Labor Markets: China and America

I’ve been only half following the hubbub over unionism in America, but it suddenly caught my attention today as a few of the defenders of unionism began attacking my prized belief in the value of outsourcing. Ezra Klein started the ruckus by arguing that unions provide a countervailing power to companies interested in outsourcing. Which Will Wilkinson pointed out is not really a good thing (starting with a quote from Gilles Saint-Paul):

Unions do not provide a countervailing force to the supposed power of big business. Whenever big business gets rents from monopoly power, unions often manage to share some of those rents (this explains why unions are more present in concentrated industries like automobiles, as opposed to, say, retail trade). This benefits the employees of big business, and it has indeed been shown that these employees enjoy higher wages and greater fringe benefits. But by raising labour costs it further adds to the harm done to consumers (and workers in the competitive sector) by the monopoly power of business. In addition to being too high because firms collude, the price is also too high because employees collude. Furthermore, the interests of the union and their employers are convergent whenever they deal with the outside world: both want to increase the revenue that the firm or the industry can extract through lobbying activities. To the extent that union leaders provide additional voices, unionisation adds to the lobbying power of an industry.

… this is why my brow furrowed when Mr Klein said unions “push back” on business models that aren’t environmentally sustainable. I think you’ll find that unionised coal miners are as unenthusiastic as the coal companies they work for about regulations that would restrict the growth of mining operations or reduce demand for coal.

However, Mr Klein is surely correct that unions are antagonists to businesses that seek to enlarge the cake in ways unlikely to be shared by domestic union workers. When unions successfully resist outsourcing, they hurt consumers, foreign workers, and the competitiveness of their firm, which eventually leads to domestic layoffs or reduced domestic job-creation.This is not the sort of countervailing we’re hoping for.

Elsewhere Matt Steinglass looks at the implication for wages (which are also effected by outsourcing):

Like Ms McArdle, Karl Smith approaches the question of fair pay as a labour-market problem, but he goes deeper into what’s implied in the phrase “to attract adequate workers”. As Mr Smith writes, if you pay more, you’ll attract more and higher-quality applicants. If you’re paying too much, that means the over-qualified worker you hire could be generating more value elsewhere in the economy; by implication, if you’re paying too little, the under-qualified worker you hire can’t generate the level of value that should be possible in that position. If Mr Hanushek is right, that would imply we need to raise teachers’ salaries until the profession attracts candidates good enough that they raise student performance to the point where the marginal gains from from further teaching improvement would be equal to the amount you’d need to spend to achieve those gains…

But there’s a final issue that Mr Smith doesn’t address either. Progressives these days start from the standpoint that 90% of Americans have been systematically underpaid, and increasingly so, for the past 30-plus years, because GDP growth and gains from productivity are overwhelmingly being harvested by the top 10% and even the top 1% of the income distribution. When one defines “overpaid” the way Ms McArdle does, it doesn’t make any sense to say that lower- and middle-class Americans are underpaid; whatever they’re being paid, it was sufficient to get them to do the jobs they’re doing. This way of thinking hard-wires in insensitivity to inequality, and excludes any idea of fairness other than what the market will bear. For instance, we routinely accept the idea that blacks and women tended to be grossly underpaid before the 1960s, because social prejudice restricted their access to more highly-paid professions, or simply made it possible to pay them less for the same job. But if you think of pay purely from an employer’s point of view, the idea that blacks and women were underpaid is nonsense. They were happy to take the job at the pay they were offered, it was better than their available alternative of not having a job—what’s the problem?

I’m going to respond by comparing America’s workforce with China’s workforce. They are two very different things, but I think the comparison helps to shine a light on some of the negotiating difficulties faced by American workers, and why union issues are somewhat secondary to the problem, if not contributing to the problem. My conclusion if anything though is closer to that of Karl Smith: that there has been a fundamental mispricing of labor in America but that regulatory reforms, not more or less unions, are necessary to change the situation.

Reporters, when they first come to China, are often quite surprised by the negotiating power of China’s workforce. Urban wages have been growing at over 10% a year for the past decade, while rural migrant wages have recently skyrocketed to growth rates of around 15-20% a year. The reason why this surprises many reporters, is that labor conditions at larger firms are often noticeably worse than on average, with workers exchanging perceived job security and a more reliable (though often worse) working environment, for lower wages. China’s economy though is highly entrepreneurial with a seemingly endless demand for labor, so workers willing to accept instability are able to shop for employers, and are often able to markedly improve their wages and working conditions in a way that larger representation would only constrain them. 

Besides being helped by a large number of small and medium sized enterprises, the Chinese labor market is helped by an extreme level of labor mobility, referred to as some as “the largest migration in human history.” Workers are easily able to meet demands from the highest paying employer wherever that employer happens to be in China, and increasingly in the Chinese diaspora communities in the Middle East, Africa, and Europe. In other words labor is attracted to the companies and locations where its returns are most highly rewarded, and where productivity gains are the strongest. 

A quick glance at the American labor market shows similar forces at work. The two boom industries of the past twenty years either benefitted from a high level of geographic labor mobility (finance) or a high level of corporate labor mobility (technology). Whereas the most hard hit industries were those with a small labor pool which chose from a small number of companies (autos). In those industries labor is being misused, because individuals lack the options to negotiate a proper use of their skills and requisite wages. In many cases the workers in these industries have better skills than the the workers that they are competing with overseas, but are either being downgraded to low-skilled workers because there is a lack of such workers in that geographic area or because of the communication inefficiencies of large firms.

Naturally the American workforce is not going to ever compete with China for geographic mobility, but American cities are much better places than Chinese cities to host ideal labor markets if it weren’t for several regulatory hurdles, the most obvious being ease of immigration. Having a large migrant population coming from areas with lower skills than American workers increases the efficiencies of local production, and provides advantages to the comparatively more skilled American workforce which can then upgrade to more technically proficient jobs, or jobs which require a higher level of english or marketing skills. Outsourcing is a second best solution which unfortunately is much more disruptive to the local labor market. Besides labor mobility, stronger anti-trust enforcement, and increased access to international logistics services would also go a long way towards fostering the sort of small business environment in which labor thrives.

Unions are an effective and often necessary solution to negotiating fair treatment for workers in a captive labor market (which includes the public sector). In situations where the labor market is not held captive though, much of this debate would quickly become irrelevant.