It’s true that productivity is a slippery concept. But whichever way one looks at it real wages have moved in line with it. Professor Paul Krugman, a leading US Keynesian, had this to say on the matter:

History offers no example of a country that experienced long-term productivity growth without a roughly equal rise in real wages. (Pop Internationalism, The MIT Press, 1997).

Now for some empirical evidence. The following charts indisputably show that wages move in line with productivity. Chart 1 is particularly interesting . The grey area above the productivity line for 1930 to 1940 clearly show hourly wages rates greatly exceeding productivity¹. This was a period of unprecedented unemployment. (See Richard K. Vedder and Lowell E. Gallaway’s Out of Work, New York University Press, 1997). Chart 3 shows South Korean labour productivity in manufacturing²

Chart 1

Chart 2

Chart 3

Chart 4

The reader should carefully note Chart 4³ which shows a levelling off in the rate of increase for hourly wage rates from about 1895 to 1918. The period 1895 to 1917 was known as “the great Ellis Island influx” when around 14 million immigrants arrived. The size and speed of influx from Europe lowered the rate of productivity and wage rates. Once WWI was over and highly restrictive immigration controls were implemented the growth in real hourly wage rates accelerated.

We can therefore conclude that that for Stiglitz to be right about wages he would have to basically show two things: Either productivity has fallen during the past five years or productivity increases had been aborted by a rapid expansion of the labour force brought about by immigration. I’ll admit that the statistical evidence strongly suggests that wages rates for the unskilled would have been higher in the absence of immigration. (See George J. Borjas). Paul Krugman, no lover of Bush is he, also made some adverse comments about the economic consequences of importing ‘cheap’ labour (North of the Border, New York Times, 27 March 2006).

No economist has any business lamenting so-called low wage rates for many Americans while turning a blind eye to massive illegal immigration and the Clinton recession that President Bush inherited. Nevertheless, despite the presence of illegals gross wages have risen during the last nine months. By gross I mean what Americans call total compensation. In other words Americans have been receiving higher wage rates in the form of untaxed benefits. Moreover, Ed Lazear, chairman of the President’s Council of Economic Advisers, recently stated that hourly earning are beginning to rise in line with productivity. Bernanke agreed with this observation. In his opinion “wages will rise. I’m a little surprised they haven’t risen more already”. (Perhaps Bernanke should take a look at the immigrations stats).

What about Stiglitz’s other assertion that real wages “for those at the bottom” had stagnated “for more than a quarter of a century”? If Adams has quoted correctly then Stiglitz is an out and out liar. Like the ineffable Adams, one would have to be a complete ignoramus to swallow the idea that the purchasing power for Americans “at the bottom” had remained unchanged for the past twenty-five years. If Stiglitz were right then these stagnant wages would be reflected in stagnant consumption. Richard Alm and Michael Cox, senior vice president and chief economist at the Federal Reserve Bank of Dallas, exposed this lie some years ago. They did a statistical study in which they found that

[i]n 1971 a color television went for more than $US600 and one would have had to work 174 hours to purchase it. Today, a better 19-inch color television costs about $199, which requires 14 or 15 hours of work. (Myths of Rich & Poor, Basic Books, 1999).

The same held for the whole range of household appliances. A 5000-BTU unit air conditioner dropped from 45 hours of work in 1970 to 23 hours in 1999; a portable radio dropped from 13 hours to 1 hour. Everything from washing machines, stoves, vacuum cleaners, microwave ovens, VCRs, telephones and telephone charges, holidays, cars, clothing, food, computing power, even McDonald’s hamburgers, have fallen in terms of work time. Moreover, these consumption figures conceal the enormous improvements that have occurred in established production and development of new products and services.

So is Stiglitz saying that as soon as Bush was inaugurated the mass of workers, particularly those at the bottom, suffered a massive fall in their living standard? Any economist worth his salt knows that what really matters is purchasing power. Therefore if Americans can purchase more with less time — measured in minutes — then their purchasing power must have risen.

Then we get the poor. For lefties like Adams and Stiglitz America is nothing but one long soup line. According to this dynamic duo “[t]he percentage of people living in extreme poverty increased from 41.6 per cent in 1981 to 46.9 per cent in 2001 and it’s getting worse by the moment. Now why did Stiglitz pick 2001 instead of 2006. Is it because the former was when the recession was biting and unemployment rising while the latter has seen unemployment drop to 4.7 per cent?

Last February the Census Bureau released The Effects of Government Taxes and Transfers on Income and Poverty: 2004, a report showing that the number of Americans living under the poverty line in 2005 had dropped to 8.3 per cent. But the half-witted Adams could sneeringly declare that in progressive countries like Finland and Sweden the poor get 38 per cent of the median income — except that in America the poorest 10 per cent get 39 per cent of the median income. What is more, in terms of purchasing power the US median income exceeds the Finish and Swedish median incomes. And that goes for France and Germany as well.

Naturally, “globalisation” (free trade) came in for a trashing. ‘Sorrowful Adams’ has swallowed the line that the US is damage the poor by exporting jobs. Is that so? The funny thing is that last year the Kansas City branch of the Federal Reserve Bank, reported that outsourced jobs came to 0.1 per cent of total employment. Furthermore, the OII (Organisation for international Investment) found that as America was ‘exporting jobs’ it was also imported them to the tune of 5.4 million. These imported jobs paid 31 per cent more than the US average salary.

In 2004 economist Martin N. Baily, chairman of the Council of Economic Advisers under President Clinton, examined the data concerning outsourcing. He found that out of every dollar spent by an American corporation on outsourcing to India 67 cents came was returned in the form of repatriated profits and increased productivity which in turn added more value to the US economy. (Adams wouldn’t know anything about the division of capital and labour). Baily concluded that every dollar of outsourcing returned something like $1.12 to $1.14 to the US economy. As for employment, the household survey shows that the growth in long-term jobs has moved to a record high of 145 million. No wonder the EU looks sick in comparison.

And then we got Africa. According to Stiglitz and the brilliant Mr Adams free trade just doesn’t work for Africa, “the region most exploited by globalisation”. (Italics added). But why does it work for South Korea, Singapore, Hong Kong, Ireland, etc., but not for Africa? Could it be because the place has been wracked by civil wars, hare-brained socialist planning and the most outrageous corruption? Of course not! Everyone knows that globalisation — meaning rapacious corporations — has mercilessly exploited the region⁴.

Trying to sound as if he knows what he is talking about, Adams donned an economists’ hat and solemnly declared that

there will be an inevitable move towards equilibrium in incomes around the world. Down the track wages in China and the US — and everywhere else — will equalise. But at the Chinese level, not the American. The new world order of free markets will, finally, reduce the incomes of most Western workers. The rich will get richer — they always do — but the masses? They may feel the need to join a trade union.

Only a bonehead totally ignorant of economic history and economic theory would come out with such neo-Marxist claptrap. This is nothing more than the thoughtless application of the Stolpert-Samuelson theorem according to which free trade will equalise factor incomes. As I pointed out elsewhere (Free trade does not lower wages or cause persistent unemployment):

For a factor’s income (wages, for example) to be equalised in a situation where its mobility is confined to given areas, not only would it be necessary for the product of the lower paid factor to (a) have free access to the other areas the factor would also (b) have to be specific. The reason for ‘b’ should be obvious: the price of any factor cannot be driven down below the value of its alternative use. The price of labour is determined by the value of its marginal productivity; this in turn is determined by the size of the country’s capital structure. The smaller the capital structure relative to the population, therefore, the lower real wages will be and vice versa.

Adams’ fallacy is the old one of confusing the products of labour with labour services. Even has Krugman made it clear that “fears about the impact of Third World competition are almost entirely unjustified”. (Pop Internationalism, The MIT Press Cambridge Massachusetts, 1997). Not only that he stated, as would most economists,

that matters is our domestic rate of productivity — end of story. Comparisons between our productivity growth and the productivity growth in other countries are essentially irrelevant for the trend in the US standard of living. (Peddling Prosperity, W. W. Norton & Company, 1997, p. 277).

Enough said.

1. The data is from John W. Kendrick’s paper National Productivity and Its Long-Term Projection, National Bureau of Economic Research, May 1952.

2. This chart was taken from Douglas A. Irwin’s Free Trade Under Fire, Princeton University Press, 2002, and was constructed from World Bank Tables. Chart

3. The Tucker series converted to hourly rates and adjusted to the cost of living, Employment and Wages in the United States by W. S. Woytinsky and Associates, New York: The Twentieth Century Fund, 1953.

4. For a genuinely honest view of Africa and ‘globalisation’ see Jagdish Bhagwati’s In Defense of Globalisation, Oxford University Press, 2004. For further reading on free trade there is Free Trade Under Fire, Princeton University Press, 2002, Melvyn Krauss’s How Nations Grow Rich: The Case for Free Trade, Oxford University Press, 1997 and James Bovard’s The Fair Trade Fraud St Martins Press, 1991. For those with a theoretical bent in this direction there is Gottfried von Haberler’s classic The Theory of Free Trade, William Hodge and Company LTD, 1950, first published 1933.

See Dr Frank Shostak’s Professor Stiglitz and Lord Keynes for a demolition job on Stiglitz’s economics.

Gerard Jackson is Brookes’ economics editor

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