Rich Countries Are Becoming Addicted to Cheap Labor
So reads the headline of a long news story in the March 3 Wall Street Journal by Tom Fairless.
We generally think of addictions being bad. But workers aren’t cocaine. What’s wrong with being “addicted” to cheap labor?
In a word, nothing.
The headline is true to the content of the article and Fairless isn’t simply asserting his own views. He actually quotes economists who claim that there’s something wrong with hiring cheap labor when instead you could pay for more-mechanized production methods. Economists often point out that one of the downsides of an increase in the minimum wage is that it would cause employers to adopt labor-saving production methods sooner than otherwise. If the economists quoted in this news story were consistent–and maybe they are–the would see that downside as a feature, not a bug.
Here’s one excerpt that references a prominent Canadian economist named David Dodge:
In Canada, economists say the government has cast aside a carefully managed immigration system that gave priority to highly skilled workers, and ramped up significantly the intake of foreign students and other low-skilled temporary workers. By flooding the market with cheap labor, Ottawa may be propping up uncompetitive businesses and ultimately damaging productivity, according to a December report co-written by former Canadian central-bank governor David Dodge.
Notice the strange use of the word “uncompetitive.” If those businesses are able to do well and maybe even thrive, how are they uncompetitive? In fact, they are quite competitive.
And how would hiring more workers reduce productivity? Are the employers stupid? Do they want to pay people who not only don’t produce but also reduce production?
Of course not. It ‘s clear what Dodge means. He means that hiring low-skilled workers could easily reduce average productivity.
Indeed, the very next paragraph of the news story makes my point:
Economic output per capita is lower than it was in 2018 following years of record immigration, notes Mikal Skuterud, an economist at Waterloo University in Ontario. Canada has been bringing in so many low-skilled workers that it lowers the country’s productivity overall, he says.
Skuterud is pointing to average productivity even though he blows it at the end by equating that to the “country’s productivity overall.”
But in this context average productivity is not a good measure. The employers have found a cheaper way to produce and the workers, many of them from poor countries, as the news story points out, are better off. Also, with cheaper production, consumers are better off.
What other objections, according to Fairless, do economists have to cheap labor? Fairless writes:
“Once industry is organized in a certain way and the structure encourages employers to recruit migrants, it can be very hard to turn back,” said Martin Ruhs, a professor of migration studies in Florence, Italy. “In some cases, policymakers should ask, does it make sense?” said Ruhs, who is also a former member of the U.K. Migration Advisory Committee, which advises the British government on migration policy.
It might be hard to turn back. But who has the better incentive to look ahead and estimate whether they will need to turn back: economists at universities and think tanks or employers with a whole lot of skin in the game?
And while I don’t know how quickly employers would adjust if they found labor becoming cheaper, we do know that the history of the U.S. and other rich economies in the 20th century is that production methods became more and more capital-intensive as labor became more and more expensive.
Relative prices matter.
The pic above is of a car dealership that has a number of workers from India serving as apprentices. The horror!
HT2 to Marian Tupy.
READER COMMENTS
Jon Murphy
Mar 5 2024 at 8:28am
Interestingly, the story you link to does a good job showing how misinformation can generate absent any malicious actor.
David Dodge is making an econ 101 point: lower wages means the marginal productivity of labor of the last hired worker is lower.* This will naturally lower the average productivity. I literally just covered that in my Principles class yesterday morning; it’s a standard Econ 101 point.
But the reporter misinterprets the statement as saying the total productivity is down, which it is not. Total productivity is higher.
A reasonable reader can interpret the story, then, as increased immigration and lower wages reduces productivity, thus making a nation poorer. This is misinformation (and clearly contradicted by empirical evidence).
We have ourselves a game of telephone. The futher the nonexpert is from the expert, the greater the chance of misinterpreting the information, which consequently means the higher chance of misinformation being spread even though no one person intended it!
*Wage = marginal productivity of labor, so if wages are down, mpl is down.
David Henderson
Mar 5 2024 at 10:30am
You write:
But notice that he quotes an economist, Mikal Skuderud, who really did say that more unskilled laborers lower “the country’s productivity overall.” So, no, it’s not just like a game of telephone.
Jon Murphy
Mar 5 2024 at 11:22am
Oh, I didn’t see that!
Jose Pablo
Mar 6 2024 at 12:05pm
Total productivity is higher.
You mean “total production”, right?
If “productivity” is production per worker, adding less productive workers should reduce average productivity. Which is, very likely, irrelevant because it is just a composition effect.
An interesting question could be, what is the impact on the “initial pool of workers” productivity of adding these “new low productivity workers” ?.
Do we know?
Jon Murphy
Mar 6 2024 at 1:23pm
Yes, thank you!
steve
Mar 5 2024 at 10:44am
Being mostly a math nerd, if you have 10 people working making 20 units of GDP, then you double that but they make only 30 units of GDP, I think lots of people are going to focus on the average (not the marginal) and not the total. To some extent I think that is a normative judgment. I think you need better, more clear explanations about why this is a superior outcome for everyone especially as I think people are less concerned about the state of the country than their own individual income and you are achieving that higher total by paying workers less.
Steve
Jon Murphy
Mar 5 2024 at 11:28am
How are we supposed to explain why it’s better for everyone (total productivity) when people are just concerned about their individual income (marginal productivity) when you say people focus on the average (which has nothing to do with either)?
The average doesn’t necessarily tell us anything about whether something is best for everyone, nor does it tell us anything at all about individuals. So, if people are concerned about the average, then they necessarily cannot be concerned about the total or individual.
Of course, I am assuming here that people understand rudimentary statistics. If they do not, then the answer to y our question is simple: merely remind them of middle school mathematics
john hare
Mar 5 2024 at 5:50pm
It’s quite possible for many of the existing workers to be better off. If there are 20 workers and two of them are leaders(foremen, manager, whatever), then doubling the workforce creates at least two more leaders.
One problem I have is that people that should be promoted can’t be promoted when there’s no one to do the job they are doing now. It’s painful when a crew leader is having to do the job of a non-skilled laborer for lack of non-skilled laborers.
Jon Murphy
Mar 5 2024 at 6:33pm
It’s not just possible; it’s what we tend to see. While the marginal worker’s productivity may be lower, others can form complimentarities and become more productive.
We see this in immigration. Immigrants do not displace native workers. Rather, immigrants complement native workers. Native workers’ wages tend to rise with increased immigration and fall with lower.
Thomas L Hutcheson
Mar 5 2024 at 11:01am
At least he was a CANADIAN economist 🙂 that committed two grave economist sins:
1.) Failure to think on the margin
2.) Zero-sum thinking
Thomas L Hutcheson
Mar 5 2024 at 11:02am
More seriously, could this be Murdock “National Conservative” ideology seeping into the news sections?
Richard W Fulmer
Mar 5 2024 at 11:56am
A great way in which to increase average productivity would be to fire every worker in the country whose productivity is below the current average. Of course, everyone would be worse off, but that one measure would look great.
Moral: Be careful what you measure; bean counters get beans.
David Henderson
Mar 5 2024 at 2:56pm
Richard, Good point.
Or to take a current example. Imagine that California politician Barbara Lee got her way and we had a well-enforced $50 minimum wage. Average productivity would skyrocket and the number of jobs would probably fall by at least 40 percent.
Jose Pablo
Mar 6 2024 at 12:16pm
In Richard’s “line”. It would be great to start thinking in Pareto optimal terms instead of thinking in the more shakier terms of “increasing average social utility”.
If you can envisage a situation in which somebody is better off, and nobody is worse off, then you can be pretty sure that the new situation is better than the previous one.
Adding new low productivity workers to an existing economy seems like a Pareto optimal to me: the new low productivity workers are better off and the initial “higher” productivity workers are, at least, no worse off (and very likely better off too).
Thomas L Hutcheson
Mar 6 2024 at 2:38pm
Almost. There could be a group of workers for whom the immigrants are close substitutes and so reduce their wages. We’ll make little progress if we insist on Pareto dominance.
Jose Pablo
Mar 6 2024 at 5:56pm
We’ll make little progress if we insist on Pareto dominance.
That’s one of the great advantages of Pareto dominance!
The “progress” we made with cost-benefit analysis is extremely questionable (particularly for the ones bearing the “cost”)
Jose Pablo
Mar 6 2024 at 5:58pm
And, even if what you say is true, Pareto dominance offers a clear course of action and helps focusing the debate: identify and compensate that group.
Jose Pablo
Mar 7 2024 at 9:20am
And there is an undeniable beauty in doing very little “progress”:
https://www.youtube.com/watch?v=Ggz_gd–UO0
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