THE COMPETITIVENESS EQUATION— THE COST OF LABOR
Among the first factors considered by a corporate board in determining where to locate a new facility often is the cost of labor. If that is not the case, the implication is that the firm has found a way to operate its business with little labor content, that is, without creating many jobs. If the company is concerned with hiring factory workers, it will undoubtedly be noted that nine such workers can be hired in Mexico for the cost of one in the United States. I recently visited a plant in Vietnam where 20 assembly workers could be hired for the cost of 1 in the United States. As far as labor wrap-rates are concerned, the US worker would have to take a 95% cut in pay and benefits simply to be on an even footing with a counterpart in Vietnam from the standpoint of cost. Needless to say, few US workers would do so willingly.
In recognition of these trends, a new “international standard” of comparative wages has emerged in recent years: the “McWage.” The McWage is what McDonald’s pays its beginning employees in various countries, and it reveals an average pay differential of a factor of 12 between the US worker and workers in low-wage countries. Not 12%. Not even 120%. A factor of 12—1,100%.
But perhaps it is not factory workers who are needed for the new facility being considered; perhaps it is engineers and scientists. In this case, eight engineers can be hired in India for the cost of one in the United States. Five chemists can be employed in China for the cost of one in the United States. And they may well be graduates of the renowned
Indian Institute of Technology, Tsinghua University of China, or one of America’s foremost universities. Some studies indicate still greater exchange ratios for engineers and scientists in Russia; however, the data on Russia are notoriously imprecise, as well as volatile.
Such disparities will presumably narrow when other economies and their citizens prosper, as indeed is already beginning to happen. But global wage equivalence appears to be a long time away—much longer than America can afford to wait before addressing its competitiveness shortcomings. There is also, as critics point out, the possibility of major political upheavals in developing countries that could have significant effects on the competitiveness of those nations—but it seems unwise to predicate America’s future on such destabilizing events. It thus appears highly likely that the United States will suffer a substantial wage disadvantage for many years to come and that some means will have to be found to offset that fundamental tilt of the flat earth away from America.