Cheap Labour Taking Over?

[daniel]

Hi

I was reading an article which argued that in the Uk cheap labour is taking over. It casts doubt on the idea that the UK is doing well in the emplyment stakes since Germany has a higher unemployment rate but is the highest exporting nation in the world. Consequenlty it argues that the government should do more to bring back manufacturing jobs. It ends with the argument that the government can't put all the blame on China give that Germany is the top exporter?

Wht are your views on these views? What is wrong with the above argument?

[DavidV]

There are four questions here: is more skilled labor better, what can government do to increase the proportion of skilled (“expensive”) jobs, why does a country (Germany) have more skilled labor jobs, and why does it have such high exports?

A higher-paying job is obviously preferred by a worker to a lower-paying job. In a free market, it is generally better for the employer too, since it means that his employees are more productive, and it is usually preferable to have fewer more productive (and expensive) employees over more cheaper, less productive employees, since there is less overhead, and more flexibility. (Unless you specialize in unskilled labor, such as fast-food workers or fruit pickers.)

But can the government create more high-paying jobs? Yes, it creates a few by raising labor costs by many means, such as minimum wages and mandatory vacations. This raises the costs to employers, and creates incentives to shift production from many unskilled workers to fewer skilled workers. In fact, this is what Germany and other European welfare states do.

But this is only possible on a very limited basis. Fruit pickers can’t be replaced by more-efficient versions. If the labor costs are driven above the productivity levels, you will have no choice but outsource your labor, replace people with machinery, or if that’s still too expensive, go out of business. Instead of making your labor force more efficient (the only way to raise real wages) you are forcing employers to simply fire the least productive 25%.

This is why the unemployment rates are so high in Europe. It seems that Germany has more skilled jobs, but that’s only because the government drives industries which depend on unskilled labor out of business, or out of Germany.

Now regarding Germany being the top exporter:

It’s natural that shifting your economy to high-margin products (both by government coercion and because Germany has long specialized in technology) will lead to high exports. But to the extent that exports are due to government coercion, they are not a good thing. If German industries are forced by the government to produce expensive high-skill products, then there will more expensive stuff then Germans can actually afford. They can’t leave all those cars gathering rust, so they have to export them somewhere. The Germans can’t actually afford any of those nice exports because all those labor regulations have driven costs so high – which is why German per capita GDP is only $29.7K, below U.S ($41.8) or the UK ($30.9).

They can’t fully profit from all those exports either. When they sell those cars to Americans, they will get dollars in exchange, so they will eventually have to buy something with those dollars – otherwise they would be giving the cars away for free. The fact they have a $200+ billion trade surplus means that they don’t have anything worth investing or buying in at home (because of the regulatory/welfare state), so they prefer to invest 20% of their income from exports in America and other importers.

In other words, we Americans are living large because EU citizens aren’t allowed by their government to make profitable investments at home -- hence our trade deficit.

Another policy that contributes to high exports is the government subsidies of exports such as steel. This supremely idiotic policy consists of the government robbing taxpayers to give free money to American importers.

[mrocktor]

Well the argument is fundamentally flawed in three ways:

1- It assumes that the government can "create jobs" and that unemployment is a consequence of government inaction.

The truth is the exact opposite, productive people create jobs - the government can at best not hinder them and at worst can cause massive unemployment. Look no further than minimum wage and other labor regulations for the cause of unemployment.

2- It assumes manufacturing jobs are intrinsically better than other types of employment.

This is nonsense as well, if you can produce a gadget for 4 pounds or buy it from China for 2, it is foolish to think anyone would be better off making the gadget rather than buying it. I can bake bread, I don't do it because I can *buy* bread and I have things I can do with my time that generate a lot more value than a loaf of bread.

3- It assumes exportation is necessary for prosperity.

This mistake is centuries old. The idea that exports are a measure of a country's prosperity is silly. The world as a whole can export nowhere, and yet it has been fantastically prosperous over the last 200 years - how could that be?

Goods are the measure of prosperity. Exports are only good to the extent that they enable you to *import* what you want (i.e. what you can get cheaper or better from elsewhere).

mrocktor

Edited March 30, 2006 by mrocktor

[Hal]

But can the government create more high-paying jobs? Yes, it creates a few by raising labor costs by many means, such as minimum wages and mandatory vacations. This raises the costs to employers, and creates incentives to shift production from many unskilled workers to fewer skilled workers. In fact, this is what Germany and other European welfare states do.

But this is only possible on a very limited basis. Fruit pickers can’t be replaced by more-efficient versions. If the labor costs are driven above the productivity levels, you will have no choice but outsource your labor, replace people with machinery, or if that’s still too expensive, go out of business. Instead of making your labor force more efficient (the only way to raise real wages) you are forcing employers to simply fire the least productive 25%. importers.

The government could create long-term high paying jobs in our present context by (eg) giving tax breaks to companies which employ highly paid workers, or encouraging companies not to outsource jobs overseas (again via tax breaks or subsidies etc). In other words, by removing restrictions that are currently in place.

More abstractly, bear in mind that the internet started as a government creation (DARPA), and this has resulted in a very large number of highly paid jobs. Along the same lines, the state could fund scientific research which was likely to produce highly paying jobs in the future (quantum computing perhaps?). This would obviously involve a gamble.

Obviously I'm not saying that the government should do this, just that they have the power to.

Edited March 31, 2006 by Hal

[softwareNerd]

That's a mixed reply, Hal.

Your first point is valid: if the government has placed restrictions that impede productivity, then it can increase productivity by removing the restrictions.

However, the second point is not a valid one. The Internet and government sponsored scientific research are examples of positives that are positives only because we do not consider the other side: what could have been. [Henry Hazlitt's "Economics in One Lesson" gives other examples.]

If a government entity enters a field instead of letting business do so, or in competition with business, the government entity will sometimes produce good stuff. Sometimes, the government entity will even produce better stuff than the private business. However, the real question is not about the coincidental, but about the rule. As a rule, the government entity will be less productive than the private one.

So to your second point, chances are that the government entity will not be as productive as the private one.

[Hal]

However, the second point is not a valid one. The Internet and government sponsored scientific research are examples of positives that are positives only because we do not consider the other side: what could have been. [Henry Hazlitt's "Economics in One Lesson" gives other examples.]

Well perhaps, but you could say this about anything (maybe if Einstein had went into biology he would have made greater contributions to science than he did as a physicist. Perhaps Microsoft could have achieved more had they focused on telephones rather than computers.). However, given that the internet is probably one of the most important inventions in humanity's history, it seems unlikely that private industry would have managed to do anything as productive with the money - I suppose its possible, but its a fairly arbitrary claim.

In general though, I would agree that the market does a better job of allocating resources than the government. The government funding/creating the internet may have worked out well, but theres been countless billions wasted on other projects which havent. My point was just that you cant say every single government initiative is doomed to failure (or doomed to do worse than the market) because this simply isnt true. However, you can correctly say that the government has no right to do these things, regardless of what consequences they might have.

Edited March 31, 2006 by Hal

[DavidV]

However, given that the internet is probably one of the most important inventions in humanity's history, it seems unlikely that private industry would have managed to do anything as productive with the money

Actually, the Internet was little-used or known for 20 years until private industry was allowed to do "productive" things with it in the early 90's.

There were several private networks developed in the 80's (such as CompuServe, which first created a network in 1969) that eventually merged with "the" Internet. We asociate the Internet with the original DARPA project, but most of the technology came from universities and companies. It was only the billions of dollars stolen from private investors that allowed a government agency to claim credit for it.

Furthermore, most of the flaws and deficiencies of the Internet, such as the limitations of the TCP/IP protocol can be attributed to the lack of market pressure on the academics who created them. There are private networks in existence (such as Google’s) that have greatly improved on the underlying protocols. The government’s involvement made the Internet worse than it could have been if a private company designed it. This is why to this day large companies rely on dedicated private networks for mission-critical communications.

[softwareNerd]

Good point David. I remember converting a system using IBM's APPC [proprietary communication protocol] to use TCP/IP instead. That's when I realized how much TCP/IP lacked. We did convert however, because sometimes it just makes sense to do things the "standard way".

My point was just that you can't say every single government initiative is doomed to failure (or doomed to do worse than the market) because this simply isnt true. However, you can correctly say that the government has no right to do these things, regardless of what consequences they might have.

Agreed, you cannot say that government initiatives are doomed to failure. Also agreed that the morality is the primary issue. However, the practicality is also vital.

Can one say that a government-funded initiative is "doomed to do worse than the market"? In the sense of the success of a particular initiative: no. However, the bulk of government initiatives that do well do so in spite of being government run, not because of it.

The only extra that the government can bring to the table is coercion. Therefore, for a government-run initiative to do better than a private one the following has to be true: that coerced action acheived a better result than free action. So, for instance, people would have done one thing, but the government forced them to do another. This could be in adopting a standard, in paying a certain minimum wage, in giving maternity leave, or whatever.

I fear we veer off topic though.