What happens to wages worldwide when we reach the bottom of the "race to the bottom"?

Question

In economics there is this concept that Capital (in the form of multi-national corporations mostly) will continually seek the lowest cost labor to increase the return on their capital. Some call it the "race to the bottom." Capital moved from the Northern US to the Southern US, from the Southern US to Mexico, Mexico to China....you get the idea. It may be in 50 or 100 years, but what happens to wages when there is no place cheeper for Capital to go? It seems to me that without the threat of "take these lower wages or we will move to _____," corportations will start to pay higher wages globally. What do you think? Of course my next quesiton is: can we raise the bottom by increasing funding for development?

Let me ask a broader question: Does increasing the rate of sustainable development in third world countries have an impact on wages in the US and other first world countries? And if it does, what might it be?

Answer 1

You are exaggerating. A lot. You are right when you say that capital moves where it expects the greatest return on investment, but you are forgetting that this is a RISK-ADJUSTED return we are talking about. And there is more to returns (and way more to risks) than just cost of labor. Even in the notoriously footloose textiles, wages rarely account for more that 20% of production costs...

You say, "capital moved from the Northern US to the Southern US, from the Southern US to Mexico, Mexico to China". The reality is the exact opposite. Capital is moving INTO the U.S., even from China. Just take a look at the U.S.' international investment position:

http://www.bea.gov/bea/di/home/iip.htm

Between 1989 and 2005, the cumulative net capital inflow into the U.S. amounted to more than two trillion dollars.

The real reason for the race to the bottom has nothing to do with international trade. The real culprits are technology and demographics. People on the street think that manufacturing jobs move from U.S. to China, while in reality China is losing manufacturing jobs faster than the U.S. (between 1995 and 2002, manufacturing employment in the U.S. declined by 11%, in China, by 15%). The world as a whole is losing manufacturing jobs. Manufacturing gets progressively easier over time, as workers are replaced by machines. Elderly care, in contrast, doesn't. Moreover, with population aging, there are more elderly people around to care for. The world is slowly turning into a nursing-home economy...

Answer 2

Excellent answer from NC. Talk of a "race to the bottom" is pure B-S, used by politicians and labor unions for purposes of demagoguery and repeated by ignorant journalists. Free economies are dynamic: they change over time as people and businesses freely seek out more productive ways of doing things. Sometimes this means certain jobs are exported to countries with cheaper labor. Sometimes the jobs are just lost to automation and better processes (someone once called this "exporting jobs to the land of productivity").

But when old jobs disappear, invariably whole new jobs and industries are created. Yes some production jobs are lost to China and some call center jobs are lost to India. But meanwhile I could probably list 50 job descriptions today and a dozen industries that didn't even exist 25 years ago.

Experience consistently shows that in the long run, so long as a country's economic productivity increases (which is the whole point of these these labor shifts), real compensation for people will increase.

Some individuals will lose out and have to settle for lower paying jobs. But the overall trend in the economy is that there are new types of jobs created that pay better than the old types of jobs.

In the big picture, productivity results in the economy moving labor from doing less productive things to doing more productive things. This results in more goods and services being available to the population. So, whereas once 98% of American workers were employed in hard labor growing just enough food to survive on and not much else, today an American only needs 1 or 2 days work to buy enough food to survive, and can spend the rest of his money buying Lattes and Plasma TVs and big hulking SUVs and imaginary land in his virtual-world video game. We're hardly experiencing a race to the bottom.

Answer 3

The bottom will be hit when there is nobody left with sufficient buying power to provide a market for the capitalists to exploit.

Increasing funding for development will hasten the day that service based economies fall as they are no longer needed.