As I See It: Ricardo’s Law
May 17, 2004 Victor Rozek
Almost 200 years ago, British economist David Ricardo, Adam Smith’s successor in England’s economic esteem, had a momentous insight about the cost of labor. “The natural price of labor,” he declared, “is that price which is necessary to enable the laborers to subsist and to perpetuate their race, without either increase or diminution.” To put it another way, if it didn’t have to, a company would pay a worker no more than the amount required to feed him and beget his replacement. Although much of humanity’s struggle has been a back-breaking effort to free us from the yoke of this axiom, that effort is stalled and gains are being reversed.
In a compelling three-part series of articles first published in India, Huck Gutman, a visiting Fullbright professor at Calcutta University, paints a troubling picture of a global economy that increasingly relies on a desperate workforce, which, compelled by circumstance and vulnerable to exploitation, is forced to toil for subsistence wages. The glut of such workers overseas is having two deleterious effects back home: it is draining American jobs and depressing wages.
Gutman puts it this way: “Ricardo’s Law was true then and is true now: unless there is a scarcity of labor, wages tend to drop lower and lower, till they reach a point where they equal the minimum amount required to keep a worker alive.” Granted, what it takes to keep a person alive, in an economic sense, is relative. Suffice it to say that, as The New York Times reported, hunger is spreading into the suburbs. There is even a sanitized phrase used to describe it, “food insecurity,” which I suspect means not knowing where your next meal is coming from.
Since food insecurity is directly tied to job security, it should come as no surprise that it has risen 15 percent over the last four years while nearly 3 million American jobs have disappeared. Tens of millions of Americans live paycheck to shrinking paycheck, one economic misfortune away from insolvency. Last year alone, one in 73 households filed for bankruptcy–a telling monument to economic desperation.
In more extreme climes, we see Ricardo’s Law applied in factories and sweatshops in places like China and Vietnam. Foreign subcontractors employed by American corporations often force women and children to work excruciatingly long hours for just enough sustenance to get them back to work the next day. The arrangement works nicely for both the factory owners, who make the bulk of the production profits, and the domestic corporations, which can disavow any knowledge of labor conditions overseas, blaming foreign subcontractors who conveniently operate beyond the reach of U.S. law.
Such abuses, although distant and largely hidden, have real consequences back home. Syndicated columnist Robert Samuelson, frenetic pompom waver for globalization, recently admitted that “Chinese workers can’t organize independent unions,” that “wages sometimes aren’t paid,” and that “millions of migrant workers are held in virtual bondage.” That’s the stacked deck against which American workers are expected to compete. What Samuelson judiciously avoids mentioning is that some of the same outcomes have already reached our shores. It’s no secret that the American union movement is being gutted and that wages and benefits of many union workers have been slashed in the name of global competitiveness, backed by the threat of moving jobs offshore. As for failing to pay wages, employees of Wal-Mart have long complained that the retail giant forced them to work overtime without compensation. Thirty states are now suing Wal-Mart to recover the withheld wages.
It’s a medieval model, requiring a never-ending supply of serfs, and it is driving the biggest and most profitable competition unleashed by the forces of globalization: the race to the bottom.
The race began with the unloading of manufacturing jobs to Mexico in the early 1990s. And the trend continues. “For 43 consecutive months,” Gutman reports, “manufacturers have cut the number of workers on their payrolls.” Responding to the grim numbers documenting the steady hemorrhaging of domestic jobs, President Bush made a visionary proposal. He suggested that fast-food hamburger flippers be reclassified as manufacturing workers.
Regardless, for about a decade, factories sprang up along the Mexican border like mushrooms after the first autumnal rains. But Mexico’s job boom was short-lived. Mexican wages were low, but not as low as those in China or Vietnam or Indonesia or Malaysia. Factories were disassembled and moved off continent. For a time, China profited from Mexico’s misfortune, but Gutman reports that between 1995 and 2002 “China lost 15 percent of its manufacturing jobs” as restless capital moved on in search of still cheaper labor. As far as we know, Chinese authorities are not reclassifying won-ton makers as manufacturing workers, but to stem the outflow of jobs, the government is now trying to lure investors further inland, away from coastal centers of commerce, to where employment opportunities are scarcer and people are more desperate. And if predictions are accurate, globalization is creating millions of them.
Reforms imposed by the World Trade Organization have left small farmers in both nations vulnerable. As a result, according to Gutman, Mexico lost 1.3 million farm jobs to multinational agricultural juggernauts, and China is predicted to loose a staggering 20 million more. As these and other displaced workers enter the labor market, they will drive wages down even further, making offshoring even more profitable. “As nation after nation has discovered,” writes Gutman, “. . .money may flow in from the developed nations, but when the total accounting is tallied–interest charges, repatriation of profits, costs of technology–more money flows back to the centers of imperial finance than flows out.”
But things look different in India, the beachhead for the second wave of globalization: the outsourcing of white collar jobs.
A dark and unlikely period in India’s history is unexpectedly working to its advantage. For all of its horrors, colonialism left India with one very valuable legacy, the global language of business. Britain’s imperial ambitions imposed English on India’s institutions and most crucially on its system of education. Some time ago, India realized that its ability to compete in the modern world required a highly educated population. It made enormous investments in higher education, making it available at modest cost to talented students. The Indian people, Gutman reports, have an “immense drive to succeed and [a] deep pride in doing work well.” Those two factors–the availability of low-cost higher education and a culture that values it–have produced “large numbers of Indian engineers, architects, computer programmers, scientists, mathematicians, and students of management,” all of whom speak excellent English.
By contrast, the United States has been starving education of federal funding, thus driving up the cost. It’s a matter of priorities. Prioritizing space missile defense over domestic job defense has down-stream consequences. Because affordable education is not a national priority, higher education has become so expensive as to make it unaffordable for the poor and to saddle students with an enormous debt burden even before they graduate. But as more white-collar jobs disappear, the less likely it is that the debt borne by graduates will produce hoped-for future earnings. Katharine Mieszkowski of Salon magazine reports that “the number of unemployed college graduates has recently surpassed the number of unemployed high-school dropouts.”
These young men and women have entered a vast labor pool increasingly delimited by India’s biggest competitive advantage–its modest wage scale for white-collar professionals. Gutman cites research from the International Labor Organization and the Paaras Group: “While a software engineer in the USA makes an average of $66,100 a year, in India she or he makes $10,000 a year. Mechanical engineers: $55,600, India $5,900. IT managers $55,000, India $8,500. Accountants $41,000, India $5,000.” There are already one million people in India who work for American companies. In 2002 alone, multinationals moved “nearly $35 billion in white-collar job spending offshore.” That trend, Gutman reports is expected to grow by 30 to 40 percent each year through 2008. And for India, the future looks even brighter. Forrester Research predicts “at least 3.3 million white collar jobs and $136 billion in wages will shift from the USA to low-cost countries by 2015.”
For IT workers, the news is grim. Mieszkowski reports that companies like IBM, GE, Oracle, Hewlett-Packard, and Google already “send significant portions of their operations offshore.” Business Week, according to Gutman, predicts that by 2008 “IT work and other service exports will generate $57 billion in revenues, employ 4 million people, and account for 7 percent of [India’s] gross domestic product.” Mieszkowski adds: “It is one of the tremendous ironies of the digital era that the easy flow of capital and labor to every inch of the globe, made possible by the superhuman efforts of American and European programmers, ended up wreaking havoc on the job security of those very programmers.”
If those figures are not sobering enough, by some estimates, up to one third of all U.S. jobs are tempting targets for relocating abroad. Mieszkowski’s analysis is only a bit more benign. Her research suggests that 14 million American jobs “are vulnerable to foreign competition.” Neither alternative is very reassuring.
When an economy has more workers than jobs, the only way to counteract Ricardo’s Law, writes Gutman, “is when workers organize labor unions, and use their collective strength to provide a counter force to the race to the bottom in their place of work.” That’s the theory. Unfortunately, the plentiful availability of cheap labor trumps any attempt to organize it.
That failing, Gutman argues for a system of international agreements which “recognize the right of labor to organize unions, and which establish fair labor practices to abet the rights of workers in every country.” This may ultimately occur, provided labor gets a seat at the governing table. So far, the people that profit most from the status quo are the ones who dominate the rule making process. In the meantime, labor will be inching back toward subsistence.
Since Gutman was writing primarily for an Indian audience, he avoided mentioning the simplest and most effective solution to migrating jobs and declining salaries: that is labor tariffs. Corporations would still be free to hire $5 per hour programmers, but would be required to pay a $20 per hour tariff. That would slow the enthusiasm for outsourcing and allow battered American workers to continue the hard work of “perpetuating their race.”
Which brings us back to good old Ricardo, the wealthy and disdainful economist who had the arrogance to say that “the natural price of labor is that price which is necessary to enable the laborers to subsist and to perpetuate their race, without either increase or diminution.” He of all people should have known better. Ricardo was one of seventeen children.
Somebody must have overpaid his daddy.