Saturday, February 23, 2013

Cheap foreign labor, in theory, should lower manufacturing costs. This should result in lower, more competitive prices for goods sold here. American companies with higher US labor costs would then be forced to reduce prices to compete. This would mean smaller profit margins for companies and pressure to reduce labor costs by reducing the work force and/or lowering wages. It would also lower the total value of all goods and services sold in the US. In other word, it would lower our GDP.

If your theory about the impact of foreign wages is correct, then we should see not only more unemployment and lower wages (which we do), but also lower prices, smaller corporate profit margins, reduced economic growth and lower GDP.

Have the prices of goods and services significantly declined? Are US corporations less profitable? Has the growth of our GDP significantly declined in the face of foreign competition?

If the cost of goods we buy declined due to foreign competition, then a decline in wages would not be so bad. But that isn’t what has happened. GDP, or at least hourly GDP, has risen steadily year after year while hourly wages have nearly been frozen since the mid ‘70’s. Prices (and inflation) have continued to climb. Corporate profits have soared. Wall Street investments have boomed. The economy has continued to grow. Bonuses and CEO compensation has skyrocketed. Yet the proportion of wealth that our growing economy has been generating has declined for working Americans and increased for wealthy Americans. When wages are frozen despite a growing GDP, higher corporate profits and increased wealth for the rich, the better explanation is wage suppression, not foreign labor.

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