“Global Labor Arbitrage” Dismantling America

In the current economic recovery,
low pay, low skill jobs account for twice the normal
amount of job growth reports Stephen Roach, chief
economist for Morgan Stanley (More Jobs, Worse Work

New York Times,

July 22).

Mr. Roach attributes the low
quality of new US jobs to globalization:

unrelenting pressure to cut costs, American companies
are now replacing high-wage workers here with like
quality, low-wage workers abroad. With new information
technologies allowing products and now knowledge-based
services to flow more easily cross borders, global labor
arbitrage is likely to be an enduring feature of the

“What are we going to do about
he asks.

As long as most economists and
elected officials remain in total denial, we are
unlikely to do anything about it.

Desirous of demonstrating that globalization is creating
more US jobs than it is destroying, normally sound
economists are making fundamental analytical and
empirical errors.


Matthew J. Slaughter,
a professor at Dartmouth,
recently concluded that during 1991-2001 “for every
one job that US multinationals

created abroad
in their foreign affiliates they
created nearly two US jobs in their parent operations.”
[Globalization and Employment by U.S. Multinationals: A Framework and
Facts,” Daily Report for Executives,

Bureau of National Affairs,
[Subscription] March 26,

This would be good news, if true.
Unfortunately, in measuring the growth of US
multinational employment Mr. Slaughter failed to take
into account the two biggest forces driving
multinational employment during that period.

Multinational employment grew
because multinationals acquired many existing smaller
firms and because many firms became multinational by

establishing foreign operations
for the first time.

In brief, Mr. Slaughter overlooked
the real reasons more people work for multinationals and
mistakenly concluded that the employment growth was due
to stimulus to US employment caused by outsourcing.

Matthew Spiegelman, an economist
with the

Conference Board
, is similarly afflicted with a case
of the denials as he stumbles through the data.

Mr. Spiegelman wants to show that
there is not much difference between remuneration in

service jobs and in manufacturing jobs.
To this end
he compares hourly wages and concludes that
manufacturing pay is only slightly higher.

As Charles McMillion of

MBG Information Services
pointed out to me, Mr.
Spiegelman thus overlooks substantial differences in
compensation that stem from manufacturing employees
working more weekly hours and from a substantially
larger share of manufacturing employers providing
pension and health care benefits.

Economists don`t seem to understand
globalization, and that`s a puzzle. Referring to low
foreign wages, Dartmouth`s Mr. Slaughter writes:

wages do not necessarily mean low production costs
abroad. This is because low wages are mainly a signal of
low worker productivity. In much of the world, workers
are less productive than their American counterparts
because they enjoy less access to the training, tools,
ideas, and broad market institutions that are the
foundations of high productivity.”

Once upon a time this was true.
That was when US employees, working with US capital,
technology and business know-how, were producing
products to compete in import and export markets against
products made by foreign workers, who worked with less
capital and inferior technology.

Those were the bygone days of
international trade.

Today when a US multinational moves
a factory from Ohio to China, the Chinese labor works
with the same capital and technology that formerly
employed Americans in Ohio.

The Chinese workers are no less
productive. Yet, their wage is far lower.

Dartmouth`s Mr. Slaughter is wrong
to attribute low Chinese wages to low productivity. The
wages are low because of the enormous excess supply of
labor that overhangs the Chinese labor market.

Morgan Stanley`s Stephen Roach is
correct to differentiate between free trade and
“global labor arbitrage.”
US employers are
substituting cheaper foreign labor for US labor in the
goods and services that they supply to markets at home
and abroad.

As a result, the US labor force is
being redirected to nontradable services. Charles
McMillion`s monthly reports (MBG Information Services)
based on the Bureau of Labor Statistics payroll data
show that job growth during the current recovery is
concentrated in domestic services that cannot be

A country whose work force is
concentrated in nontradable domestic services is a Third
World country.

Will economists stay in denial
until the US reaches this destination?


Paul Craig Roberts is the author with Lawrence M.
Stratton of

The Tyranny of Good Intentions : How Prosecutors and
Bureaucrats Are Trampling the Constitution in the Name
of Justice