Hype or Help?
Globalization and the Fight over Labor Standards
December 1, 1995
Dec 1, 1995
17 Min read time
Globalization and the Fight over Labor Standards
Workers throughout the world have always fought for better labor standards in their own countries—the right to earn a fair wage, work a reasonable number of hours in safe conditions, form trade unions, and engage in collective bargaining. For 75 years, the International Labour Organization (ILO, a part of the United Nations) has also tried to set international labor standards, and supervise their implementation. And until recently, the politics of these international standards was fairly straightforward: in a nutshell, employers and right-of-center social scientists (especially mainstream economists) tended to be against them; labor and its left-of-center allies tended to be for them.
Now the issue of labor standards has become economically more momentous and politically murkier. The importance of the economic issue has grown in proportion to the exploding income gap between the world’s rich countries in the “North” and poor countries in the “South.” In the nineteenth century the divide in per capita income between England and its emulators was roughly 2:1. Today the comparable distance between the United States and the average developing country is on the order of 25:1. At the same time, technology and foreign investment are flowing more freely than ever from North to South, thereby evening out international differences in output per worker. As a result, employers can now hire high productivity labor in the South, at relatively low wages. And that represents a threat to the living standards of Northern workers.
This threat has mixed up the politics of labor standards. Conservative views about labor standards have remained the same—they propose to let the compensation of labor be fixed by market forces. But a geographical division has developed between the South and “progressive” or “internationalist” labor advocates in the North (mainly the United States). These advocates note the two-decade-long stagnation of real wages in the United States, and argue that important causes of that stagnation are low wages (in relation to productivity) and minimalist labor standards in late-industrializing, Southern countries. To revitalize wages in the North, they propose a more militant posture towards labor standards in late-industrializing countries, and urge that that posture be implemented through trade agreements. Such agreements would make access to Northern markets by companies located in the South contingent on sharp improvements in Southern labor standards.
This view was presented with particular force during the debate on NAFTA (North American Free Trade Agreement). Writing for the Economic Policy Institute (EPI), the most vocal left-leaning think-tank on the standards issue, Richard Rothstein exhorted: “Mexico should increase its minimum wage, child labor, and hours-of-work standards to US levels. This harmonization should take place gradually, over a ten-year period.” Labor standards themselves have come to be interpreted more broadly, to include wage increases commensurate with productivity increases. The debate over international labor standards has thus moved beyond the sleepy domain of the ILO into the realm of politics.
Some critics of labor standards question the practicality of monitoring agreements about them. Inspecting factories in more than 100 Southern countries seems highly problematic, not least because it is so easy to disguise real productivity or wage movements. But the force of this objection is uncertain: with sufficiently strong political will, implementation problems may be surmountable. (In 1994, France and the United States agreed to include international labor standards on the agenda of GATT negotiations.) In any case, I put the enforcement issue aside here, and con- centrate on whether the standards will do much good.
According to their Northern advocates, labor standards will benefit workers in the North and South. Their arguments suggest a basic harmony of interests, and reject the claim that international labor solidarity is compromised by tougher Southern labor standards. Northern workers will benefit, they say, from standards that increase the price of late-industrializing countries’ exports—thus improving the competitiveness of Northern products—and reduce the attractiveness of low-cost, Southern production sites for Northern investors—thus reducing the flow of jobs from North to South. Southern workers will benefit directly from higher wages and better working conditions, and indirectly, as wage increases expand aggregate demand and thereby increase employment. Indeed, the argument runs, if Third World workers do not receive the fruits of their labor, the result will be global stagnation. According to an EPI publication by Walter Russell Mead: “Continued economic growth in a liberal trading order requires increased consumption and higher real wages among the newly productive workers of the developing world.”
Are these arguments for tougher Southern labor standards compelling, or are they—as critics argue—a thin veil for protectionism? Should progressives in the South accept them, or be placed in the awkward position of resisting higher labor standards? To answer these questions, we need to be clear about the the kinds of labor standards in question. In particular, the issue is not health and safety conditions, and the right of Southern workers to be treated like human beings—not to be murdered for organizing unions, for example. These rights are inviolate, and must continue to be fought for through diplomatic channels, such organizations as the ILO, and popular protest. Rather, the standards in question focus on rates of pay—for example, minimum wage regulations, or requirements that wage increases be linked closely to productivity growth.
• • •
Good for the South?
Let’s assume, as seems plausible, that productivity in the South is increasing rapidly—faster than real wages. What, then, would be the likely effect on the South’s manufacturing growth of pegging real wage increases to productivity increases? To answer this question, we need to start by recognizing the diversity of the South, which ranges from China to Honduras. In particular, the answer depends on whether the late-industrializing economy is—to borrow a distinction from economist Lance Taylor—“wage-led” or “profit-led.”
Wage-Led Economies. The Northern argument for tying real wage gains to productivity gains makes most sense in the case of large, wage-led Southern economies—for example, Brazil and India. These are predominantly “closed economies”: that means that they produce largely for a sizable domestic market, and export relatively small quantities of manufactured goods. Suppose, then, that productivity increases, and that, through labor standards included in a trade agreement, real wages are forced to rise proportionately to that increase. Then, aggregate demand will plausibly rise as well, leading to more investment and ultimately higher incomes. But precisely because these countries presently export little to Northern markets (or anywhere else), Northern wages will not be much affected by what happens to these countries’ labor standards.
The case of China is different, though the bottom line is the same. Here, too, the domestic market is huge, but China has begun to export aggressively. Nevertheless, requiring wages to increase in tandem with productivity growth would probably make only a minor dent in China’s economic performance, attractiveness as a locale for foreign investment, or international price-competitiveness. The reason is that, while total factor productivity in China’s state-owned enterprises has been rising at about 2.5-3 percent per annum, real wages have already been increasing by as much, if not more. Despite this wage-productivity link, the “threat” of Chinese exports in American markets has in no way diminished, because wages are so low to begin with by comparison with American levels. Even if wages in China are forced to rise in conjunction with rising productivity, and even if US wages continue to stagnate, it will be decades before Chinese and American wages converge to the point where Chinese competition ceases to be a cost threat to American labor.
Profit-Led Growth. Unlike China, India, and Brazil, most developing countries are small (measured by population or gross domestic product) and, therefore, tend to be “open” to international trade: that is, exports account for a large share of their output (although only a handful of late-industrializing countries have succeeded in exporting significant amounts of manufactures to Northern markets). Under such conditions, real wage growth might increase domestic demand. But wage increases would likely generate price increases, and this would result in a fall in demand from the price-sensitive rest-of-the-world which the growth in domestic demand could not be expected to offset. Put otherwise, the dynamic international competitiveness of these countries is profit-led, so insisting that their gains in productivity be offset by rising real wages could be expected to stunt their growth. Converting productivity gains into corresponding real wage gains in their export sectors would hurt their profitability, which would almost certainly reduce their investment rates and hence longterm growth—unless firms found ways to protect their profit margins and circumvent new labor standards by means of, for example, production “speed-ups” (as noted earlier, I am ignoring such implementation issues).
Moreover, while labor productivity has certainly been rising fast in successful late-industrializing countries, such growth has also tended to be faster in some sectors than in others. Suppose, then, that real wages in small, open economies were tied, through trade agreements, to the fastest-growing productivity sectors, and that impulses from these sectors led to aggregate wage increases in excess of aggregate productivity increases. The result would probably be inflation and corrective exchange rate devaluations, and thus a recurrent cycle of threats to Northern workers from low-cost Southern goods cheapened by repeated exchange rate devaluations.
The Northern argument that higher labor standards lead to higher Southern growth rates appears, then, to be false in small, open Southern economies. There is thus an undeniable intra-class conflict between workers in these economies and those in the North.
Borderline Cases. Mexico is a borderline wage-led/profit-led economy and the biggest current threat to American labor. Large by developing country standards, with a population of 90 million, Mexico is fairly open: exports, mostly to the United States, were 15–20 percent of GDP in the early 1990s. If forced to adopt Rothstein’s recommendation of an American minimum wage within a ten-year time horizon, Mexico’s ensuing crisis would make its current one seem like a picnic. Its oil industry would be substantially unaffected, but its maquiladora industries along the Northern border, dominated by American-owned companies, would be driven under; these industries, however, have kept Mexico’s economy alive. They provide a large share of total exports, which would suffer from artificial wage hikes in two ways: exports would suffer directly as higher costs pushed up export prices and lowered demand; and they would suffer indirectly as lower profits dried up the inflow of American investment capital, a major source of Mexico’s real capital formation.
The US Congress and organized labor were responsible for bringing minimum wages in Puerto Rico up to the US level starting in 1981. Although this equalization was not the only factor behind Puerto Rico’s economic stagnation and rising unemployment—into double digit ozone levels—it surely influenced it. Singapore briefly tried a high-wage policy in the 1980s in an attempt to shift output towards more capital- and technology-intensive industries, but abandoned it after taking a nose-dive in international competitiveness.
Singapore’s former authoritarian Prime Minister Lee Kwan Yew has criticized market economies for their hypocritical conception of human rights—which omits the right of all individuals to an income-earning opportunity. Lee has blatantly opposed political democracy and violated human rights, but he correctly points out that a job is now the most elementary right of most people in the South. Given the structure of most Southern economies, making their access to Northern markets contingent on their creating jobs as decent as those in the North would condemn them to perpetual poverty. A necessary (although far from sufficient) condition for the satisfaction of basic needs in the South is access to the investment capital and markets of the world’s richest countries.
• • •
The North’s Fate
How are Northern labor incomes likely to fare if the South continues to adopt Northern technology and raise its productivity faster than its wages? The mainstream answer relies on free market forces to stimulate growth anywhere in the world, and regards Southern growth as largely beneficial—or at worst irrelevant —for the North.
In an article in the Harvard Business Review (July-August 1994), economist Paul Krugman summarized the mainstream view: “Economic growth in low-wage nations is in principle as likely to raise as to lower per capita income in high-wage countries; the actual effects have been negligible. . . . Contrary to popular opinion, the economic development of the Third World does not threaten the First World.” Krugman, like the advocates of labor standards, finds no conflict between the interests of North and South; the difference is that he thinks that strong labor standards would be disastrous for South, and at best pointless for the North. If productivity in the South increases faster than wages, then the price of goods consumed by Northerners falls: real income in the North increases. If, on the other hand, wages in the South increase in tandem with productivity—as Krugman erroneously assumes—then world income rises: and that, too, might help Northern incomes, if it stimulates demand for Northern products.
But, as Krugman acknowledges, there is a potential hitch in this happy story, which emerges when we disaggregate the North into skilled and unskilled labor. The problem is income inequality: Northern income appears to be redistributing from unskilled to skilled workers as the North specializes in skilled labor-intensive production, while unskilled labor-intensive production relocates to the South. In effect, expanding international trade has vastly increased the supply of unskilled labor that Northern workers must compete with, and this international pressure is—according to a popular argument—dragging down real wages in the United States. This is no small concern: income inequality in the United States is now running at a 60-year high; wages for nonsupervisory workers are 15 percent below their 1973 level, and have experienced their worst 20-year performance since the Civil War. Moreover, there is at least suggestive evidence that international pressures are responsible for wage stagnation: the beginnings of wage stagnation in the early 1970s correspond to an increase in the dependence of the US economy on trade.
But Krugman, like most academic economists, rejects this popular argument. Low-wage competition cannot bear much responsibility for wage-stagnation and increasing inequality because trade between high-wage and low-wage countries is simply too small to explain economic performance in the United States and other advanced industrial economies: “In 1990 advanced industrial nations spent only 1.2 percent of their combined GDPs on imports of manufactured goods from newly industrializing economies.” Although foreign investment in newly industrializing countries has been rising rapidly, Krugman makes a rough calculation that capital export reduced growth of the North’s capital stock by only an infinitesimal 0.2 percent. Krugman therefore concludes—correctly—that Northern demands for tougher labor standards amount to protectionism: efforts to protect relatively high incomes in the North. Unfortunately, however, he leaves the fate of the North simply to free trade.
That’s unfortunate because the threat to Northern workers from the emerging economies—especially those in East Asia such as South Korea and Taiwan—is not as trivial as Krugman indicates. Krugman has made it a point to minimize the importance of these economies because the role of the state in fostering their economic success contradicts established economic theory. On the basis of highly dubious data he has, for example, predicted that they will share the same fate as the Soviet economy (see Foreign Affairs, Autumn 1994). But more reliable firm-level evidence, and much of the national data as well, suggests that these countries are rapidly moving up the ladder of technological complexity, becoming world leaders in “mid-technology” industries such as steel, shipbuilding, commodity semi-conductors, and cars—even as their industrial wages remain well below levels in the United States, Germany, and Japan. These industries employ many skilled workers, and so it is not just unskilled workers in the US who are likely to be hurt by competition from the South. The share of US imports from Asian latecomers, including China, increased from 8.5 percent in 1970 to 16.6 percent in 1991. That’s about 1.7 percent of US GDP—which is getting to be a sizable number, and shows no signs of levelling off.
Moreover, due to the presence of multinational firms, labor standards in one part of the world influence those in other parts regardless of trade and fresh capital flows. When one subsidiary of a multinational firm implements a productivity improvement—which usually involves slashing employment—that improvement tends increasingly to diffuse to all existing subsidiaries.
So the threat to Northern income is greater, and the harmony of interests less clear, than Krugman supposes. What, then, are the implications for international labor standards?
• • •
Globalism, Old and New
It is a commonplace in contemporary debate to attribute the wage stagnation and unemployment problems of Northern workers to “globalism” or, as Charles Tilly has argued, more globalism than ever before. In fact, it is questionable whether by past standards globalism today is greater than it was towards the end of the 19th century. The leading economic power, England, was exporting capital on the order of 10 percent of its GDP annually. Capital outflow today from the United States is nowhere near this magnitude. Trade may not have been growing as fast then as it has grown since the end of World War II, but for the first time manufactured products began to be widely traded, and more countries than ever before were being drawn into the world trade network.
What is different today is not the quantity of globalism but its quality.
1. As just noted, globalism is currently driven by multinational firms, whose internal communication channels often supersede arms-length transfers of goods and capital. No matter how much a country barricades itself from imports, and no matter how much it prevents outward capital flows, it cannot prevent multinationals already existing within its midst from aping the world’s most cost-cutting labor practices.
2. Previously, the periphery was being drawn into the world trade network only as suppliers of raw materials. Now, as just mentioned, parts of the South are rapidly industrializing and selling products overseas produced by highly skilled workers. The position of the old labor aristocracy in the North—the stalwart of unionization—is thus being threatened.
3. Contemporary globalism involves highly segmented Northern labor markets. Whereas the new technology of the late 19th century weakened the position of the highly-skilled worker, the new technology of the late 20th century is strengthening professional employees who are most well-endowed with “human capital,” thereby further dividing rather than unifying the workforce.
4. Finally, from the late 19th century until 1973, globalism was tempered by a tolerance for various institutional measures to adjust domestic supply and demand to international market forces. Today it is accompanied by a virulent form of free market orthodoxy.
Mainstream economists rely entirely on the free market to trigger and sustain rapid economic growth. They understand, correctly, that when global economy is growing rapidly, when both Northern and Southern economies are expanding enough to create new job opportunities and higher incomes, then distributional squabbles over labor standards and the division of the pie between the North and South are trivial. Unfortunately, there is virtually no evidence that growth in both North and South will necessarily materialize due to free market forces.
The world’s fastest growing countries, those in East Asia, have prospered with a form of capitalism that involves far greater degrees of government direction than is postulated in American mainstream economic textbooks. They have flouted free market theory. Now the East Asians are being pressured by the US and international organizations like the World Bank to return to 19th century British laissez-faire capitalism. Instead of trying to learn from the East Asian economies, there is an attempt to make them “more like us”—which is bad news for growth. The rich capitalist countries’ Golden Age of development after World War II (until the first energy shock in 1973), was, it is true, driven by freer trade and a weakening of trade barriers. But it was also guided by activist Keynesian demand management. The economic downswing after 1973 was much steeper because Keynesian policies had been jettisoned. According to economic historian Angus Maddison:
[What] reinforced the sharpness of the slowdown [after 1973] was the basic change in the “establishment view” of economic policy objectives. The new consensus emerged as a response to events, but it also helped mold them. The shock of inflation, the new wave of payments problems, and speculative possibilities brought a profound switch away from Keynesian-type attitudes toward demand management and full employment. Most countries gave overriding priority to combating inflation and safeguarding the balance of payments. Unemployment was allowed to rise to pre-war levels. Even when the oil prices collapsed and the momentum of world inflation was broken in the early 1980’s, the new orthodoxy continued to stress the dangers of expansionary policy in spite of widespread unemployment and strong payment positions.
Against the background of this particular form of globalism, the demand for tighter labor standards in the South as a way to protect workers in the North is not only likely to harm the South but is also likely to be weak tea in the North. While demands by Northern progressives and labor activists for international income redistribution may be politically attractive with the home team, they are no substitute for aggressive policies in favor of economic expansion. Unless the growth of the global economy accelerates—as it did in the late 19th century —the problems posed by low-wage Southern competition to Northern workers promise to be enormous.
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December 01, 1995
17 Min read time