Sunday, April 29, 2007
Workers count the cost of a global labour flood
Posted by David Smith at 10:59 AM
Category: David Smith's other articles

tsunami.jpg

Sometime topics debated here are part of a much bigger picture – that bigger picture is globalisation.

Attending the Institute of Directors’ annual bash at the Albert Hall last week, I was struck by how global the focus was; it included a live broadcast from the Arctic Circle and an address by the European Commission president.

The big issues for business are those that extend beyond these shores – the world economy, protectionism, climate change and energy security – and the focus of globalisation is shifting.

At first globalisation was about trade, and the free movement of goods and services. Then the emphasis was on capital, and the free flow of funds, around the globe. Now, while those things are still very important, the new big thing is the globalisation of labour.

The forces of globalisation thus include the rise in the share of gross domestic product (GDP) taken by profits, at the expense of wages. Boardrooms are doing better than living rooms; investors gain at the expense of wage slaves.

These forces appear to be consigning trade unions to the history books. Department of Trade and Industry figures show union density, the proportion of unionised workers, fell by 0.6 percentage points to 28.4% last year, its biggest drop for eight years. Only 16.6% of private-sector workers are in a union.

The unions would argue they are being deserted when they are most needed. Their members, perhaps, have realised unions are no more capable of holding back globalisation than Canute was in preventing the tide coming in.

The big story that underpins much of what is happening is an enormous increase in the worldwide supply of labour.

I had been comfortable with the calculations of Professor Richard Freeman of Harvard University, who estimated that the opening up of China and India, together with the collapse of the iron curtain in Europe, had in effect resulted in a doubling of global labour supply.

But the International Monetary Fund, in its latest World Economic Outlook, has come up with an even more dramatic number. It suggests global labour has quadrupled in the past quarter-century, because of the factors outlined above and because of demographic factors – rapidly growing populations – in many of the economies that have burst onto the world stage, particularly in east and south Asia.

It was partly this that prompted me to write my new book, The Dragon and the Elephant, about the emergence of China and India. See today’s News Review for a piece on the book, and there will be a chance to win copies here in the coming weeks.

What do we mean by extra labour supply? It means the flood of low-cost workers into Chinese manufacturing jobs at wage rates that undercut the West. It means outsourcing to India at a rate that is gathering pace. Citigroup and Barclays have recently announced plans to shift 20,000 banking jobs between them to India. Barely a week goes by without a new announcement.

The increase in the global labour supply is clearly evident in Britain’s offices, factories, farms and bars – large-scale immigration. We don’t know exactly how many migrants from the new east European members of the EU have come to Britain since May 2004, but it is likely to be around 500,000-600,000, and half to two-thirds have stayed.

Economists debate the extent to which immigration has held down wages in Britain, but to me this is one of those cases where, if it looks like a duck and quacks, it probably is a duck.

Additional labour supply has helped to hold down the price of labour: wages.

A rise in labour supply has not been the only factor holding down wages, as the IMF study points out. Technology, which has permitted large-scale international outsourcing, has also played into the hands of companies, and tended to squeeze pay.

But labour-market reform – increased flexibility – has also benefited workers in Britain.

One big benefit of globalisation, in addition, has been to hold down or reduce prices, so pay packets stretch further.

What should we do? On immigration, the government has moved from something like a free-for-all to a more restrictive policy.

Liam Byrne, the immigration minister, has been lauding the tougher, Australian-style, points-based immigration system to be introduced in Britain next year. In a paper to be published by Policy Exchange today, he talks about moving “from free movement to fair movement” of labour.

The government, which will get it in the neck politically over immigration in this week’s local elections, is responding. The aim is to allow in only those migrants with skills or wealth. We want skilled workers or people with wealth (what would Britain be without its nondomiciled billionaires?) but we don’t much want the unskilled, “your tired, your poor, your huddled masses” as the Statue of Liberty has it.

This probably makes political sense, but I am not sure it makes economic sense.

Allowing in people with skills may seem sensible, but if this deters the UK-born population from acquiring those skills the effect will be damaging. Think of newly qualified medical staff squeezed out of jobs by foreign doctors or nurses. Or, on a trivial level, English Premiership players on the bench because of the influx of foreign footballers. In each case, controlled immigration acts as a disincentive to British people to acquire the skills we are told we need to get on in the world.

On the other hand, immigration by unskilled workers, which we are told we do not need, fills all those gaps in the labour market that local workers can’t or won’t do. Stopping them coming could be damaging.

Globalisation brings benefits, but it also brings strains. The government is trying to move to a policy that retains the benefits but reduces the political costs.

I doubt it will work. Either open up your labour market to foreign workers and take the rough with the smooth, or you close it off completely, within the bounds of our international commitments. I’d favour openness; others would disagree. In a globalised world, you cannot pick and choose which bits you want.

PS: Economists can’t usually agree on anything, but are curiously addicted to round-robin letters. You know the thing: somebody has the idea of penning an open letter and persuades like-minded colleagues to put their names to it. The daddy of them all was in 1981, when 364 economists signed a letter protesting at the Thatcher government’s policies. That did not set a great precedent; things started to go right even as the ink was drying.

A smaller open letter, from nine economists, was published last week.

Led by Tim Congdon, who has fought a tireless campaign to keep the broad money supply (M4) on the agenda, its signatories included Charles Goodhart, a founder member of the monetary policy committee (MPC), and several members of the “shadow” MPC. The nine were concerned that in setting out the reasons for the current inflation overshoot, Mervyn King, the Bank of England governor, did not mention M4.

These are murky waters. The Bank sees M4 as just one of a series of indicators worth monitoring. The MPC does not adopt a simple monetarist approach of the sort that says money growth now equals inflation later. There are good reasons for that. You quickly get into the debate about whether the moment you focus on a money-supply measure it becomes distorted. Goodhart knows about that; his own “Goodhart’s Law” described exactly that situation.

M4 is growing at 12.8%, and is distorted by lending to “other financial corporations”, currently growing by 23.5%, and to other businesses, up by 19.7%. It is not being driven by households. It does not, either, have a great relationship with inflation.

Since early 1993, M4 has risen by 200% and inflation (measured by the retail prices index) by just 45%. GDP in cash terms (money GDP) – growth and inflation – has risen by 105%. So while M4 growth does look heady, it would be a mistake to overreact to it.

From The Sunday Times, April 29 2007


Comments

How, as an economist, can you write "... immigration by unskilled workers ... fills all those gaps in the labour market that local workers can’t or won’t do."? This view contravenes everything that is taught about economics, i.e. supply/demand is balanced through prices. It is not that local workers can't or won't do the jobs, it's that they won't do the job for the pay that is offered. Are you arguing that the labour market is not a market?

In the name of fighting income inequality, the Labour government spends billions of pounds on income support for low skilled workers (doing untold damage to the economy through high levels of bureaucratic waste and taxation), and then turns around and undermines those same incomes by allowing unfettered immigration of low skilled labour. The whole effort to manage inequalty is a complete waste and drain on economic growth. (I suppose it could be worse: France adds in inane regulations around job creation, along with income transfers, in order to have both immigration and income equality).

If you look at the history of the globalization of capital, one of the more salient lessons would be that governments cannot use interest rates to both manage demand in the economy and exchange rates. It would have seemed obvious beforehand, but it took the ERM debacle in 1992 for the the UK to learn this. It would seem equally obvious that you cannot have a sustainable social democracy with reasonable levels of inequality at the same time that you have unlimited immigration of unskilled labour. What is it going to take for the UK to learn this lesson?

Posted by: RichB at April 29, 2007 12:41 PM

Yes the labour market is a market but:
(a) It is now increasingly an international market
(b) It is distorted by the benefits system. One reason indigenous workers don't take on the low-paid jobs is because it does not pay them to do so once loss of benefit is taken into account, as you yourself implied.

In terms of inequality, the main cause has not been immigration, and the present government has tried to look after low-paid workers by introducing and increasing the minimum wage. The problem - if it is as problem - is caused by the fact that skills are in demand, particularly certain skills, and the premium for those skills has increased sharply.

Posted by: David Smith at April 29, 2007 02:52 PM

I agree that the labour market is distorted by the benefits system, but the the fact that the benefits system exists can't just be willed away so that the real world conforms to some economic model of how the market could/should operate.

As for the causes of inequality, the evidence that it all comes down to skills or technological change seems less than conclusive. Technology is rapidly changing now, but technology was also changing rapidly in the 1960's without increases in inequality.

Posted by: RichB at April 29, 2007 05:28 PM

Reading David Smith's latest piece in The Sunday Times I was a little surprised by his apparent 'about-turn' on the importance of M4 money supply data as an indicator of Uk inflation. I (as well as the entire short-sterling market in the UK) avidly follow what Mr Smith has to say on a Sunday and I remeber reading 2 or 3 pieces last year when he warned of the impending rise of M4 above 12%, stating that the MPC would be wise to follow it more closely, or ignore it to their peril. However, this week he plays down the importance of M4 growth - about to rise over 13%. I would be interested to know why he feels its less important now than last year, especially as the latest CPI figures would seem to justify his arguement of last year, rather than refute it??

Posted by: Ranvir Singh at April 29, 2007 09:37 PM

I'm a bit puzzled by your comment. On August 13 last year and February 11 this year I said something similar about M4 to my latest remarks. It is possible that you are confusing me with David B Smith, chairman of the shadow MPC, who has indeed warned often about M4 growth.

Posted by: David Smith at April 29, 2007 11:07 PM

The house price to earnings multiple used to be around 3 or 4. It is now 6. Why are workers less efficient than they used to be?

Posted by: the_austrian at April 30, 2007 05:58 AM

That's an interesting way of looking at it. Housing, of course, is relatively fixed in supply, workers are not. But workers are more efficient if you compare wages with the prices of other things that are flexible in terms of supply - e.g. cars, consumer durables, food (look at those comparisons of how long the average worker used to have to work to pay for a loaf of bread or pint of milk). Productivity - output per worker - rises by about 2% a year.

Posted by: David Smith at April 30, 2007 09:08 AM

My tentative answer would be that houses have an investment value. They are not perishable like food and clothing. Houses and shares have become a proxy money. Housing is all about Location Location Location so I'm not sure more supply would do much good.

Posted by: the_austrian at April 30, 2007 09:36 AM

Hi David,

I agree that the challenges posed by globalisation are numerous and treacherous. Luckily the UK of late has turned into a carefully engineered and very effective plutocracy. UK citizens if homeowners should from now on be labelled as serfs, since this is the NU reality when negative equity returns. You got to admire the cheek of it all.
Make people believe (officially)they can only win, sign them up and suck them dry. And after all what have people really gained? .....SERFDOM
I dont use the fancy statistics, just follow the rules of fundamental economics....ooooh and how soon we alll will and must do the same. Debit credit balance....NOT debit debit balance stupids
Best wishes,
Arik Schickendantz

PS stay liquid

Posted by: Arik Schickendantz at May 1, 2007 09:53 AM