Why fear labour market globalisation?

While reading Rates Blog today I came across the following statement:

7. Training your replacements - The next wave of globalisation is going to hit service sectors in developed economies that have previously been immune to outsourcing to the likes of China or India.

First the manufacturing sectors in America, New Zealand and Australia (Toyota laid off 350 workers there yesterday) were gutted. Now the services sectors face being cleaned out.

The first batttleground we are seeing across the Tasman is in financial services. The media there is up in arms about layoffs in banking as some of the big banks outsource IT services and accounting to India.

This could come here too. It has already happened in chunks of Telecommunications (tried ringing Telecom’s Philippino O18 staff lately?) and will eventually spread to the likes of IT, banking, medical services, media, insurance and legal services. The growth of the Internet is accelerating this shift.

My response?   So, in the same way that they’ve lowered the cost of manufactured goods, subsidised them, and done all the work making them – they are now threatening to do the same with the service sector.  So they are offering to do all the work for us?  Sweet deal!

There are two things to keep in mind with all this:

  1. There may a concern that if they make everything we will make nothing!!!  But this is a false dichotomy – in truth, if they can do these things at a truly lower cost, and decide to do it in an environment of free trade they have a comparative advantage and so prices will adjust to ensure that both they and us (with whatever we have a comparative advantage in) are better off.  Now, if they are intervening to do this through subsidies it does not mean we are worse off – as their choice to subsidise is implicitly a transfer to consumers (us).  The people who truly pay are the tax payers in these other countries.
  2. It is possible that, as globalisation in labour markets gets underway, we experience stagnant or even lower wages in the Western world.  However, this is because people who are currently STARVING are now getting the opportunity to pull out of abject poverty and consumer some resources.  Globalisation of labour markets will reduce global income inequality, improve the lifestyles of the worlds most poor, and increase the size of the “economic pie” – this is a great thing.  As a result of this we may see a hollowing out of the middle class in developed countries in the near term – so what.  We could make the argument that the middle class that was artificially holding up their claim on resources by restricting the ability of the very poor to get themselves out of poverty – when we frame it that way does your opinion about what is “morally right” change ;) [Good post on this sort of issue on Money Illusion]
  • ArmchairAnalyst

    RE: point 2, the question is is it possible to still have increasing middle class real wages in OECD countries in the medium term with increasing globalisation/”tradable” jobs? Especially if the global, educated non-OECD population keeps growing, I see the only (unlikely) way (without intervention) is for technology/productivity in  OECD to grow at a faster rate than growth in the productivity of those in non-OECD countries. I just don’t see this happening – in fact there should be greater technology convergence. The upshot is more demands for labour market protection in OECD countries.

    • http://www.tvhe.co.nz Matt Nolan

      I think in real terms its going to be interesting to see what happens to the distribution of income.  Changes in the factors of production and relative scarcity are the real drivers here – no matter how much people want to make it an argument about class war.

      Technology is changing so quickly that the “social contract” we based policies on through government becomes quickly out of date, trying to understand and describe what is going on is going to be an important first step – because in my opinion there is no consistent and clear description of what is going on now, and there can’t be because the data is not there.

  • Richard29

    ” As a result of this we may see a hollowing out of the middle class in developed countries in the near term – so what. ”

    To answer the question in the headline of your post. Because somebody is a member of the middle class that will be hollowed out.

    It might be that from an economically rational perspective this hollowing out is necessary or even desirable to deliver the greatest benefit to the greatest number of people.

    But fear is not rational and most people are more concerned about their own self interest than that of the starving millions (in fact much of economics is built on the assumption of the latter).

    “Globalisation of labour markets will reduce global income inequality, improve the lifestyles of the worlds most poor, and increase the size of the “economic pie” – this is a great thing.”
    Be careful – you are evangelising here. I’m always wary when I hear an economist say something ‘will’ happen as if economics followed similarly immutable laws to physics.

    This is an assertion is supported by various economic models and some past experience – but there are always exceptions. For example one of the criticisms of the free trade deal with China was that the government is known to use slave prison labour – does the theory still stand up where labour market participation is not free?
    How about the ‘race to the bottom’ in terms of environmental legislation. If the subsidy that is being provided in the developing country is the non-pricing of damage to the global environment then price benefits may passed on to the global consumer but so too are the environmental costs. 
    Similar could be said for safety legislation (which is often very expensive) should we (or poor country workers) be grateful if the competitive advantage is moving dangerous activities to a country where the value placed on human life is lower or the workers ability to organise for safe working conditions is more restricted. 

    It may well be that your assertion is correct in a number of circumstances – but it is not a certainty in all circumstances. So what you are proposing is for middle class workers to face the immediate certainty of job loss in exchange for a projected possible benefit to some other person in a far away country where they have no way of knowing for sure if that person will actually recieve any benefit.

    • http://www.tvhe.co.nz Matt Nolan

      “To answer the question in the headline of your post. Because somebody is a member of the middle class that will be hollowed out.”

      Indeed you are right :D

      “Be careful – you are evangelising here. I’m always wary when I hear an economist say something ‘will’ happen as if economics followed similarly immutable laws to physics.”

      Fair point, I agree with your sentiment.

      “It may well be that your assertion is correct in a number of circumstances – but it is not a certainty in all circumstances. So what you are proposing is for middle class workers to face the immediate certainty of job loss in exchange for a projected possible benefit to some other person in a far away country where they have no way of knowing for sure if that person will actually receive any benefit.”

      I wouldn’t go that far.  In essence even if the middle classes are losing out I think we need to weigh any said loss against the fact that many people are moving out of poverty.

      There are significant institutional issues in the developing world that will hopefully be solved through time – but I don’t believe that the current fair of “losing jobs” is consistent with that.

      However, I agree with you that any free trade agreements need to be made with a moral basis – in so far as labour laws are weaker overseas, this can provide a justification for protectionism in goods markets in some sense.  However, I don’t think it aids the case for further protectionism in labour markets – which would simply make the perceived imbalance stronger.

  • jh

    Globalisation of labour markets will reduce global income inequality, improve the lifestyles of the worlds most poor, and increase the size of the “economic pie” – this is a great thing.”
    ……..
    Would you put some figures to that. How many (approx) does “the worlds most poor” represent? What sort of increase in economic growth does that require and will NZ workers need to take  hit in living standards  to achieve that reduction in inequality?

  • jh

    There may a concern that if they make everything we will make nothing!!!  But this is a false dichotomy – in truth, if they can do these things at a truly lower cost, and decide to do it in an environment of free trade they have a comparative advantage and so prices will adjust to ensure that both they and us (with whatever we have a comparative advantage in) are better off.
    …….
    But your also in favour of selling the Crafar farms to the highest bidder (ie an open market) and  it would seem that land based (?) industries are what we have a comparative advantage in.
    The world isn’t  a level playing field. People aren’t born in response to high prices for labour; people have large families even though they live by picking over rubbish.
    Another point: the things we buy are often junk and we end up having to sell what really matters (land and life style).

    • http://www.tvhe.co.nz Matt Nolan

      “But your also in favour of selling the Crafar farms to the highest bidder (ie an open market) and  it would seem that land based (?) industries are what we have a comparative advantage in.”

      Yes.

      If the seller is getting a price that represents the discounted present value of their return from the land, then that is fine.  They can use their new found liquid capital to do something else.

      “The world isn’t  a level playing field. People aren’t born in response to high prices for labour; people have large families even though they live by picking over rubbish.”

      Indeed – so why should we support policies that exacerbate the inherent inequality.  This seems weird to me.

      “Another point: the things we buy are often junk and we end up having to sell what really matters (land and life style).”

      People buy and sell things based on their desires and preferences, that is fine.  If other people want to base policy off NZer’s being stupid that is good for them, but its never an assumption I’m willing to make ;)

      • Richard29

        “Indeed – so why should we support policies that exacerbate the inherent inequality.  This seems weird to me.”

        It might be worth you defining what you mean when you say “we” and clarifying who’s inherant inequality you are concerned about.

        Does “we” mean New Zealanders or does it encapsulate the whole global family of humankind.

        It’s an important distinction in the framework of market interventions (the visible hand). As a country we spend many billions in government revenue on Health, Education and Welfare spending to support New Zealanders but we spend well under the UN target of 0.7% on International Development Assistance to give the same support to people in other countries.

        I think it would be safe to say then that our government’s priorities value the welfare of New Zealanders way ahead of the problems of global inequality (and I’d argue they would struggle to get elected if they did otherwise)

        By your own analysis labour market globalisation would hollow out the New Zealand middle class (leaving just the top and bottom) thus policies which facilitate rapid labour market globalisation would aggravate inequality for New Zealanders. So the government is rationally acting in accordance with it’s democratically endorsed priorities – absolutely nothing “weird” with that.

        • http://www.tvhe.co.nz Matt Nolan

          “It might be worth you defining what you mean when you say “we” and clarifying who’s inherant inequality you are concerned about.

          Does “we” mean New Zealanders or does it encapsulate the whole global family of humankind.”

          For sure, excellent point.  In so far as we view NZ like a labour union – just protecting itself and its capital – and insofar as we view NZer’s as myopic (as in the most likely circumstance total income will end up higher here as well – although this is not a definite I agree).

          By we I actually meant something else, I meant as individuals who try to look at issues without a nationalistic hat on.  As individuals looking at a whole bunch of other nameless faceless individuals.

          “By your own analysis labour market globalisation would hollow out the New Zealand middle class (leaving just the top and bottom) thus policies which facilitate rapid labour market globalisation would aggravate inequality for New Zealanders”

          Note, this is in a worst case scenario ;)

      • Richard29

        PS - I find your belief that we should prioritise the alleviation of poverty internationally above the protection of middle class privilege domestically to be laudable. You’ll be pleased to know you are in great company:

        Imagine there’s no heaven
        It’s easy if you try
        No hell below us
        Above us only sky
        Imagine all the people living for today

        Imagine there’s no countries
        It isn’t hard to do
        Nothing to kill or die for
        And no religion too
        Imagine all the people living life in peace

        You, you may say
        I’m a dreamer, but I’m not the only one
        I hope some day you’ll join us
        And the world will be as one

        Imagine no possessions
        I wonder if you can
        No need for greed or hunger
        A brotherhood of man
        Imagine all the people sharing all the world

        You, you may say
        I’m a dreamer, but I’m not the only one
        I hope some day you’ll join us
        And the world will live as one

        PPS – You would never be elected on this platform you dirty hippie :P

        • http://www.tvhe.co.nz Matt Nolan

          I am a hippy.  I even went to get a haircut and kept my hair long.

          Give me a year and I’m sure I’ll grow out of it ;)

  • jh

    We could for the sake of experiment, have a completely cross border free market in land and labor and see what happens. If we represent each countries population as a container of water, how would the wealth even out and how would we measure wealth?
    My first ancestors in NZ were poor but happy because of their physical and social environment (according to family records).
    I notice two world views: “NZ is only .07% urbanised”;  “world population isn’t a problem. When people become wealthy their birthrate drops”, “there are no such thing as resources, it is humans who make resources” ; “N.Z doesn’t have nearly enough people” etc, etc there seems to be an underlying assumption that somehow markets will solve all our problems in a painless  way. 
    The other view (my view) is “there are cities in China bigger than London that no one has heard of” type view.
    I’ll quote this piece by Richard Heinberg:
    The ideological clash between Keynesians and neoliberals (represented to a certain degree in the escalating all-out warfare between the U.S. Democratic and Republican political parties) will no doubt continue and even intensify. But the ensuing heat of battle will yield little light if both philosophies conceal the same fundamental errors. One such error is of course the belief that economies can and should perpetually grow.
    But that error rests on another that is deeper and subtler. The subsuming of land within the category of capital by nearly all post-classical economists had amounted to a declaration that Nature is merely a subset of the human economy money or technology. The reality, of course, is that the human economy exists within, and entirely depends upon Nature, and many natural resources have no realistic substitutes. This fundamental logical and philosophical mistake, embedded at the very heart of modern mainstream economic philosophies, set society directly upon a course toward the current era of climate change and resource depletion, and its persistence makes conventional economic theories utterly incapable of dealing with the economic and environmental survival threats to civilization in the 21st century.
    http://richardheinberg.com/221-economics-for-the-hurried
     

  • jh

    Two world views, (like looking at the world through different ends of binoculars)  frame our views on the outcomes of  globalisation.
    I do note however that one end of the binocular doesn’t believe in global warming, so I perceive a view where everything works like clockwork, where mans sits at the apex of the process rather than just as a player.