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Wages plummet in global race to the bottom

Despite massive state interventions including two interest rate reductions, and huge injections of credit, the Chinese economy has been unable to withstand the consequences of global overcapacity.

The accelerating contraction in the US is a reciprocal result of the contraction in China’s immense, globally-significant manufacturing sector recorded by two, complementary measures. 

HSBC, the global financial conglomerate, measures activity in the smaller, private firms, and its index has been in contraction territory for ten months in a row.

Last month the official government-maintained measure of manufacturing activity, focussing on big state-owned firms which have been heavily supported by government spending on infrastructure, fell to a lower-than-expected 49.2 in August.

The impact is being felt sharply in the United States. In August, manufacturing activity shrank for the third month in row.  The Purchasing Managers’ Index recorded that new orders – an indicator of future demand – fell to 47.1 from a reading of 48 in July.

Anything above 50 indicates expansion. Below 50 means contraction. August’s figure is the lowest since the depths of the post-crash recession in April 2009.

Looking deeper we discover that in the US manufacturing comprises only 12% of economic activity, and its continuing growth has been founded upon a drive to lower wages.  

Millions of relatively well-paid skilled jobs were lost following the crash as unemployment soared to be replaced by a much smaller number of low-paid workers in the service sector.

A new report from the National Employment Law Project shows that companies in the United States eliminated about 8.1 million jobs after the recession began in late 2007. The economy has since recovered only about 3.3 million of those jobs, starting in early 2010.
During the recession, employment losses occurred throughout the economy, but were concentrated in mid-wage occupations. By contrast, during the recovery, employment gains have been concentrated in lower-wage occupations, which grew 2.7 times as fast as mid-wage and higher-wage occupations. Specifically:

In the US unemployment benefits cease after 23 months and many workers either disappear off the employment statistics altogether or are forced into low-paying jobs. James Paulsen, chief investment strategist at Wells Capital Management sums it up very bluntly: “The cost of labour is very cheap”.

Whilst cheap labour is good for short-term profit, which is reflected in the results of US corporations in particular, in the longer term it adds another twist to the downward spiral. This is because the decline in real incomes, which is being felt throughout the world, results in weaker demand.

According to Ethan Harris, co-head of global economics research at Bank of America Corp in New York, the proliferation of “very distressed workers” hurts consumption, which he estimates is likely to increase just 1.5% in the next six quarters.  

But the drive to lower wage costs is just as relentless as the global manufacturing contraction and workers in the US and Europe face further attacks in the competitive drive to the bottom.

Foxconn Technology Group is the main manufacturer of Apple products like the hugely successful iPads and iPhone, and Apple became the world’s most valuable company ever in August surging to $624 billion. The company has been criticised for factory conditions in China resulting in a series of deaths and suicides. Foxconn is now investing $10 billion in Indonesia where manufacturing wage costs are 60% percent of China's. Just think of that the next time you use an ubiquitous Apple product.

Gerry Gold
Economics editor
5 September 2012

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