Rethinking Comparable Worth

“Comparable Worth” was a faddish idea for economic leftists that flowered (thankfully it was brief) in the 1990s.  The idea was that you could measure occupations on a technical basis, measuring education, effort, responsibility, and other aspects of the job, and figure out what occupations should be compensated similarly.

That’s a pretty difficult problem to solve in the absence of markets.  Granted, there are some Human Resources (what a phrase) consulting firms that have models in narrow contexts to try to solve salary questions inside similar corporations, but the consultants true up their models to the markets regularly, and are covering a more narrow range of jobs.

I want to muse about a different kind of comparable worth this evening, one that many Americans (and others in “developed nations”) might not like.  It is my guess that we are seeing the slow erosion of wage differentials across developing and developed countries, particularly for goods and services that are part of global trade.

Now, I am not saying that an unskilled auto worker in China will earn as much as a non-union auto worker in the US, which is backed by more capital investment, and requires a smarter worker.  I am also not saying that unionized workers in developed countries won’t earn more.  The viability of the firms their unions serve may be compromised, though.  What I am saying is that global corporations can choose where they produce goods, and on a productivity- and quality-adjusted basis they will use laborers that give them the best deal.

As for jobs that are internal to an economy, such as working at a retail store, the adjustment will be slower.  Internal job wage differentials across countries depend on the overall wage differentials across countries.  As overall wage differentials narrow, so would internal job wage differentials.

Also, given how many commodities are priced globally, and those have become a more important part of the cost structure recently (though the effect is not that bad if one takes a long-term view… increased productivity means we use less commodities to achieve the same ends as 40 years ago), the factor share going to labor in developed countries is probably being squeezed a little.  So, what does this imply for workers in the US and the developed world?

As the rest of the world develops, their living standards will slowly converge with those in the US.  They will demand a greater share of the world’s resources in the process, making the affluent life more expensive.  This will in turn drive more technological innovation to make commodities stretch further.

Now, perhaps some will say that the solution is to cut off or limit free trade.  That won’t work.  The US is so dependent on free-ish trade that any significant reduction of trade would drive inflation up in the US.  Beyond that, the US benefits from its reserve currency status.  Where else does a country get goods and services, and hand over bonds denominated in their own currency?  What a sweet deal for the present — an inflationary pity when it ends.

I started out my career with a goal of being a development economist, and doing work in the Third World.  That ended when I learned that the models used by the development economists did not work, and that capitalism and free trade did work.  When the developing world began to make great strides after the end of the Cold War, I was happy.  I’m still happy about it today; poverty is slowly but steadily being eliminated across a wide swath of the globe, and that is a good thing for most.  But to many Americans (and others in develop nations) who are finding themselves out-competed by foreign competition, this is not a happy time.

Be aware of the global competitive position of your industry, and adjust your career accordingly.  Build up your own ability to deliver special (hard to duplicate) value for your employer and work where your personal competitive advantage is maximized.  That’s not easy, but the easy path probably embeds a future that is less well off.