Although free trade yields overall benefits (188.8.131.52), globalisation displaces some jobs (184.108.40.206) and it exerts a downward pressure on wages in wealthy countries as work moves to places with lower costs. Some individuals cannot find new jobs that are as good as the ones they have lost.
It isn’t a simple ‘race to the bottom’ on wages because a country like America, for example, has high overall productivity, which enables it to remain competitive whilst paying higher wages than less developed countries. Western workers may choose a different combination of pay and benefits, but overall they will continue to be able to enjoy a higher standard of living than other countries for as long as they maintain their advantage in productivity (220.127.116.11).
As described earlier, productivity can be increased by appropriate training (3.2.5) and investments in new technologies, better facilities and better infrastructure (3.2.8). Wealthy countries can afford to do this – although, as described later, they may not have been investing enough recently (18.104.22.168).
If new suppliers start out by competing purely on the basis of low wages, existing suppliers can continue to retain some market share by achieving higher quality or higher productivity. As the new suppliers then have to improve their quality to compete, they find that their labour costs start to increase for a number of reasons:
- The advantage of cheap labour is temporary: the workers in developing economies are able to push for higher wages and better working conditions as their productivity increases because they are competing in a global market.
- Additional processes are required to achieve high quality.
- The workers become more skilled, which increases their bargaining power because they become useful to other employers.
It takes time for countries to develop their own technical expertise and to start to pay higher wages. Japan is an example which is often quoted; it had a low-wage economy after the Second World War, when it imitated other countries’ products and processes, before attaining technical leadership in several high-technology sectors; it now outsources work to other countries with lower labour costs, as described in an Economist article on 7 April 2004 entitled Manufacturing in Japan.
Countries tend to follow each other through a similar growth profile: as less developed countries become more productive, their wages too will start to increase; that growth in prosperity increases consumer demand and creates new job opportunities – but some businesses will move away to seek lower labour costs elsewhere. This continual movement of work results in social problems in areas which have lost jobs and therefore have to find new ones; these problems cannot be, and should not be, ignored. As discussed later, political intervention may be necessary (6.7.8).
Wealthy countries can afford to introduce a minimum wage to prevent living standards dropping too far (22.214.171.124). This is a political decision, taken because the society wants to reduce economic hardship and can afford to do so, despite a resulting loss in competitiveness and the potential reduction in the overall employment opportunities within the country.