Impact of Free Market Activity

Free Market Activity worldwide: Cause of Declining Living Standard in US? Does an increase in free market activity worldwide lead to an overall lower standard of living in the United States? NO. An increase in free market activity worldwide doesn’t lead to an overall lower standard of living in the United States. One concern has been frequently voiced by the opponents of free market or globalization is that falling international trade barriers destroy manufacturing jobs in wealthy advanced economies such as US and Western Europe. The critics argue a free market worldwide allows firms to move manufacturing activities to countries where wage rates are much lower. Furthermore estimates suggest that the pool of global labor may have quadrupled between 1985 and 2005 with most of the increase taking place after 1990, due to the entry of China, India, and states from Eastern Europe into the global trading system, along with global population growth. Other things being equal, one might conclude that this enormous expansion in the global labor force, when coupled with expanding international trade, would have depressed wages in developed nations. The example of Harwood Industries; citied by D.L. Bartlett and J.B. Steele, journalists for the Philadelphia Inquirer, supports the concern mentioned above.

The both journalists suggests that, Harwood Industries, a U.S. clothing manufacturer closed its U.S. operations, where it paid workers $9/hr. and shifted manufacturing to Honduras, where textile workers get $0.48/hr. Because of moves such as this, argue Bartlett and Steele, the wage rates of poorer Americans have fallen significantly over the past quarter of century. In the past few years, the same fear has been applied to the services, which have increasingly been outsourced to nations with lower labor costs. The popular feeling is that when firms such as Dell ,IBM, or Citigroup outsource service activities to lower cost foreign suppliers, they are “exporting jobs” to low wage nations and contributing to higher unemployment and lower living standards United States. In my opinion the critics of free market trend miss the essential point about free trade – the benefits outweigh the costs. Free trade results in countries specializing in the production of those goods and services that they have comparative advantage in while importing goods and services that they cannot produce as efficiently. It’s a fact that when a country embraces free trade, there is always some dislocation – lost textile jobs at Harwood Industries, or lost call center jobs at Dell – but the whole economy is better off as a result.

Sticking with Textile sector for our example, it makes little sense for the United States to produce textiles at home when they can be produced at a lower cost in Honduras or China. Importing textiles from China or Honduras leads to lower prices for clothes in the United States, which enables consumers to spend more of their money on other items. At the same time income generated in China or Honduras from textile exports increases income levels in that country, which helps their people to purchase more products produced in the United States, such as pharmaceuticals, jets, Intel based computers, Microsoft software etc. The same argument can be made to support the outsourcing of services to low wage countries. By outsourcing its customer service call centers to India, Dell can reduce its cost structure, and thereby its prices for PC’s. U.S consumers’ benefit from this as the prices of PC’s fall, Americans can spend more of their money on other goods and services. Moreover, the increase in income levels in India allows Indians to purchase more U.S. goods and services, which helps to create jobs in United States.

The argument against free trade or globalization must need to support three points. First, the share of national income labor receives, as opposed to the share the owners of capital (e.g. stockholders and bondholders) receive, should have declined in advanced nations as a result of downward pressure on wage rates. Second, even though labor’s share of the economic pie may have declined, this doesn’t mean lower living standards if the size of the total pie has increased sufficiently to offset the decline in labor’s share. Third, the decline in labor’s share of national income must be due to the moving production to low wage countries, as opposed to improvement in production technology and productivity. So what does the data say? The data suggests that over the last two decades the share of labor in national income has declined and the decline is much more pronounced in Europe and Japan ( about 10% points) than in U.S. and UK (3-4% points). However, the detailed analysis suggests that the share of national income of skilled labor has actually increased; suggesting that the fall in labor’s share has been due to a fall in the share taken by unskilled labor. As per a study of long- term trends in income distribution in the US, it concluded that: Nationwide, from the late 1970s to the late 1990s, the average income of the lowest-income families fell by 6% after adjustment for inflation, and the average real income of the middle fifth of families grew by about 5%.

By contrast, the average real income of the highest-income fifth of families increased by over 30%. Another study suggested that the earnings gap between workers in skilled and unskilled sectors has widened by 25% over the last two decades. In sum, it’s unskilled labor in developed nations that has seen its share of national income decline over the last two decades. However, this doesn’t mean that the living standards of unskilled workers in developed nations like US have declined as well. It’s very well possible and evident that economic growth in developed nations has offset the fall in share of national income of unskilled workers, raising their living standards.

For example, almost a decade or so ago, computer laptops and other electronic gadgets were not easily affordable by mass public, but now (due to production of these items moving to low wage countries and effectively slashing the prices) these electronics items are a very common and a must have gadget in almost every household As per the study by OECD (Organization for Economic Cooperation and Development), whose members include 20 richest economies in the world, stated that in almost all countries, real income levels rose over the 20 –year period the study considered, including the incomes of the poorest segments of the most OECD societies. To add to the mixed research results, a 2002 U.S. study that included data from 1990 to 2000, concluded that during those years, falling unemployment rates brought gains to low-wage workers and fairly broad-based wage growth, especially in the latter half of the 1990s.

The income of worst paid 10% of the population actually rose twice as fast as that of the average worker during 1998-2000. Furthermore, the apparent decline in real wage rates of unskilled workers owes far more to a technology- induced shift within the advanced economies away from jobs where the only qualification was a willingness to turn up for work every day and towards the jobs that require significant education and skills. In many advanced economies, there is a shortage of highly skilled workers and an excess supply of unskilled workers. E.g. for the year 2013, USCIS has an annual quota of 65,000 for H1-B category, which is specifically reserved for highly skilled workers. So in conclusion, increase in free market activities does not seem to have any negative impact on the living standards in US. In the contrary it seems to have risen the living standards not only in US but other countries as well which have embraced the free market. Furthermore the evidence suggests that technological changes have had a bigger impact than free market activity or globalization on the declining share of national income enjoyed by the labor. Sources: Competing in the global marketplace: Charles W. Hill and http://www.uscis.gov