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Income Lag? Blame China

Interesting article in The Economist about China and its growing economic (and therefore political) influence. I was particularly struck by these comments on the global wage arbitrage:

In America, Europe and Japan, the pace of growth in real wages has been unusually weak in recent years. Indeed, measured by the growth in income from employment, this is America's weakest recovery for decades. According to Stephen Roach, an economist at Morgan Stanley, American private-sector workers' total compensation (wages plus benefits) has risen by only 11% in real terms since November 2001, the trough of the recession, compared with an average gain of 17% over the equivalent period of the five previous recoveries (see chart 3). In most developed countries, average real wages have lagged well behind productivity gains.

The entry of China's vast army of cheap workers into the international system of production and trade has reduced the bargaining power of workers in developed economies. Although the absolute number of jobs outsourced from developed countries to China remains small, the threat that firms could produce offshore helps to keep a lid on wages. In most developed countries, wages as a proportion of total national income are currently close to their lowest level for decades.

The flip side is that profits are grabbing a bigger slice of the cake (see chart 4). Last year, America's after-tax profits rose to their highest as a proportion of GDP for 75 years; the shares of profit in the euro area and Japan are also close to their highest for at least 25 years. This is exactly what economic theory would predict. China's emergence into the world economy has made labour relatively abundant and capital relatively scarce, and so the relative return to capital has risen. It is ironic that western capitalists can thank the world's biggest communist country for their good fortune.
 

Hat tip: New Economist

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 Source:
China and the world economy: From T-shirts to T-bonds
The Economist, July 28th 2005
http://www.economist.com/displaystory.cfm?story_id=4221685

Saturday, July 30, 2005 | 12:30 PM | Permalink | Comments (2) | TrackBack (0)
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Comments

India is almost as important as China in this equation. China is sopping up manufacturing jobs and India is sopping up jobs in services, so the US is vulnerable in both sectors. And, yes, the US consumer is plunging deeper into debt to maintain a lifestyle despite these trends.

Investors need to realize that some US companies are going to be decimated when US consumers hit their debt ceiling. Some US companies with substantial operations overseas may still prosper, but the bulk of investment opportunities lie overseas. You all need to think of yourselves as global investors and not be stuck on the local markets as most of you are.

Posted by: touche | Jul 30, 2005 7:54:42 PM