Are U.S. Wages Too High?

The last thing Americans want to hear at a time like this is that they're being paid too much. But that's precisely what an article today from Breakingviews.com appearing in the New York Times argues. It says that U.S. wages need to decline in order for the nation's businesses to compete in a global economy. As much as I hate to say it, I think the piece's logic makes a lot of sense.

The basic idea is almost trivial. If two workers are doing the same thing, one in China, one in Ohio, their real wages should be equal in a global economy, taking exchange rates into account. As long as one worker is being paid more, then that business must lower his wages so to compete in the global economy with the country that has firms paying similar workers less.

The article states an admitted caveat:

Of course, workers in the United States should earn more than their peers in China, Moldova or Vietnam. Americans take advantage of the higher productivity that makes their country rich: better education and infrastructure, abundant capital and a strong work ethic. But how much higher should American wages be?

And it answers its own question:

The answer depends in large part on two measures: the difference in productivity in making goods that can be traded across borders, and the quantity of such goods. Both measures point to a narrowing wage gap.

In trade theory, you learn that developing countries can specialize in certain industries where low-skilled work can be done for cheaper. That's why the garment industry has shrunk in the U.S. and is more robust in countries like China. But what's beginning to happen is that many of these developing nations are manufacturing products that are no longer inferior in quality to those that the U.S. produces. But wages still differ vastly.

That's unsustainable. But many of those developing nations are also beginning to enter more skilled manufacturing industries that had more traditionally been handled by the U.S. and other more developed economies. That implies that even more skilled labor wages in the U.S. must fall. That's a huge departure from what the U.S. economy is used to.

A Business Channel piece posted earlier by Derek Lowe shows this effect on pharmaceuticals that are increasingly outsourcing their work to foreign chemists. Unless U.S. workers are willing to accept lower wages, theses companies can't compete globally unless they outsource.

So how do we keep wages high in the U.S.? We don't. The further progression of a global economy is inevitable, as is the growth of developing nations. That means that U.S. workers cannot ultimately continue to have higher wages relative to those in other nations who compete in the same industries.