It’s no secret that in the past decade, the middle class here in the U.S. has gotten smaller. Wages have stagnated and prices on most all items have risen (with the exception of real estate). The stock market has been flat for the past ten years, albeit volatile. Yields on savings and bonds are at historically low levels, hovering just above zero (Financial Times Markets data 10/2/2012). So, the middle class is being squeezed. Stagnant wages, low to no returns on savings and investments and rising prices.
Many would tell you that the stagnant wages are the result of the Great Recession that began in 2008. With high unemployment (8.3%), why do employers feel they need to raise wages to attract workers? (“Paychecks Can’t Keep Up With Rising Prices” NPR, April 10, 2011). That’s partially true, but I contend that the causes of stagnant wages here in the U.S. runs much deeper than just that.
Businesses are interesting creatures, in that the owners of them want to make a profit, which is their compensation for the risk they took on in starting the business. That desire never goes away, no matter how old the business is. The way you make a profit is to produce something and sell it for more than it costs you to produce it. So, to increase profits, you can raise the price at which you sell it, which at some point will cease to work because the buyers won’t buy if the price goes beyond where they see value. Or, you can reduce costs, which is something that a business owner has more control of. Generally, the biggest cost of producing something is labor.
If we go back 80 years to the Great Depression, the labor force here in the U.S. was plentiful. There were more workers than there were jobs, so workers were willing to work for just about any pay they could get, just to have a job. And they would take any job they could find. An example is my grandfather. He was a farmer, but the Great Depression and the Dust Bowl caused him to lose his farm in Northwest Kansas. When he moved his family in to town, he took a job serving food in the high school cafeteria, so that he could keep food on his own table. In those days, farmer to food server was not moving up the economic ladder.
Let’s fast forward ahead to just after World War II. Economically, things were getting better. The U.S. was an economic powerhouse. We produced the world’s best cars, planes, trains, bikes, shoes, you name it, we made it and the quality was top notch. Our labor force was skilled at what they did. They worked hard and were compensated fairly. Unions had been around for a number of years, but really started flexing their power about now. The unions wanted more of the business owners’ profits for their people in the form of higher wages, better benefits, such as retirement plans and medical insurance, more time off and other benefits. They knew they could get it because where would the business owner find workers that could do as good of a job for less money? He couldn’t.
Then a funny thing began to happen. Workers in other countries began acquiring the same skills as their U.S. counterparts. These workers were coming from countries that were what we called developing countries. Japan was the first. Having been bombed into the dark ages at the end of World War II, the Japanese economy looked like the U.S. during the Great Depression. Lots of workers, no jobs. The U.S. was committed to help Japan rebuild, so their people came over here to our schools, toured our factories and took all that info back home and began competing with the U.S. on the global economic stage. Initially Japanese goods were found to be inferior to those made in the U.S., but they were much cheaper. Gradually the quality of certain goods being produced in Japan exceeded that of those made here in the U.S., and they were still cheaper because Japan’s labor costs were less than ours. What did we see? We saw jobs in certain industries begin to disappear. I can think of clothing and steel production as two industries that nearly went out of business and where workers lost thousands of jobs.
The formula also began working for other countries too. China, Korea, India, Brazil and Mexico all had large hungry labor forces that through education and training improved their skills and would work for much less than their U.S. counterparts, so jobs began to move to these countries and out of the U.S.
My point here is that labor moves to where it costs the least. And it will continue to do so. Really, since the 1970’s our labor force has been overpaid when compared to other workers in similar positions around the world. Once our workers (and their unions) saw jobs moving to less expensive labor markets, demands for raises, benefits, etc. cooled down. Wages haven’t been rising. Many employers have reduced or eliminated benefits. But what we are now seeing is that the wages in what used to be cheap labor markets are catching up with those in the U.S. workers in China and India are demanding higher wages and better benefits. We are actually seeing jobs moving back to the U.S. Foreign car manufacturers are opening plants to build here in the U.S. because our workers are willing to work for less and demand fewer benefits. High transportation costs have also helped, because it makes it less expensive to produce something here that is sold here rather than shipping parts somewhere else to be assembled and then ship the finished product back here for sale.
Mike Berry is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.
Copyright ©2012 Mike Berry. All Rights reserved. Commercial copying, duplication or reproduction is prohibited.
