Wednesday, July 8, 2015

Education is Insufficient to Maintain US Wages with Unrestricted Trade

A recent post over at Bloomberg Business:' Global Labor Glut Sinking Wages Means U.S. Needs to Get Schooled' is nonsense.

Education will not maintain US wages in the face of international competition. Once foreign countries are able to supply sufficient basic education, both in quantity and quality, there is nothing to stop them investing in the necessary specialized education needed for their own workers. Information (education) is more transferable than labor. The US cannot embargo the export of information.  The development of skills in foreign countries cannot be prevented. Any advantage in education is transitory, requiring a continuing race of investment in human capital. Further, the cost of education in US is greater than the cost of the same education in foreign countries, the US is at an absolute disadvantage in such a race.  Because education in the US is more expensive, it makes greater sense for international corporations to invest in the education of the foreign workers, rather than American workers.  Finally, the high cost of maintaining and developing capital in the US discourages the investment in education in the US, aggravating the competitive disadvantage in which American labor finds itself. 

In particular, the equalization of factor prices affects those factors more directly exposed to international competition faster than those factors more insulated from direct competition.  (All factors of production are connected, and therefore affected. The price of all factors of production eventually equalize, across borders. However, during the transition stage to the new equilibrium, the relationship of factor prices within the economy is altered.)   In the American case,  because of its substantial trade deficit with low wage so called ‘developing nations,’ the prices of labor and other exposed factors declines faster, while factors such as education and government, (in particular infrastructure, and military,) become relatively more expensive, and more difficult for the rest of the economy to sustain.  On the other hand, in the case of the developing countries themselves, and where they run a substantial surplus, these insulated factors become relatively less expensive, as the prices of the exposed factors rise faster.  Education, (and infrastructure, and the military,) in the developing countries thus becomes relatively inexpensive to capitalize.  Thus, the US is also at a comparative disadvantage in providing education to labor. 

One further aspect is that because the price of American education is increased relative to the rewards, and a greater share of that cost is borne by the individual, the individual is less encouraged to capitalize in himself.  This is aggravated by the fact that, with continued economic destruction because of the deficit, and inequality and resultant decrease in career opportunities, vs mere job opportunities, the chances of advancement through education are reduced anyway, especially for disadvantaged youth.  Indeed, many of these might see the costs, in time and attention, of even a minimal education as not worth the bare rewards this society seems to them to be prepared to offer them.

 The result of these factors is that, over time, US labor's disadvantage will increase, and their wages continue to decline.  This decline in wages will not result in greater competitiveness, because the capitalization of the American labor force will be reduced over the period of factor equalization, and be less than the capitalization of their foreign competitors.

Efforts to educate the American work force will not save American jobs or maintain American wages in the face of international competition.  These efforts are not being made, anyway.

Corrected and slightly expanded version of an earlier post