners or managers who are much more well-versed.

There's a company here in WI that has been a major name in cookware and kitchen appliances. A couple of years ago, they outsourced their production to China.

The result was that coffee makers and other appliances were sub-par. Black coffee makers would be delivered to the US with white knobs and buttons on them. On top of that, the appliances were well out of engineering spec's. The company was losing sales because of inferior products.

Another manufacturer looked at the cost of having millions of dollars of inventory--IOW, money--floating for weeks at sea, when the company could make more money by getting their products delivered in days rather than weeks.

Yet another business-focused type pointed out to me that the jobs we're outsourcing to China are the ones that produce products that have little profit yield, and not much in the way of future product development. T-shirts, for example.

Meanwhile, we're selling them high-tech gear and technology that they can't match. And, as such, we're giving our skilled and educated workers jobs.

Again, I plead ignorance when it comes to international trade.

So, I'll just offer up those examples, and wait for rebuttals.

[Antibubba]

I think we will see a reaction to all the service and operator jobs going overseas, too.

I work in a call center, and some of my company's Customer Service Reps are in foreign countries-Trinidad, India, and the Philippines.  In theory, they speak and understand English.  In reality, some are incomprehensible on the phone, when they're connecting a customer to me.  I've stopped trying to get vital information from them, because it's a waste of my time.  If it isn't on the script-forget it.  Even the ones who are fluent in the language often miss clues in the customer's inflection or tone.

Penny wise, pound foolish.

[Iain]

I think we will see a reaction to all the service and operator jobs going overseas, too.

Over here we're seeing some of this. One or two major banks are advertising the fact that their call centres are in the UK. I think that means they have been moved back to the UK.

[LAK]

Yet I still see all sorts of new, very expensive home construction, new toys and games coming out, etc...

When you bring home something to the tune of "well above average wage" many of these things are within reach. The other aspect is credit; many people living beyond their means. In homes alone, look at the numbers for foreclosures.

Many people are buying hybrids when they don't make perfect economic sense right now.

They are trendy. And again, credit brings them within reach of people who really ought to stick to a cash-bought older small used car, or two-wheeled conveyance if practical.

Still, the market is globalizing.  A boat ride for cargo from India/China to the United States is extremely cheap, actually cheaper than the final delivery to stores.

As a person who understands macroeconomics fairly well, I know that resources, to include labor, will tend to shift towards the most cost effective solution.  I say cost effective because 'cheapest' doesn't always make the cut.

Yes, water - uncontrolled - always runs downhill.

Now, with India and China employing workers for an amount of money per day that many americans in the same position would earn per hour, my theories would have labor users tending to move to the less expensive areas.  This will eventually drive the price up there due to a shortening of available workers, and a lowering of the price of laber in the expensive areas due to a surplus of workers.

China, and India in particular have exploding populations. There is no likelyhood of a labor shortage in our lifetimes or the next.

Thus, I'd tend to expect American wages to be dropping on average, at least until China/India and such catch up in labor costs with the United States.  Minus some for the costs of dealing with foreign countries and different languages on the other side of the planet of course.

The net effect of so-called "free trade" and unrestricted cheap importation has without a doubt depressed wages in this country. The uncontrolled influx of cheap labor has compounded this.

Basically, I predict that the current generation will see the end of major outsourcing as China and India develop enough that the expense of doing business there ends up costing the same as doing it at home.

I don't think so. Not in our lufetimes at least. What might happen is that China and India will get into the higher quality markets - as Japan did in the 1960s - to supplement their cheap goods exports.

Perhaps leading to the 'Great American Industrial Renaissance'?

Wishful thinking.

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http://ussliberty.org
http://ssunitedstates.org

[lupinus]

keep in mind (slowing now but for a good while at least) a lot of those fancy new homes were bought by people using no money down variable interest loans.

Now a lot of them are in a serious pickle.  The interest rate is up, hence their payment is up considerably.  Also since they bought it no money down with 100% financing they are stuck with that loan because the house has no equity (in some cases "negative equity" the loan worth more then the house) they can not refinance to a fixed rate mortgage.  Thats why the market has slowed considerably and you are seeing more and more homes on the market for a very long time.  Both because there are so many to choose from right now and so many sellers are having to have high price tags on the homes just to cover the cost of paying off the loan...which is often most all or even more then what the house is worth.

[BozemanMT]

The word you are looking for is "deflation"
as in, America is about to go into a deflationary recession

real wages are declining except for the very top.  Notice the .gov always tells you the average (mean) and not the median.
cuz the median is ugly.

This was coming to a head in the mid 1990's and the tech bubble put it off, then that rolled into the housing bubble.
Well, all bubbles end in a deflationary crash.

Prepare well.

[The Rabbi]

What percentage of American workers are involved in manufacturing?

Depends onyour definition of involved.   There are fewer and fewer actually sitting at machines.  But there are lots of them writing software for machines and all the ancillary stuff.

The word you are looking for is "deflation"
as in, America is about to go into a deflationary recession

Do you have any data whatsoever to back this up?  We have never experienced a deflationary recession since 1929.  I think the economy will soften and we might see recession, but this is cyclical.  It has absolutely nothing to do with Chinese production.

I agree with the statement that the jobs exported have been at the lowest end of manufacturing.  What no one has commented on is the lowering of prices as a result of this and the benefit to the consumer.
I highly recommend Olaf Gersemann's book Cowboy Capitalism for a comparison of the US and Europe, esp Germany.  You won't think things here are so dire when you read that.

[BozemanMT]

Data?  i don need no stinkin' data, this is the internet.  

currently no, just like all economists we can only see things in hindsight.  Me, I think you'll see next year that the .gov says the recession started 3Q or 4Q this year.  (as in right now)

Housing is deflating, wouldn't you agree?  And it's about to get real ugly IMO, and all those defaults are all going to be deflationary as the money created (the loan) just vanishes.

The stock market will be following the housing market down, that's all deflationary.

If,we have an inflationary environment, why doesn't anyone have any pricing power?  The only thing actually inflationary is commodities and most of those are just money going overseas to whoever mined the commodity (also deflationary removing money from the economy).   nobody is raising prices, nobody is getting more pay, the cost of most commodities continues to rise, but not really the underlying products (mostly, I admit there are exceptions, but do you know anyone raising thier prices?)

I don't fully have a grasp on this and i'll be honest I only recently changed my mind from a inflationary environment (which I called early, thank you, no applause) to a deflationary trend.  

Here's one blog I read a lot that does a much better job of it than me.
http://globaleconomicanalysis.blogspot.com/

[The Rabbi]

Actually all the cereal manufacturers have announced price increases.  Many companies have been raising prices and getting away with it.

I agree that housing will be in for downtrend.  That is cyclical and also a hangover from the low interest rate environment we have had for 5 years.  I personally look forward to it since I am looking to buy more rental property, something impossible for 5 years now as every shmoe in the universe piles into it.
But less demand and lower price increases do not equate to deflation.  We had recessions in 1991 and 2001 and neither led to deflation.
Employment data have been strong.  This is a lagging indicator as the last thing companies do is hire workers in an upswing and fire them in a downturn (workers are expensive to hire and fire).  But look at overtime worked and you will see a slowdown.
I agree we are heading into recession but this is cyclical.  It is no reason to anticipate 1929 all over again.

[Firethorn]

Lak, I have to agree with you.  It is probably wishful thinking.  Though I'll disagree with you on China and India having an 'exploding' population.  What they have is a large population that's converting from rural to city living.  China's draconian birth control policy is still in effect.  The cost of outsourcing work to India has gone up substantially, to the point I've heard of a couple companies canceling their plans to move stuff over there.  There's even a couple that found it didn't save them money and pissed of customers, so they moved their call center back to the states.

Theoretically yes, you are right.
Practically there is a problem.  People said this about Mexico, that all our jobs were going there.  But the Chinese labor cost is less than the Mexican so manufacturing (of some things) goes there.

That's what I said...  China's cheaper than Mexico, so the jobs go there.  It's not an absolute thing, because everybody's 'cost equation' is somewhat different.

But Chinese labor costs have been increasing.  So now the next market is Vietnam, where labor costs are less than China's.  After that it is anyone guess.  Africa?

Yep, Chinese labor costs have increased somewhat, but costs for Indian labor is increasing substantially, and faster than most economists thought.  We talk about China and India, but that's because they're two countries with massive labor pools.  Compared with them, South Korea, Vietnam, etc just don't have the availability.  Then you run into another problem.  While I didn't mention it before, you also have infrastructure costs.  In the USA, all you generally have to do is build the factory.  In some countries, you'd also have to build a water treatment plant, power plant, road system, etc...  The infrastructure just isn't there.  Then you have government corruption.  It can hurt financially when every official needs his palm regularly greased, especially when they get greedy.

It is not necessarily an issue of wages.  It is an issue of unit labor costs, which is not the same thing.  If you have a highly machined item that would take 5 Chinese workers 2 hours to produce or you could have an American worker do it in 15 minutes, producing it in America makes more sense.  I will bet this is one reason you don't see lots of AR parts made overseas.  There will probably be others as well of course.

The thing is, you can import all the machines when you put up the factory; a milling machine costs pretty much the same in the USA or China.  Then you just train the operators, efficiency ends up being within a few %.  Then again, from what I've read, because Chinese labor is so cheap, they don't buy as much automation, saving millions on equipment costs, in exchange each piece takes a little more labor to make(but the item still ends up costing less overall).

The result was that coffee makers and other appliances were sub-par. Black coffee makers would be delivered to the US with white knobs and buttons on them. On top of that, the appliances were well out of engineering spec's. The company was losing sales because of inferior products.

Another manufacturer looked at the cost of having millions of dollars of inventory--IOW, money--floating for weeks at sea, when the company could make more money by getting their products delivered in days rather than weeks.

Yet another business-focused type pointed out to me that the jobs we're outsourcing to China are the ones that produce products that have little profit yield, and not much in the way of future product development. T-shirts, for example.

All good examples.  I'll note that I listed a number of costs, though I didn't explicitly list the first two.  Quality Control costs money, the extra inventory coming by boat costs money.  The USA is kinda holding onto it's existing manufacturing capacity by taking the high end stuff.

[Waitone]

Cheaper labor costs in China and India is a red herring.  The issue is unit cost of product full allocated.  Move production to China or India or where ever and labor costs will drop.  But more importantly so will indirect costs associated with health, environmental, safety and litigation.  Depending upon the country the costs are just about zero.  Savings associated with indirect costs often swamp the unit labor costs saving associated with reduction in wages.  

Our policy here in the US is to let go the so-called high volume, low margin production while saving the high tech, high touch, high valued added production.  Reality is, such a neat differentiation is not really possible.  Losing production leads to losing process improvement leads to losing application development leads to losing process development leads to losing product development leads to losing . . . . . . fundamental research.  Politicians try to draw a line through the process to say where it will stop.  Reality is, each line is drawn by individual businesses and can't be projected at the macro level.

Paul Craig Roberts is an economist of repute.  He is one of a few in the popular press who explain the ramifications of our de-industrialization.

[drewtam]

Firethorn's first post is right on the money.
Yes we have seen wage stagnation, and we will continue to see it for another 10yrs.
At the same time, goods prices should continue to fall. We are in the middle of that price drop. It will slow down in about 5 to 10 years.
With low wages increase, but a price drops results in buying power increases (deflationary forces). Of course, the fed will prevent any deflation by printing money.

The good news, is that at the end of this Chinese and Indian industrial revolution is that a much larger portion of the world will be involved in the world market. They will begin to rise above substinance (and sadly, from below substanince) living, and begin to buy electricity, cars, entertainment, cell phones, televisions, computers, medicine and houses.

The company I work for makes construction equipment (bulldozers, excavators, mining trucks, etc), and the Chinese, Japanese, Indian and the rest of the Asian market has got us oversold for several years into the future. Good news for us, but thats a sign that these respective nations are spending big bucks on building infastructure. Something that is generally good for everyone; the factory that wants to relocate, the peasants who want to work at those factories, the consumers who want to buy the factory goods, and the cycle that continues progress across the globe.

The few things that will kill this trend, is the US going through a bad downturn, panick and start creating large tariffs to hold on to the factories they have. It would only cause stagflation, we are not powerful to legislate fundamental economic forces away.

Drew

[LAK]

Firethorn,

China's birth control, as brutal as it is, is going to take a very long time to be a significant factor. There are no doubt some entrepreneurs in India who have tried to charge too much - but I think this is in the more popular current locations for business which being as crowded as they are, the demand is allowing the higher asking prices. As other, smaller cities and adjacent areas come online, businesses will simply go there instead.

Have to agree fully with BozemanMT on housing; it is going to get real ugly real soon.

Waitone raises a good point too, it is not only wages that make these and most third world countries cheaper to operate in.

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http://ussliberty.org
http://ssunitedstates.org

[Firethorn]

Firethorn,

China's birth control, as brutal as it is, is going to take a very long time to be a significant factor. There are no doubt some entrepreneurs in India who have tried to charge too much - but I think this is in the more popular current locations for business which being as crowded as they are, the demand is allowing the higher asking prices. As other, smaller cities and adjacent areas come online, businesses will simply go there instead.

As good as India's infrastructure is compared to most developing countries, it's not everywhere, and part of the rising costs I mentioned is that their electrical is strained to the point of breaking right now.  You also have to get the education centers up and working outside the cities.  Then as these people's education levels rise and they start demanding more and more internally, people moving in from the rural areas won't be going to work so much for export production, they'll be producing internally for China/India.

Have to agree fully with BozemanMT on housing; it is going to get real ugly real soon.

Yeah, I'm buying an exceptionally cheap place right now that I'll break even on in three years even if I end up having to walk away from the place.

Waitone raises a good point too, it is not only wages that make these and most third world countries cheaper to operate in.

Yeah, I'd almost forgotten about the looser labor laws, safety specs, and most importantly pollution controls.  The one thing I'd maybe support tariffs for.

The good news, is that at the end of this Chinese and Indian industrial revolution is that a much larger portion of the world will be involved in the world market. They will begin to rise above substinance (and sadly, from below substanince) living, and begin to buy electricity, cars, entertainment, cell phones, televisions, computers, medicine and houses.

I agree with this.  Not only that, you'll have more people in the 'first world' status, contributing to the advancement of humanity.  This will allow us to gain even faster.

Oh, Drewtam, part of my point is that the price of goods won't continue to fall because of labor/enviromental savings, though they'll continue to fall for technological advances.  What I'm saying is that as we move from localized economies to global ones, because we're basically the top of the heap, there's pressure for our wages to equalize with everybody's.  Therefore there will be downward pressure on our wages and upward pressure on low wage countries like India & China.  Even if their native currency wage doesn't go up, their currency should become stronger relative to the dollar, and that makes imports more expensive.

Even the enviromental controls should even out eventually.  China's putting up with a lot of pollution right now for their industrialization, but I see that changing this generation.

Once it equalizes out, we'll all be better off, but until that happens we're lucky to hold on.  I'll say this:  Once it's more or less stabilized(change always happens), even the citizens of the USA will be better off, but it's a case of we have the least to gain and the most to lose.

[roo_ster]

BozemanMT:

Uh, median income figures are easy to come by:
http://www.census.gov
http://www.census.gov/prod/2006pubs/p60-231.pdf page four for households.

It took me all of two minutes starting with the search string "median income usa census" at dogpile.com.

[BozemanMT]

I didn't say they weren't easy, I said I wasn't going to go find them

gotta find inflation adjusted.

[roo_ster]

The data is in 2005 dollars.

[LAK]

As good as India's infrastructure is compared to most developing countries, it's not everywhere, and part of the rising costs I mentioned is that their electrical is strained to the point of breaking right now.  You also have to get the education centers up and working outside the cities.  Then as these people's education levels rise and they start demanding more and more internally, people moving in from the rural areas won't be going to work so much for export production, they'll be producing internally for China/India.

These are the normal growing pains of any rapidly developing country. It has been the same story in China - but it didn't take long for them to pass. Where there is plenty of investment capital available and cheap overheads things will rapidly change. The suggestion just ten years ago that China's output, appetite for raw materials would be at it's present level would have largely been met with similar arguements - in addition to many jokes.

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http://ussliberty.org
http://ssunitedstates.org

[Firethorn]

These are the normal growing pains of any rapidly developing country. It has been the same story in China - but it didn't take long for them to pass. Where there is plenty of investment capital available and cheap overheads things will rapidly change. The suggestion just ten years ago that China's output, appetite for raw materials would be at it's present level would have largely been met with similar arguements - in addition to many jokes.

True, but it is providing a certain level of drag, slowing or stopping some outsourcing.

Did I mention that I've also heard that India is internally hiring workers faster than expected, helping to keep the pool available for outside work somewhat restricted?

[drewtam]

True, but it is providing a certain level of drag, slowing or stopping some outsourcing.

Did I mention that I've also heard that India is internally hiring workers faster than expected, helping to keep the pool available for outside work somewhat restricted?

Does that really matter?
If a US company Lampshades INC produces lamp shades and wants to outsource to India, but an Indian company beats the US company to the punch and starts to make lampshades to sell either to India or export, they are still being produced by the same people at the same price.

[Firethorn]

drewtam,

I was thinking more along the lines of internal consumption of products and services that previously weren't being consumed.  Medical care previously largely unavailable to the subsidance farmers.  Things like restaurants, hair cutters, cell phone sellers, moped dealerships, etc...

If the lampshade manufacturer isn't even looking to sell in the USA, it doesn't matter yet, it's still one more usage of that company's labor for something that isn't exporting to the USA, thus raising the cost of labor a little bit there, reducing the effectivness of outsourcing.