Wage Stagnation and Globalization

William Gladstone wrote in the Wall Street Journal on August 14 that "wage stagnation is everyone's problem." I agree, but I strongly disagree with his analysis of cause and effect. Wage stagnation is a problem for the economy's growth and very much a problem for the people who find their wages stagnating. The challenge is doing something about it. Something that will work.

After looking at many possible causes of wage stagnation, Gladstone quotes a single Federal Reserve Bank of San Francisco publication that attributes 85% of the decline in labor's share to globalization. Since I know that there have been hundreds, if not thousands, of articles written about the many impacts of globalization, it made me wonder why he chose only one single article to support a very extreme claim. I promise I will read that article and get back to you. But today I decided to look at some relevant data and see what it says.

I didn't look at wage data because I know that wages are not the exclusive source of income for most workers. Most of us get benefits at work. Some grocery workers lift a banana now and then, and many of us have retirement and health benefits. When you combine wages and benefits, you get something called earnings. If a worker accepts a better health plan in lieu of a wage increase, one should count that benefit. So earnings is a superior measure of what the employee gains.

I also chose constant dollar earnings because that deflates the earnings figure for changes in the cost of living. The Labor Department deflates earnings with the consumer price index. With constant dollar earnings, we get a pretty good measure of how much the spending power of employees changes over time.

I chose the time period from 2001 to 2018 because Gladstone argued that most of the labor wage problems stemmed from that time period. The data found in the table below come from the US Bureau of Labor Statistics.

BLS loves to collect this kind of data. Among the many economic times series they publish, I found information about constant dollar earnings for a number of occupations and industries. I was hoping by looking at this information I could see if there is a strong case for a large impact of globalization on the earnings of US workers. It is well known and often cited that foreign countries have stolen jobs from America, especially manufacturing jobs.

The table presents data for various US occupations and industries. The numbers for June of 2001 and June of 2018 are called index numbers and represent the levels of constant dollar earnings in those years. The last column presents the cumulative change over those 17 years. At the top is the average for all civilian workers. The table shows that the buying power of wages plus benefits rose by 10.2% over those 17 years. The typical employee in 2018 could buy about 10% more than he could in 2001.

The next part of the table gives similar data for various occupations. The strongest real earnings growth was the 14% increase for the occupation called Office and Administration. The lowest increase was earned by the category called Management, Business, Finance. Other weak growth occupations included Production and Management Professional. While this occupation information has no direct bearing on which industries were impacted the most, it does show that a broad spectrum of employees had less than average earnings growth. Production workers were among that group with less than average buying power increases. But so were many office workers.

The bottom of the table shows changes by industry. Workers at Hospitals and those in Administrative industries did the best while those that produced Goods and Manufacturing did the worst. Aha, you say. See, globalization hurt production workers! But by how much? The average worker saw her buying power increase by 10.2%. Goods producing workers earnings expanded by 9.2%. That is a cumulative difference over 17 years. That means that the buying power of the average worker beat that of the goods producer by 0.06% per year. If the average worker had an increase of $100 in a given year, then the production worker had an increase of $99.40.

Workers in Public Administration firms saw their buying power rise by 16.8% over those 17 years. That is 7.6% more than workers at Production firms. That sounds like a lot but when you look at the average yearly amount the major difference disappears. The gap suggests an improvement of 0.45% per year. If a worker at a Public Administration firm had an increase of $100, then the worker at a Production company would have gained purchasing power of about $99.54.

I redid these calculations several times, and they are correct. The reason why we might disbelieve them is that an increase in the buying power of wages of around 10% over one year is great -- but over 17 years it is tiny. Thus the differences among industries and occupations are even tinier. Maybe globalization did impact production workers -- but the Labor Department tables suggest that average employees of none of these occupations and industries got rich.

I'm not sure globalization had much to do with all that but it is worth pondering the real causes. The US is a very large economy and trade is a relatively minor part. If employee earnings have grown too slowly, we might want to look a little harder at what is causing that. Check out this blog next week. I will offer one explanation then.

Constant Dollar Employment Cost Index As of June in each year

	2001	2018	%     Change
All Civilian Workers	94.5	104.1	10.2
Occupation
Management, Professional	94.6	103.8	9.7
Management, Business, Finance	96.1	104.7	8.9
Sales and Office	94.2	104.3	10.7
Office, Administration	93.6	106.7	14.0
Natl Resource, Constrn, Maint.	93.8	104.4	11.3
Construc, Extraction, Farming, etc	94	104.3	11.0
Installation, Maintenance, Repair	93.6	104.5	11.6
Production	94.1	102.6	9.0
Transportation	95.5	106.6	11.6
Services	95.2	105.4	10.7
Industry
Goods	93.6	102.2	9.2
Manufacturing	93.3	102.1	9.4
Services	94.7	104.5	10.3
Education	93.5	103.9	11.1
Healthcare and Social Assistance	93.5	103.6	10.8
Hospitals	90.9	104	14.4
Public Administration	91.4	106.8	16.8
https://www.bls.gov/web/eci/ecconstnaics.txt

Catching Up to the USA 1990 to 2017

Happy December!

I had so much fun last week with data I decided to do even more this week. This time I have some tables to discuss and they need a little explaining. But first, a little background. The idea today is to shed some light on how much the world has changed in the last 28 years. My data starts in 1990 and looks at changes through 2017. The data come from the International Monetary Fund; it's their measure of real GDP per capita. RGDP per capita is one way to measure changes in the economic welfare of the average person.

This sort of cross-country comparison is not easy. I chose per capita real GDP because it seems closest to the buying power of people in these countries. Country comparisons usually require conversions of non-US currencies to the dollar so all the GDP figures below have been translated to dollars. It is traditional for longer-run comparisons to use an exchange rate called the purchasing power parity value of the exchange rate to the dollar. The IMF used the 2011 PPP value of the dollar for these comparisons. Yes, using PPP is highly debatable but I am sticking with it!

Much has happened in the world since 1990. The Soviet Union imploded, and the Berlin Wall came down. Globalization re-started. Many free trade agreements were consummated. The year 1990 was a time when the USA had a considerable lead on most countries in terms of economic size and competitiveness. Home Alone was the most popular film in 1990, and Windows 3 was released by Microsoft.

Table 1 lists 36 countries I selected to compare with the US. In 1990, real GDP per capita in the USA was nearly $37k. Right behind the USA in 1990 were Germany, Italy, Canada, France, and Japan. Saudi Arabia was ahead of all these countries with a value of $46k. Among those at the bottom in 1990 were two countries freed from the Soviet Union (Lithuania and Latvia) and three Asian countries (China, India, and Vietnam).

Table 2 measures the growth of real GDP per capita of these same countries between 1990 and 2017.  During that time period US per capital GDP increased to almost $54k and grew about 2.5 times. Twenty-two of these countries grew faster than the USA. But three stick out in the list for growing more than the rest, with China growing 10 times between 1990 and 2017. You might say that since the per capita real GDPs of those countries were small in 1990, they had the chance to grow faster and that would be true. But notice that not all of those countries with lower incomes in 1990 grew so fast. Obviously the speed demons had something special going on that helped assist the growth. Latvia and Estonia took advantage of the dissolution of the Soviet Union. Several Asian countries -- especially China, Vietnam, and India -- showed remarkable ability to change and grow.

Table 3 focuses on how fast this group of 24 is closing in on the per capita RGDP of the US. I did a double-take and then some research just to check the top line of Table 3 that shows Ireland's per capita real GDP was $66K in 2017. Ireland's value went from 60% of the US in 1990 to 120% in 2017. Now that is catching up! Where's the Irish whiskey? I am ready to drink to that. No offense intended to JD.

The order of countries in Table 3 is in terms of how much each country caught up to the US. Taiwan is second in the table because it went from 40% to 80% of US per capita RGDP. Countries that closed the gap on the US the most were Ireland, Taiwan, S. Korea, Lithuania, China, Latvia, Poland, Turkey, Vietnam, India and Israel.

Mexico is one of the countries that did not close the gap with the US. Mexico's per capita RGDP was about 30% of the US in 1990 and it remained at 30% in 2017. Canada's values were larger than Mexico's but Canada did not gain on the US either, remaining at about 80% of the US in 2017.

Some countries slid downward. For example, the bottom of the chart is taken by Saudi Arabia whose per capita RGDP was 120% of US in 1990 and fell to 90% in 2017. Other sliders were Italy, Venezuela, Greece, Japan Russia, France, S Africa, Brazil, Haiti, and Germany. Recall, the US grew by 2.5 times in those 28 years. These last countries grew slower than that.

There are many factors that contribute to a country's growth in real purchasing power. Today's blog post does not explain why some countries grew faster than others. But it does show quite a disparity in performance over a 28-year time period. We are not all the same in relative terms as we were when we watched Home Alone in 1990. These differences will reflect the bargaining positions and powers as trade and other relationships are fashioned in the years ahead. Understanding changes in economic power might be useful as we negotiate in the future.

Real GDP Per Capita (Purchasing Power Parity)

Source: IMF: World Economic Outlook Database October 2017

Table 1

Country	1990	2017
Argentina	11,225	18,844
Brazil	10,562	14,127
Canada	31,411	43,875
China	1,515	15,151
Colombia	7,523	13,174
Egypt	6,848	11,842
Estonia (1995)	11,003	28,684
Ethiopia	644	1,926
France	30,421	39,691
Germany	32,067	45,757
Greece	21,442	25,314
Grenada	7,210	13,470
Haiti	2,027	1,650
Hungary	17,015	26,348
India	1,802	6,538
Iran	11,571	18,255
Ireland	21,208	66,196
Israel	20,065	33,037
Italy	30,969	34,606
Japan	30,362	38,878
Korea	11,633	35,897
Latvia (1995)	8,298	24,873
Lithuania (1995)	9,307	29,105
Mexico	12,411	17,753
Poland	10,163	26,658
Puerto Rico	22,286	34,537
Russia	20,801	25,427
Saudi Arabia	45,643	50,365
South Africa	9,899	12,215
Spain	23,662	34,788
Taiwan	15,546	45,412
Turkey	10,834	24,109
UK	27,077	39,755
US	36,999	54,223
Venezuela	14,786	11,290
Vietnam	1,473	6,267
Table 2
Country	1990	2017	Change
China	1,515	15,151	10.0
Vietnam	1,473	6,267	4.3
India	1,802	6,538	3.6
Lithuania (1995)	9,307	29,105	3.1
Ireland	21,208	66,196	3.1
Korea	11,633	35,897	3.1
Latvia (1995)	8,298	24,873	3.0
Ethiopia	644	1,926	3.0
Taiwan	15,546	45,412	2.9
Poland	10,163	26,658	2.6
Estonia (1995)	11,003	28,684	2.6
Turkey	10,834	24,109	2.2
Grenada	7,210	13,470	1.9
Colombia	7,523	13,174	1.8
Egypt	6,848	11,842	1.7
Argentina	11,225	18,844	1.7
Israel	20,065	33,037	1.6
Iran	11,571	18,255	1.6
Puerto Rico	22,286	34,537	1.5
Hungary	17,015	26,348	1.5
Spain	23,662	34,788	1.5
UK	27,077	39,755	1.5
US	36,999	54,223	1.5
Mexico	12,411	17,753	1.4
Germany	32,067	45,757	1.4
Canada	31,411	43,875	1.4
Brazil	10,562	14,127	1.3
France	30,421	39,691	1.3
Japan	30,362	38,878	1.3
South Africa	9,899	12,215	1.2
Russia	20,801	25,427	1.2
Greece	21,442	25,314	1.2
Italy	30,969	34,606	1.1
Saudi Arabia	45,643	50,365	1.1
Haiti	2,027	1,650	0.8
Venezuela	14,786	11,290	0.8
Table 3
Country	1990	2017	Rel to US	Rel to US	Chg Rel
Ireland	21,208	66,196	0.6	1.2	0.65
Taiwan	15,546	45,412	0.4	0.8	0.42
Korea	11,633	35,897	0.3	0.7	0.35
Lithuania (1995)	9,307	29,105	0.3	0.5	0.29
China	1,515	15,151	0.0	0.3	0.24
Latvia (1995)	8,298	24,873	0.2	0.5	0.23
Estonia (1995)	11,003	28,684	0.3	0.5	0.23
Poland	10,163	26,658	0.3	0.5	0.22
Turkey	10,834	24,109	0.3	0.4	0.15
Vietnam	1,473	6,267	0.0	0.1	0.08
India	1,802	6,538	0.0	0.1	0.07
Israel	20,065	33,037	0.5	0.6	0.07
Grenada	7,210	13,470	0.2	0.2	0.05
Argentina	11,225	18,844	0.3	0.3	0.04
Colombia	7,523	13,174	0.2	0.2	0.04
Puerto Rico	22,286	34,537	0.6	0.6	0.03
Egypt	6,848	11,842	0.2	0.2	0.03
Hungary	17,015	26,348	0.5	0.5	0.03
Iran	11,571	18,255	0.3	0.3	0.02
Ethiopia	644	1,926	0.0	0.0	0.02
Spain	23,662	34,788	0.6	0.6	0.00
UK	27,077	39,755	0.7	0.7	0.00
US	36,999	54,223	1.0	1.0	0.00
Mexico	12,411	17,753	0.3	0.3	-0.01
Germany	32,067	45,757	0.9	0.8	-0.02
Haiti	2,027	1,650	0.1	0.0	-0.02
Brazil	10,562	14,127	0.3	0.3	-0.02
Canada	31,411	43,875	0.8	0.8	-0.04
South Africa	9,899	12,215	0.3	0.2	-0.04
France	30,421	39,691	0.8	0.7	-0.09
Russia	20,801	25,427	0.6	0.5	-0.09
Japan	30,362	38,878	0.8	0.7	-0.10
Greece	21,442	25,314	0.6	0.5	-0.11
Venezuela	14,786	11,290	0.4	0.2	-0.19
Italy	30,969	34,606	0.8	0.6	-0.20
Saudi Arabia	45,643	50,365	1.2	0.9	-0.30

Globalization and the Trumpaline

A trampoline is a thing you jump on. If you get really good at it you can do flips and all sorts of amazing gymnastic maneuvers. Right now everyone is jumping on Donald Trump so I thought I would jump on him too. Let’s call this a Larry Cannonball on the Trumpaline.

I will leave all the exciting stuff to other people and focus on the one thing that I think I know a little about – industrialization and globalization. Okay smarty pants – those are two things but in some ways they amount to the same thing because they are known to chew up jobs. Industrialization is a force that has been going on for centuries but it got a very hot reputation when it resulted in tractors replacing horses and plows. 

Ever since then we acknowledge that new technologies and innovations destroy jobs. Of course, we have also learned that while each significant industrialization phase creates its own destabilizing impacts the net result takes time and usually leads to not only more national employment but also higher wages and incomes.

Lauren’s great grandpa used to be the guy who blew out the candles in all the street lamps in Bloomington. Electricity knocked him out of work but that whole electricity thing also led to cool inventions like vacuum cleaners and blenders and pretty soon all sorts of people had great jobs as electrical engineers and bar tenders. If you take a big swig of JD, close your eyes, and think about your life you can easily think of all the labor-displacing inventions that caused similar disruptions but eventually came to be ho hum. I make light but these are no small things. When the textile industry abandoned the NE part of the US – it wasn’t very funny to those displaced by the invention of air conditioners that made work in the South more tolerable. Now we all say "yawl" and I "guarandamnteeit".

Most of us don’t fight industrialization very hard. We know it works. We like the fact that all those street lamps can be turned off with the push of one button and we like the fact that we can afford vacuum cleaners and bartenders. One of the reasons we have social programs is to try to make the transitions a little gentler. Helping those persons who become unemployed or otherwise disadvantaged by change is both good for the head and the heart. So we usually embrace change. Some of us love change but that is not necessary so long as society allows these transitions. The truth is in the pudding since not many of us are demanding a return to the horse and plow.

That brings us to globalization. Globalization is pretty much the same thing as industrialization except it allows us one more angle – the good guys (us) versus the bad guys (foreigners). Globalization is the same as industrialization because it does the same things – it creates havoc for some people while opening up avenues for growth and change for the rest of us. If a company closed operations in Indianapolis and reopened in Guadalajara Mexico you could hear the labor union and Donald Trump screaming all the way to the South Pole. How dare those blankety blanks leave Indianapolis to go to Mexico? They must be national traitors and they should be hung in the public square or in the Hoosier Dome.  Trump has made it very clear that he will make America great again by pulling all those companies back to Indianapolis and Detroit. Hillary Clinton is saying similar things. 

It sounds great. Let’s save American jobs. How can one argue with that? For one thing, it amounts to asking us to return to horses and wooden plows. Industrial transitions do not just occur in America. Now that dozens of countries are freer to compete in global markets the marketplace for change is everywhere. New ideas and innovations that improve our lives are developed and sold everywhere. To think that all that stuff would always be made in America does not make any sense. China will be the best place to make some items but even China is outsourcing output to Vietnam. Mexico will be a place of manufacturing for other things and they will outsource some of their supply chain to Chile. To think that Donald Trump or anyone else can or should fight globalization is silly.

For another thing fighting globalization means voting against change and the transitions that actually make American workers worth what they want to earn – close to $50,000 per year. We talk about greedy US companies who want to go to Mexico to take advantage of lower labor costs in Mexico. Now they are greedy. Yesterday and for how many years were those same companies employing American workers? Unions might complain about this or that but the truth is that many people raised families for decades because of the jobs offered by these companies. Were they greedy then? I don’t know whether they are more or less greedy today. What they are doing is fighting to succeed and in some cases to survive.  Competition across the globe is intense. To not change is to die.

So long as the average income of educated and/or trained workers in many emerging markets is less than $10,000 per year it is pure folly to think that US workers hired at $50,000 will offer the best place to do business.  To save the company and American jobs, a US multinational will move some operations out of the US. Of course to save the remaining jobs they will continually have to improve productivity of the domestic workforce or even the higher skilled jobs will be threatened. Think of wave after wave of enemy combatants coming after your defensive position. Building a bigger wall might work for a while. But what you really need is an advantage.

Trump vilifies other countries for trying to come into the global economy and for daring to compete with the USA. The only real solution to this challenge is not to regulate US companies but to unleash them. Making America great means American companies winning in the global marketplace. It means change and growth. Don’t tell me that centuries of US growth are over. Tell me we have a plan to empower US companies so they can do what is necessary to continue producing good jobs and incomes in America.  The world is not always a fair place. Making it even less fair isn’t the solution. We have so many advantages over emerging market competitors they are impossible to list. We should use them and quit bellyaching!

Inversions and Globalization

I learned how to invert a matrix in college and I have never been the same. Which is one reason that all this political talk about inversions brings back some pretty sweaty moments at Georgia Tech. Some people think corporate inversions show that some American companies are not good citizens. Others use this occasion as a means to discuss corporate taxes and to point out how and why US taxes are too high. Still others shrug their shoulders and admit that inversions are part of a larger process going on and will be with us with or without taxes or flag waving.

What a nice way to start. I now have everyone mad at me!  But the truth is that a larger process called globalization is going on. Globalization has been going on a long time but clearly it took a leap forward after the Cold War melted.  Distance matters when it comes to trading things. If you live here, you trade more with Bloomington's Big Red Liquors than with a similar store in Seattle. But it is also true that when you take a little trip to Indianapolis to visit Aunt Hillary, you might go to Costco – since you don’t have one yet in Bloomington. Why don’t Bloomingtonians drive to Indianapolis every day for their JD if Costco is so good? Answer: the cost of distance. Whether you value your time or gas or wear and tear on your car or the chance of getting into a wreck in Martinsville, the cost of distance makes you buy most things close to home.

What happens if the cost of distance dramatically decreases?? Answer: you widen the size of your market.  The end of the cold war reduced the cost of distance. After the cold war it was safer to travel to more places. As formerly non-capitalist countries entered into global competition and offered lower priced goods it was as if someone had “shortened the road” there. Innovations and technological progress in shipping, communications, and travel also lowered the costs of doing business across continents and countries. Of course reductions in regulations, taxes, and corruption added a recognition of the improved ease and cost of transactions at distance.

Globalization is a word that describes how International trades have mushroomed since around 1990. It isn’t just greedy business people who trade more. Lower distance costs have promoted more tourism. Imagine in 1985 the Chinese being the largest groups of worldwide travelers. Churches cooperate more. International organizations meet and work together more. Governments find it easier to use Skype or Korean Air – to facilitate more frequent meetings.

That’s the backdrop. Globalization has slowed but it continues today.  In macroeconomics we often measure globalization through what are called the Balance of Payments Accounts (BOPA). These accounts measure legal cross-border transactions of an economic nature. If you are awake you noticed the word legal – so we are already admitting these measures are not perfect. But based on a lot of different information sources, nations routinely measure trade in goods, services, dividends, interest, charitable giving, bonds, stocks, bank accounts, real estate, corporate ownership positions, derivatives, and more. This information comes out quarterly. And yes, it often gets revised over time.

Pertinent to the question of inversions is the part of the BOPA called the Financial and Capital Accounts (FCA). FCA measure changes in international transactions that relate to cross-border trades in financial instruments and capital, including acquiring and merging with foreign companies. These trades are summarized in the International Investment Position (IIP). It is the IIP that is relevant to put today’s concern about inversions into perspective. You can find the kind of information I quote below at the Bureau of Economic Analysis (  http://www.bea.gov/international/index.htm#iip ).

Let’s start with one fact. At the end of the first quarter of 2014 foreigners owned US assets worth $29.1 trillion. That’s a lot of Taco Bells. Of course it wasn’t all Taco Bells. Foreigners owned approximately $16 trillion of US bonds and stocks. Add to that $5.7 trillion for enough ownership in US companies to give foreign owners some managerial control. While we are worried about money flowing out of the US please note that between 2012 and 2013, foreigners increased their ownership of US assets by about $2 trillion.

And we reciprocated the interest. By Q1 2014 we owned $23.6 trillion assets abroad, up from $22.5 trillion the year before. You own me. I own you. That’s part of globalization. Furthermore – in the last year you owned even more of us and we owned even more of you.

Some of you accountants are saying, hold on a minute. Who owns more of whom? We calculate the Net IIP by subtracting what foreigners own of us from what we own of them. The result in Q1 2014 was -$5.5 trillion. Foreigners owned $5.5 trillion more of us than we owned of them. Some people interpret this as a bad thing. Note the negative sign. Negative signs are usually interpreted negatively. J  But it sounds pretty cool to me. Foreigners like our US assets. Would you rather be in Argentina where people wouldn’t buy your assets with a ten foot pole?

Anyway, this -$5.5 trillion suggests an imbalance in which we have future financial obligations or debts to pay internationally. That could be viewed negatively but won’t be a problem so long as people believe we can pay those foreign debts. But there is more to it. All this buying of our assets leads to needs for dollars which leads to a robust demand for dollars that makes the value of the dollar higher than it might be otherwise. So this Net IIP isn’t all good. If American companies invested more abroad, it would reduce this imbalance – making us less of an international debtor and perhaps improving our competitiveness.

I know this is getting complicated. And it is. Politicians who call our companies traitors for inversions are doing what politicians always do – making up simple stories to please some of the voters. Don’t be fooled. Companies will continue to react to the cost of distance. Taxes may impact the cost of distance but taxes are only one of many factors. Let companies do what they think is right for their stakeholders and in the end they will do what is right for America. Let's not call them nasty names until they actually break laws.