Cheap Labor is Very Expensive, Expensive Labor Very Cheap

Much ink has been spilled over the last few weeks about the Obama and Clinton campaigns’ flagging commitment to free trade. Seeking to shore up support in the industrial Midwest, both candidates have decried trade agreements that allegedly expose American workers to cheap labor from outside our borders.

So while cheap foreign labor is conveniently fingered as the root cause of economic decline in the Midwest, an essential economic reality is being ignored. Ohio and Michigan aren’t ailing due to low overseas wages, but instead they’re suffering because cheap labor is very expensive, while expensive labor is very cheap.

Indeed, if specific locales or regions were truly weakened by high levels of pay, Silicon Valley and New York City would be ghost towns. But as evidenced by the high cost of living in both areas, salaries and wages are at nosebleed levels commensurate with those costs.

So why aren’t jobs rapidly exiting Manhattan and Menlo Park? The reason is that expensive labor is once again extremely cheap. Google presently has 17,000 employees, but its profits per employee are $247,000. Goldman Sachs has roughly 30,000 highly paid workers, but with profits of $16 billion last year, profits per employee worked out to $530,000. Judging by the high level of productivity on the coasts, companies there pay high nominal salaries that prove to be excellent bargains.

The problem for the Ohios and Michigans of the world is that many residents want to do that which is relatively cheap on a nominal, per-employee basis, but very expensive overall. The best example of this is General Motors. The average salary at GM is one that most on Wall Street wouldn’t bother to get out of bed for, but when we consider that GM regularly loses money, those low wages are very expensive.

Another example is Wal-Mart, the convenient whipping boy for lefty economists and labor activists seeking to reveal broad employee exploitation when it comes to hourly income. What’s missed is that compared to Goldman, Wal-Mart’s executives are ripped off on a per employee basis. Wal-Mart’s profits per employee work out to only $6,000, which exposes the lie about its executives enriching themselves on the backs of low-wage workers. On a per employee basis, Goldman Sachs is the true exploiter.

When we look overseas to China and India, wages over there are similarly expensive because they’re low. Economist Gregory Clark notes that in modern cotton textile factories in India, employees work “for as little as fifteen minutes of each hour they are at the workplace.” Much is made of heavy foreign investment flowing into Asia, but on a per person basis it’s very low given low levels of productivity.

Some would reply that if that’s the case, why not keep the outsourced jobs stateside? This doesn’t happen because with unemployment in the US still below historical norms, it would be too expensive to waste limited human capital on low wage, low value work. In short, workers in the Midwest haven’t been displaced by foreign trade; instead many want for work owing to their desire to remain in low-wage positions. Employers blanch because it would be too expensive to waste their labor on jobs that don’t pay very well.

The above is why the influx of cheap foreign goods is so essential to the health of the rustbelt. Beyond the simple truth that those struggling to make ends meet will see their money go further when goods are plentiful, the arrival of cheap goods is step one in a process that will free up previously consumed capital in favor of savings. Savings and investment fund wages, so if all Americans irrespective of geographical locale are able to save more, they’ll unwittingly be funding new entrepreneurial opportunities that will employ those eager to enhance their pay, and by extension, the value of their labor.

That’s why John McCain only gets it half right on trade. To his credit he’s not yet sold his political soul in favor of rethinking trade deals a la Clinton and Obama, but when he argues that “We’ve got to do a better job of taking care of those workers who have been displaced,” he’s misunderstanding why trade is so enriching to begin with. Cheap goods as mentioned free up limited capital for new industries, so when he proposes costly government programs meant to ease the alleged pain wrought by free exchange, he’s explicitly dipping into the very capital pool that leads to new jobs, and that exists thanks to trade.

So rather than wishing for higher tariffs to solve their problems, Midwesterners won’t get out of their economic rut until they realize the natural economic advantages that come with being English speaking and American; advantages that should have them seeking higher wage work that is less expensive to prospective employers. Free trade is not the cause of the Midwest’s economic malaise, but stationary work habits are.