Posts Tagged ‘outsourcing’

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wage-inequality

Apologists for mainstream economics (such as Noah Smith) like to claim that things are OK because good empirical research is crowding out bad theory.

I have no doubt about the fact that the theory of mainstream economics has been bad. But is the empirical research any better?

Not, as I see it, in the academy, in the departments that are dominated by mainstream economics. But there is interesting empirical work going on elsewhere, including of all places in the International Monetary Fund (as I have noted before, e.g., here and here).

The latest, from Mai Dao, Mitali Das, Zsoka Koczan, and Weicheng Lian, documents two important facts: the decline in labor’s share of income—in both developed and developing economies—and the relationship between the fall in the labor share and the rise in inequality.

I demonstrate both facts for the United States in the chart above: the labor share (the red line, measured on the left) has been falling since 1970, while the share of income captured by those in the top 1 percent (the blue line, measured on the right) has been rising.

labor shares

Dao et al. make the same argument, both across countries and within countries over time: declining labor shares are associated with rising inequality.

And they’re clearly concerned about these facts, because inequality can fuel social tension and harm economic growth. It can also lead to a backlash against economic integration and outward-looking policies, which the IMF has a clear stake in defending:

the benefits of trade and financial integration to emerging market and developing economies—where they have fostered convergence, raised incomes, expanded access to goods and services, and lifted millions from poverty—are well documented.

But, of course, there are no facts without theories. What is missing from the IMF facts is a theory of how a falling labor share fuels inequality—and, in turn, has created such a reaction against capitalist globalization.

Let me see if I can help them. When the labor share of national income falls—the result of the forces Dao et al. document, such as outsourcing and new labor-saving technologies—the surplus appropriated from those workers rises. Then, when a share of that growing surplus is distributed to those at the top—for example, to those in the top 1 percent, via high salaries and returns on capital ownership—income inequality rises. Moreover, the ability of those at the top to capture the surplus means they are able to shape economic and political decisions that serve to keep workers’ share of national income on its downward slide.

The problem is mainstream economists are not particularly interested in those facts. Or, for that matter, the theory that can make sense of those facts.

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198505_600  Bruce Plante Cartoon: The Democratic Party Restart

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outsourcing

Donald Trump promised to bring back “good” manufacturing jobs to American workers. So did Hillary Clinton.

Both, as I argued back in December, were wrong.

What neither candidate was willing to acknowledge is that, while manufacturing output was already on the rebound after the Great Recession, the jobs weren’t going to come back.

They were also wrong, as I argued in November, about there being anything necessarily good about factory jobs.

But perhaps even more important, as Eduardo Porter reminds us, the focus on manufacturing deflects attention from what is really going on in U.S. workplaces.

the vast outsourcing of many tasks — including running the cafeteria, building maintenance and security — to low-margin, low-wage subcontractors within the United States.

This reorganization of employment is playing a big role in keeping a lid on wages — and in driving income inequality — across a much broader swath of the economy than globalization can account for.

contingent

And, according to a recent study by the Government Accountability Office, much of that outsourcing is taking place outside the manufacturing sector. Moreover, the growth of contingent work—for example, 17.3 percent in education services and 6.1 percent in professional/technical services—is accompanied by lower wages, fewer benefits, and more job instability.

The problem in the United States is not what workers do or what they produce. It’s how they do what they do.

Employers, not workers, are the ones who decide how labor is performed. And when they can outsource jobs to contractors—and, as a result, avoid unions, workplace regulations, and adequate pay and benefits—they can exercise even more power over their workers, including of course the ones they continue to employ.

That, and not the loss of manufacturing jobs to foreign companies, is the real problem facing the American working-class.