America Works: Thoughts on an Exceptional U.S. Labor Market

CHAPTER 8. The Great Doubling: Is Your Job Going to Bombay or Beijing?

 CHAPTER 8  THE GREAT DOUBLING: IS YOUR JOB GOING TO BOMBAY OR BEIJING? Before the collapse of communism in the Soviet Union, China’s movement toward market capitalism, and India’s decision to undertake market reforms and enter the global trading system, the global economy encompassed roughly half of the world’s population —the advanced OECD countries, Latin America and the Caribbean, Africa, and some other parts of Asia. Workers in the United States, other higher-income countries, and market-oriented developing countries such as Mexico did not face competition from low-wage Chinese or Indian workers, nor from workers in the Soviet empire. Then, in the 1990s, China, India, and the ex-Soviet bloc joined the global economy. Few analysts had expected the world to come together so quickly into a single economic world based on capitalism and markets. During the Cold War, it had seemed normal that the world was divided into competing economic systems with only loose connections to each other. When I was in Moscow in 1984 criticizing the problems of the U.S. labor market, I never thought that the Soviet system would implode a few years later, that China’s Communist Party would introduce market capitalism and turn the country into the world’s manufacturing center, or that India would give up its high tariffs and state-planned, highly regulated economy to join the global trading community. Because these countries had approximately half of the world’s population, their entry into the global economy effectively doubled 128 the number of workers in the world’s labor pool. Absent China, India , and the ex-Soviet bloc, there would have been about 1.46 billion workers in the global economy in 2000. The entry of those countries into the global economy raised the number of workers to 2.93 billion. Since twice 1.46 billion is 2.92 billion, I have called this “The Great Doubling.”1 The doubling of the global workforce has presented the U.S. labor system with its greatest challenge since the Great Depression. If the U.S. labor market adjusts well to the change, the benefits of having virtually the whole human species on the same economic page will produce more rapid technological progress and improved living standards in the United States and in the rest of the world. If the United States does not adjust well, the next several decades will create economic problems for many workers in the United States and elsewhere and risk turning the country toward economic isolationism. The Capital-to-Labor Balance What impact might the doubling of the global workforce have on workers throughout the world? A simple thought experiment helps answer this question. Imagine what would happen if through some bizarre cloning experiment a mad economist (one of my colleagues, not me!) doubled the size of the U.S. workforce. Twice as many workers would seek employment from the same businesses. You don’t need an economics PhD to see that this would be good for employers but terrible for workers. Wages would fall. Unemployment would rise. But now imagine that another mad economist knew some nanotechnology and found a bizarre way to increase the capital stock at the same time (more to my liking!). In this case, the doubling of the workforce would have a very different effect. In the simplest economic analysis, the effect of China, India, and the ex-Soviet bloc joining the global economy depends on how their entry altered the ratio of capital to labor in the global economy. This in turn depends on how much capital they brought with them when they entered the global system. Over the long run, the effect of the entry of these three countries into the global economy depends on their rates of savings and future capital formation. Is Your Job Going to Bombay or Beijing? 129 When it first dawned on me that the “great doubling” was a signi ficant event in economic history, I looked for estimates of the global capital stock that I could use to form a capital-to-labor ratio. There were none. There were estimates of capital stock for the United States and some other advanced countries, but no consistent dataset for the entire world. The researchers who produce the Penn World Tables, which has the best data on the aggregate economies of most countries in the world, told me that they were thinking...