September 01, 2022
The Washington Post ran a piece last week that raised the possibility that workers who are now working remotely may see their jobs outsourced to countries with lower-cost labor. It raised the possibility that this might lead to the same sort of hit to jobs and wages that the rise in imports from China and elsewhere gave to manufacturing workers.
The piece then tells readers:
“Many economists are optimistic that American workers will land on their feet amid a gradual transition from a world in which they compete with a few dozen locals for each new job to one in which they compete with a few million professionals worldwide. But economists were optimistic about Y2K-era globalization as well, and it seems wise to keep a wary eye on the possible downside.”
While the second part of this paragraph is certainly true, most economists were very willing to ignore economics in arguing that massive imports from developing countries would not reduce the pay of manufacturing workers, and less educated workers more generally, the first sentence is a bit bizarre.
Exposing manufacturing workers to competition with their much lower-paid counterparts in the developing world is a big part of the upward redistribution of the last four decades. This had the effect of both lowering the pay of less-educated workers, and reducing the cost in the United States of a wide range of goods, from shoes and clothes, to cars and steel.
More educated workers were the beneficiaries of this reduction in costs. While their wages were not hurt by foreign competition, since they were largely protected, their money went further since they could now buy goods at a lower cost.
In this context, it is hard to imagine why anyone would consider it “optimistic” that the pay of more educated workers, who are now working remotely, will not be lowered by international competition. Such a reduction in pay should mean that a wide range of services, such as accounting, legal services, and medical services, can be provided at lower costs. This will benefit the whole country, but especially those workers who are not seeing their pay cut as a result of this competition.
The reduction in pay for more highly educated workers should also help reduce inflationary pressure in the economy. The highest 10 percent of the population takes in almost 50 percent of personal income. If we can reduce this by just 5 percent, this would be equal to 2.5 percent of total income.
To understand the economic importance of this sort of hit to the income of high-end earners, remember that many economists were going hysterical about the inflationary impact of President Biden’s student loan forgiveness program. By most estimates, loan forgiveness will reduce the amount that people are paying on student loans by roughly 0.1 percent of GDP.
This means that a 5 percent reduction in the pay of high-end earners would have 25 times as much impact in lowering inflation as the student loan forgiveness had in raising inflation. If people think student loan forgiveness is a big deal in raising inflation, then they should think that the prospect of international competition for remote workers will be an enormous deal in lowering inflation. Now, isn’t that optimistic?
Let me just add that I know that not all the people who will be hurt by increased competition for remote workers are rich. But, as the old saying goes, if you think you have a policy that does something useful, without harming some people you don’t want to see harmed, you don’t understand the policy. There is no way to lower incomes at the top without hitting some people who are not at the top.
Having said that, we can and should also pursue policies that are more directly focused on the very top, such as lowering CEO pay and eliminating the bloat in the financial sector. But if you show me a policy whose impact will be primarily to lower the pay of the top 20 percent of the workforce, I’m an optimist and I’m for it. I’d love to hear from those economists who say this is bad.