The Mystery of the Incredible Shrinking American Worker


Though the overall volume of global trade has grown over the last few decades, the share driven by developed economies like the U.S. has decreased. Today, developing nations account for half of global trade and half of its growth.


The infrastructures of global trade and digital communication broke the shackles of geography, making finished goods complex assemblages generated by a network of component products and services - e.g., the iPhone consists of several independently manufactured components sourced from the U.S., Italy, Taiwan and Japan that are assembled in China and then marketed globally. Since the points of production and service along a supply chain are now geographically independent, the pool of labor that can be utilized to perform any task along the chain is global, effectively increasing the supply of labor -- and decreasing the value of workers in developed economies.


The new infrastructure of global trade made it economical to deploy capital across the world to utilize enormous pools of labor in developing nations. The flow of money into developing nations operated like a magnet, causing enormous populations to leave farmlands for cities and transition from peasantry to paid labor. More than one billion non-farm jobs were created globally since the 1980's, according to the McKinsey Global Institute's report, "The World at Work: Jobs, pay and skills for 3.5 billion people." Nine out of every ten jobs were created in developing nations, and 44 percent were created in China and India alone. Now that wages are rising in both China and India, capital is moving elsewhere, chasing cheaper labor in South Asia and Africa.


The freedom of capital to move throughout the world in search for labor has fundamentally changed the balance of power between labor and capital, and technology and trade continue to expand the scope of tasks that can be performed at a distance, although truly local labor (construction, hair-cutting, locksmithing) probably won't escape overseas. This dynamic is already exerting sizable, downward pressure on the value of labor relative to capital in developed nations. But despite more efficient, more complete markets, labor is inherently divided into skill sets, placing a fundamental limit on its fungibility, leading to growing disparities between the wages of high skill workers and low skill workers.

Global trade would be impossible without the human beings that do the physical and intellectual work of everyday business. Like the transistors that blanket a microprocessor, human beings are scattered about the surface of the Earth, operating like tiny economic switches, moving and consuming objects, building and abandoning relationships, and ultimately, both deliberately and inadvertently contributing to a collective engine that determines the distribution of our planet's resources and our labors. But unlike the static abilities of a transistor, human beings are malleable, and can be cultivated to generate transformational, physical power.

Over the coming decades, as developing markets grow and mature, and new markets develop, there will be unprecedented demand for power of all varieties, from combustion to computation, and with it, unprecedented demand for the types of highly developed human intelligences that can unlock and utilize these powers. As a result, there will likely be a global shortage of high skill workers and a global surplus of low skill workers. This imbalance in the supply of skill sets is likely to exacerbate the power imbalance created by the prevailing dominance of technology and capital over labor, leading to even greater wage disparities between high earners and low earners, and further decreases in the overall value of labor relative to capital in developed nations. Nations that cultivate the brainpower of their populations will be rewarded with funds channeled from a global pool of capital aggressively searching for the brightest minds across the entirety of the human species. Nations that don't will be punished, finding themselves saddled with populations that simply cannot compete in this new, remarkably complex, and dynamic world.


The United States is the world's preeminent economic engine, generating a remarkably large and diverse set of products and services used all over the world. Nonetheless, we are subject to the same market forces gradually reshaping economic realities across the developed world. As the home of household brands like Intel, Facebook, and Google, and the world's greatest scientific research institutions, we are, arguably, uniquely positioned to exploit, rather than be exploited by these forces.

So far, however, we have done a terrible job.

The wage gap between high-skill and low-skill labor in the U.S. mirrors the broader developed world. Similarly, the value of capital relative to labor mirrors trends observed in the broader developed word, with the relative share of income generated by labor in the U.S. declining over the last several decades. As noted above, these trends will probably continue and become more pronounced as greater imbalances in the global supply of labor develop over the coming decades.


If, however, the supply of labor is truly global, then there is in theory nothing keeping the U.S. from dominating the market for high skilled labor -- not only fulfilling its own demand but generating excess and exporting its intellectual capital abroad to fill the global deficit. There are, however, substantial practical barriers, in particular our education and immigration policy. The U.S. is simply not producing enough college graduates in the sciences, technology, engineering, and mathematics ("STEM"). We can either produce more STEM graduates domestically or encourage more immigration of STEM graduates from abroad, or perhaps utilize some combination of both. Doing nothing is not an option, unless we are willing to voluntarily decay into an increasingly polarized and overall poorer society. A polarized, poorer society that will likely lead to even greater political instability as the primary revenue generator of the U.S. government, taxing labor, becomes inherently less lucrative.

Presented by

Charles Davi is a capital and derivatives markets lawyer in New York City. He received his J.D. from New York University School of Law and B.A. in Computer Science from Hunter College.

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