US Workers are Overpaid

Yes I had to read that twice too. The statement is made in an article appearing in the Telegraph newspaper penned by Martin Hutchinson and Edward Hadas, two highly experienced authors, analysts and practitioners. While acknowledging that by virtue of their better education and infrastructure, abundant capital and a more developed work ethic, American workers should earn more than those in China, Moldova or Vietnam the authors go on to say that the rapid rise in US unemployment during this recession 7.3m compared to just 2m in the second largest post war recession in 1980-82 suggests that many workers are paid more than they are worth. Numbers show that manufacturing workers in the US should take average real wage cuts of as much as 20% to get into global balance they say.

The article asks how much higher can wages justifiably be in America relative to the rest of the world and yet still support something close to full employment accepting no country ever achieves full employment. Quoting from the article, “The answer depends in large part on two measures: the difference in productivity in making goods that can be traded across borders, and the quantity of such tradable goods. Both measures point to a narrowing wage gap. There are so many factors working to push up productivity in poor countries. Fast development, cheap capital and more efficient shipping all help make foreign factories more competitive. Cheap global communication reduces all sorts of costs and makes it easy to trade more goods and services. Globalization in short. The global wage gap has been narrowing, but recent US labor market statistics suggest the adjustment has not gone far enough.

In fact the unemployment metric could point to an even greater adjustment being required according to an article this week in Bloomberg. David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto is reported as having said the U.S. unemployment rate may rise to a post-World War II high of 13% in the aftermath of the recession. Almost double the current figure Hutchinson and Hadas based their 20% wage drop on.

Globalization has long been blamed for destroying jobs in the developed world but while growth was strong, workers could usually be re-employed as new sectors arose. No doubt that will happen after this recession too but the current severity of the unemployment levels this time around does make one pause for thought as to what the consequences of a leveling of wages would bring not just to developed economies but to developing as well.

–Stuart Burns

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