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Another Thought About Why U.S. Wages Haven’t Risen Much

Summary:
Regular reader Ryan P. Long, in response to my post a few days ago, "Krugman on a Wage Puzzle," writes:I've quite enjoyed your recent blog posts. The one on Paul Krugman's idea about wage stagnation was particularly interesting to me. Both his post and yours had me thinking about a hypothesis I've had since the big recession hit, and I want to ask your thoughts. The idea itself is pretty simple, although I haven't read much discussion of it in economics blogs: Globalization and outsourcing are putting severe downward pressure on U.S. wages, even for skilled work, and the "worst of this" (from the American wage-earner's perspective, notwithstanding their benefit as consumers) is yet to come. One example

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Regular reader Ryan P. Long, in response to my post a few days ago, "Krugman on a Wage Puzzle," writes:

I've quite enjoyed your recent blog posts. The one on Paul Krugman's idea about wage stagnation was particularly interesting to me. Both his post and yours had me thinking about a hypothesis I've had since the big recession hit, and I want to ask your thoughts.

The idea itself is pretty simple, although I haven't read much discussion of it in economics blogs: Globalization and outsourcing are putting severe downward pressure on U.S. wages, even for skilled work, and the "worst of this" (from the American wage-earner's perspective, notwithstanding their benefit as consumers) is yet to come.

One example popped up in the news today: The New York Times reports that some U.S. school districts are recruiting from e.g. the Philippines to fill teaching positions that pay too low to attract U.S. teachers.

[DRH note: if you follow the link in the NYT piece above, you see that average government-school salaries 2 years ago were $47,403. I was surprised at how low that was. Some teachers' claim that this doesn't allow for a middle-class life style is absurd, though. Sure it does, if both spouses work or if the teacher works a month or two over the summer.]

The examples that originally got me thinking about this idea come from the time I spent in software consulting. Most of the development work my employer did was outsourced to India. Workers there would sometimes put in 12-hour days and were paid much less than the U.S. developers, and yet by Indian standards they had good, stable, well-paying jobs. I thought to myself, Why wouldn't all software development be so outsourced? American programmers will have to start competing with Indian, Chinese, Pakistani, etc. programmers who work longer hours for less money. And these are high-tech, high-skilled jobs requiring a competitive education.

I concede that these are two mere anecdotes, but if they are representative of a wider trend in the global workforce, I would expect to see wage stagnation in the developed world, along with wage increases in the developing world.

Well, that's the idea, anyway. What do you think? Do you think there's anything to it? If you have the time and wouldn't mind, I'd love to know what you think about how this relates to slow wage growth.


Good question and nice careful use of data, being careful not to overgeneralize.

On its face, Ryan's hypothesis is plausible. Certainly it is quite plausible that an outward shift in the supply of labor in any one labor market will cause some reduction in wages or, at least, a lower increase relative to trend. Of course, this assumes all other things equal.

I can't say for sure that this hypothesis is wrong. What I do think is that it's probably wrong for the facts at issue.

Here's why: Normally, when a competing source of supply comes along, there's a decline in demand for the original supply that the new supply competes with. The decline in demand would be expected to cause some reduction in wages, all else equal, but also some reduction in employment. But recall what led Krugman, and me, to see a puzzle. It was that the labor market is sizzling hot, with, as Richard Epstein exaggerated to make a point, employers putting out signs asking criminals to apply. In short, we are seeing an increase, not a decrease, in the number of previous residents employed. (I'm assuming here that this increase in people employed represents many previous residents and not just recent immigrants.)



David Henderson
David Henderson is a British economist. He was the Head of the Economics and Statistics Department at the OECD in 1984–1992. Before that he worked as an academic economist in Britain, first at Oxford (Fellow of Lincoln College) and later at University College London (Professor of Economics, 1975–1983); as a British civil servant (first as an Economic Advisor in HM Treasury, and later as Chief Economist in the Ministry of Aviation); and as a staff member of the World Bank (1969–1975). In 1985 he gave the BBC Reith Lectures, which were published in the book Innocence and Design: The Influence of Economic Ideas on Policy (Blackwell, 1986).

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