I might pity those poor souls that convinced their companies to chase low labor cost to China. Or maybe not. From The New York Times comes an article that describes how wages are inflating at a 10% annual rate. Of course that assumes that temple of journalistic integrity is actually accurate this time.
Our friend Don Boudreaux of Cafe Hayek at an interesting perspective of this phenomenom,
This stat is difficult to reconcile with those pundits and politicians who argue that strong, independent labor unions are necessary to ensure that workers enjoy the benefits of economic growth. In China, independent labor unions are illegal. I confess to being no expert on the realities of the operations of labor unions in China, but I suspect that this reality is not remotely close to the model that the Robert Kuttners, Harold Meyersons, Paul Krugmans, John Edwardses — and John Sweeneys — among us believe should be adopted in the U.S. so that American workers can prosper.
Wages generally rise — and wages rise generally — because of market forces that improve worker productivity and encourage economic change and growth.
Unions don’t exist simply to increase wages; they also are a sometimes necessary result of pathetic leadership. "A necessary result"… a backlash to protect workers from leaders that think of workers as a simple pair of hands instead of a creative resource.
But Don’s last statement is also very true. Most people don’t realize that, contrary to popular wisdom, foreign investment in the U.S. is magnitudes higher than investment in outsourcing havens. Also from Cafe Hayek,
Inspired by the controversial work of William Baumol and Ralph Gomory, William Greider argues that those of us who oppose protectionism today are mindless members of "the church of global free trade". But it is Greider and his ilk who are blinded by a faith wholly at odds with reality. If it were true that the developing world’s large supply of highly skilled but low-paid workers inevitably attracts capital away from high-wage countries such as the United States, foreign direct investment in open developing countries would be higher than in the United States. It’s not. In 2006, China attracted $46 of FDI per capita; India attracted just over $14 per capita; the United States attracted $578 per capita.
However as some comments on that blog post pointed out, the change in FDI is important… it is increasing in China and India far faster than in the United States. Investment, domestic and foreign, creates jobs. Jobs create demand, which create more jobs, which creates wealth, which creates improvements in standards of living.
So what needs to be done to stimulate investment? As much as we often rail against NAM for whining about "competitiveness burdens," they are real impediments to long-term overall growth. Last month we told you about how the new French president Sarkozy is going to significantly reduce notoriously high French taxes. Albania and now the Czech Republic are joining about thirty other countries in changing to a flat individual and corporate tax, effectively cutting the discarded payroll tax by almost 50%.
Even those old welfare bastions of Sweden and Norway are radically reducing taxes to reduce brain drain. Even with the tax cuts of a few years ago, the U.S. is on the verge of becoming the nation with the highest taxes, and the scary thing is that people like Hillary are suggesting an additional success tax of 4% instead of truly innovative solutions or especially reducing internal waste.
Lean manufacturing methods can easily overcome those supposed competitiveness burdens today. But ten years from now may be a different story.