China and the race to the bottom

In 2001 Alan Tonelson released his rather ridiculous book The Race to the Bottom, the gist of which is that free trade, globalization and an increasing supply of workers were combining to exert an enormous downward pressure on wages as corporations scoured the globe in search of ever cheaper labor. Ominously, Tonelson warned that U.S. manufacturing was in a downward spiral as foreigners exported to us that which Americans used to produce themselves.

While perhaps superficially plausible, the theory falls apart when one considers that those countries with the highest levels of worker compensation and most prosperous economies are also those most open to both free trade and capitalism. Increased levels of both capitalism and globalization correspond with rising prosperity, not diminished living standards.

Perhaps the reason Tonelson's book resonated as much as it did, however, was the incorporation of China and its labor supply into his analysis. China, with its vast reservoir of labor, would ensure an almost never ending supply of workers willing to work for a pittance. As he wrote in this 2002 column:

The economic policy establishment has long ridiculed these fears [of a race to the bottom]. But have they read Peter Wonacott’s eye-opening report in The Wall Street Journal two weeks ago – which show how race-to-the-bottom dynamics are turning China into a manufacturing and technology giant while keeping wages in even high tech industries at pauper levels?

Wonacott argues (without citing any evidence) that in most third world countries, “Pay jumps as workers get smarter” and more sophisticated jobs flow into the economy. China’s population, however, is “so vast that it can stay smart and cheap - a formula that’s making it a new superpower in high-tech manufacturing.” Thus even many senior engineers and managers at the country’s (largely foreign-owned) advanced electronic factories still earn only $10,000 per year. And although by some measures China’s wages have nearly doubled from their abysmal levels of a decade ago, they lag far behind the country’s growth rate of 162 percent for that period.

Moreover, with looser restrictions on worker movement in China, millions streaming from the countryside into the cities in search of factory jobs, vocational schools and universities turning out ever more technology workers, and economic reforms already leading to mass layoffs, China’s worker glut and wage lag can only continue.

I thought about Tonelson and his race to the bottom worries when I read this article in yesterday's New York Times:

Just a year after laying off millions of factory workers, China is facing an increasingly acute labor shortage.

As American workers struggle with near double-digit unemployment, unskilled factory workers here in China’s industrial heartland are being offered signing bonuses.

Factory wages have risen as much as 20 percent in recent months.

Telemarketers are turning away potential customers because recruiters have fully booked them to cold-call people and offer them jobs.

Some manufacturers, already weeks behind schedule because they can’t find enough workers, are closing down production lines and considering raising prices. Such increases would most likely drive up the prices American consumers pay for all sorts of Chinese-made goods.

...But many economists say the recent global downturn also obscured a longer-term trend: China has drained its once vast reserves of unemployed workers in rural areas and is running out of fresh laborers for its factories.

One economic myth down, thousands more to go.