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Can Greater Abundance Explain a General Fall in Real Wages?

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Regular EconLog reader Ryan P. Long proposed to David Henderson the following hypothesis for (what is taken to be) stagnant wages in the United States [2]:

Globalization and outsourcing are putting severe downward pressure on U.S. wages, even for skilled work, and the “worst of this” (from the American wage-earner’s perspective, notwithstanding their benefit as consumers) is yet to come.

As you can read at the link above, David responded – as did several commenters [3] (including Scott Sumner). I, too, added some comments, but at a more general level of discussion. Here’s my first (slightly edited) [4]:

All: I’m going to offer here a more general point, one that does nothing to undercut (or to support) any of the specific points made by David in his post, or by him or anyone else in the comments. My point is this: it is highly implausible that a general increase in access to goods and services – which is what, in effect, Ryan Long described – will lead to overall real-wage stagnation in rich countries.

A larger effective supply of labor on global markets – a larger supply made possible, say, because of falling costs of conducting global commerce – means more work effort to produce for global markets. Why would anyone suppose that an increase in the global supply of the resource “labor” (or “low-skilled labor”) is more likely to lead to a stagnation or a fall in overall living standards in rich countries than is, say, an increase in the global supply of fossil fuels or of some other resource that is widely used in production?

An increase in the global supply of fossil fuels will destroy some jobs in rich countries (or put downward pressure on some people’s real incomes), but why should it lead to overall, widespread stagnation in rich countries? There’s no reason that I can think of; indeed, we expect quite the opposite.

So why reason differently about labor? One response to my question is that an increase in the supply of labor in poor countries will indeed raise average real incomes in rich countries, but that it will do so by increasing the incomes of owners of capital while doing nothing for, or even decreasing, the incomes of labor. Yet this response is inadequate for at least two reasons.

First, an increase in the supply of human labor from poor countries is not unique in destroying the demand for particular forms of labor in rich countries. Increases in the supply of all resources – and, of course, improvements in technology – can have the same effect, yet many fewer economists worry that increases in supplies of non-human resources and improvements in technology are general sources of secular wage stagnation in rich countries.

Second and more fundamentally: if increases in the global supply of labor increase the returns to capital in rich countries, these higher returns should spark increased capital investment in rich countries – increased capital investments that increase the demand for labor in rich countries. The story here is a standard one that economists tell about competition and economic growth. I believe that the logic of this story remains valid.

If, however, this story now fails to explain reality, the reason for the failure of this story to explain reality must be found in some effect beyond ‘increased supply of labor on global markets.’ Something must be obstructing new capital investment. Perhaps the culprit is poor monetary policy. Perhaps the culprit is unwise government regulations or poor tax policy. Perhaps the culprit is Bob-Higgsian regime uncertainty. Perhaps the culprit is animal spirits. Perhaps the culprit is [fill-in-the-blank]. Whatever the culprit might turn out to be, the economist must first look for such a culprit before granting any validity to the popular claim that a larger supply of one particular resource on global markets – labor – is a source of a widespread, secular decline in the real wages (real material living standards) of workers in rich countries.

Responding to the above comment of mine, Roger Sweeny wrote [5]:

Don,

If there is an increase in the supply of fossil fuels, I figure that the price of fossil fuels will go down and people who sell fossil fuels will get less money.

If there is an increase in the supply of labor in various skilled jobs, I figure that the price of that labor will go down and people who sell that labor will get less money.

Mr. Sweeny’s response is a fair and understandable one, but I don’t believe that it works. Here’s my (error-cleansed and slightly edited) reply [6] to Mr. Sweeny’s response:

Roger Sweeny,

Thanks. But over the past couple of centuries there has been an enormous increase in the supply of labor and, simultaneously, an enormous increase in the real wages of labor. The analysis cannot possibly be so simple as to note that an increased supply of labor means lower wages.

Of course, everything turns on what is and what is not appropriately packed into the ceteris paribus conditions. Modern history tells us pretty clearly, I believe, that when the general supply of labor increases, neither the demand for labor nor the kinds of labor that are contracted for remain fixed. Among other changes, new products come to be produced and the division of labor deepens.

But let me make a more general point. Suppose that, rather than rich countries trading more openly with poor, high-labor-supply countries, rich countries instead enjoy a strange meteorological blessing – namely, goods of the sort that would be supplied by trading with poor countries instead rain down from the heavens upon the denizens of rich countries. Would this blessed meteorological event make the denizens of rich countries poorer? It’s difficult to to see how. Such a blessed meteorological event would surely generally further enrich the denizens of rich countries, even if it might lower the incomes of some people.

Yet if this blessed meteorological event makes the denizens of rich countries richer rather than poorer, why would the very same happy consequence not arise if the increased supply of goods comes from a blessed opening of trade with poor countries rather than from a blessed meteorological event?

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