Thursday, September 28, 2023

Stagnating Wages: A Globalization Problem

It’s not hard to see the numbers driving the rising financial hardship in America. According to the Economic Policy Institute, U.S. productivity per hour of work rose by roughly 60% between 1979 and 2020. However, average wages increased by only 17% over that same period. When compounding inflation, the cost of goods has increased by 310%. All told, wage increases have fallen far behind increases in productivity and the cost of living. The results have left many American citizens struggling to make ends meet. And thanks to globalization, the issue may be beyond our reach.

The problem of stagnant wages

US citizens are experiencing financial hardship due to stanating wages. Wages have actually increased over the years, but those increases have fallen far behind productivity and cost of living. This has led to a widening gap between what people earn and what they need.

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The gap between an increase in productivity and wages is particularly alarming. Productivity increasing more than three times as fast as wages is troubling. As an isolated statistic, it suggests the “greedflation” phenomenon is really happening. In practical matters, it emphasizes that workers in the US aren’t being fairly compensated for their work.  However, the issue goes beyond the US. 

Globalization means competing markets

Many Americans are left wondering why their wages can’t keep up with the cost of living. It turns out that it’s not as simple as looking at the numbers and seeing a wage stagnation problem. In some cases, employers have weakened workers’ bargaining power, which has led to stagnant wages. The real issue is how globalization has upended economies around the world. As we clearly saw during the early days of the supply chain crisis, local economies are inevitably tied to the global economy. 

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Most manufacturing today happens outside the US. Whether it’s Mexico or China, corporations are looking outside the US for their building needs. Why? A combination of lower wages and questionable labor laws means the US can’t compete always compete. In Beijing, China, the minimum wage is 25 yuan per hour- that’s roughly $3.50. Even though the argument exists that wages have stagnated in the US, you’ll be hard-pressed to find someone willing to do ardous labor for $3.50 an hour.

Globalized incentives

Apple, for example, will have to change the charging ports after a ruling from the European Union. While it’s great news that one charger will now fit all phones, it’s also an example of how globalization is dictating terms for corporations. In order maintain a global reach, companies must adapt to comply with laws from around the world. Combined with cheaper labor forces, this reduces companies’ interest in keeping their wages up-to-date with the cost of living.

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Globalization also means many companies locate their headquarters in tax-friendly countries. That leads to some odd situations, with originally-American companies like Medtronic being based in Ireland. Medtronic is still on the NYSE, and forms part of the S&P500. Yet the company enjoys Ireland’s corporate tax rate of 12.5%. Of course, that means the U.S. is missing out on the tax money these companies would put back into the country’s infrastructure.

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