Competition from China and other low-wage rivals, coupled with fallout from the 2007-’09 financial crisis, has put American wages under such unprecedented strain that they have shifted into reverse – not merely stagnating, but falling.
“Water finds its equilibrium, its own level,” said Jeff Joerres, chief executive of Milwaukee-based global staffing giant ManpowerGroup Inc., who refers to this accelerating leveling of wages as “global labor arbitrage.”
“It’s happening so fast on a global scale that it’s scary,” Joerres said.
In the U.S., the phenomenon is not limited to isolated and vulnerable sectors, such as commodity manufacturing. Rather, wages have fallen across the entire national economy – down 1.1 percent in the 12-month period from September 2011 to September 2012, the most recent comparisons available.
“Average weekly wages declined in every industry except for information,” the U.S. Bureau of Labor Statistics reported in its latest economic census.
That quarterly report has shown year-over-year declines only six times since the data collection began in 1978 – and four of those have occurred since 2009.
Nor is the United States the only advanced economy affected. The average of wages in western Europe, Japan and the U.S. fell in a “double dip,” declining in both 2008 and 2011, according to the Swiss-based International Labor Organization.
In China, meanwhile, wages have roughly tripled in the past decade, leading a trend of rising wages among developing economies such as Brazil, Peru and eastern Europe, the ILO said.
“This is not a rosy path, folks,” Joerres said. “We don’t get to choose our borders in which we create our own rules.”
The viselike pay squeeze promises to become more common as global economies become more connected – “the new normal,” according to Joerres.
Wage competition was a familiar if slower-moving dynamic of the pre-global age, but it took place almost exclusively within national confines, as when a new auto works in the 1980s bypassed unionized Detroit in favor of nonunion states in the American South, which in turn kept Detroit wages under pressure.
More recently, Mexico has added to the downward pull on U.S. earnings when, for instance, a company like Brown Deer, Wis.-based Badger Meter Inc. opened production facilities in the border city of Nogales.
To be sure, pressure on U.S. wages these days comes from multiple economic forces, not just from cheaper foreign labor.
“We have gone through the worst recession that we have seen since the 1930s,” said William Strauss, a senior economist who studies the Midwest at the Chicago branch of the Federal Reserve Bank.
Unemployment has remained high throughout the achingly slow recovery. The U.S. recession ended, at least statistically, only to find Europe mired in a renewed slowdown, keeping pressure on wages on both sides of the Atlantic. On both continents, putting people back to work means falling wages are preferable to the alternative, which all too often is no paycheck at all.
“This is the normal adjustment process that takes place when you have such extreme unemployment rates,” Strauss said.
No one disputes, however, that wages are in upheaval around the globe and that leveling pressure from low-wage rivals only accelerates the trend.
“There is a movement toward convergence,” said Patrick Belser, a senior economist in Geneva at the International Labor Organization.
In its latest Global Wage Report, the ILO warned that wage competition between nations could trigger a “race to the bottom,” with nations desperate to undercut each other with cheap labor, only to end up shrinking their own economies.
In the manufacturing sector, wages have been under pressure for years, government data shows. In some years, factory pay has not even kept pace with inflation. More recently, however, there’s evidence that wage weakness has spilled over into management ranks as well.
The Hay Group, a global management consultancy, recently studied pay increases for senior management jobs and department heads in multiple nations. Looking at the full decade from 2001-’11, it found heady gains in emerging market economies such as Brazil (181 percent in the period); Turkey (190 percent); South Africa (241 percent) and China (247 percent).
But in the U.S., the equivalent increase over the decade was 38 percent, a figure that would be much lower if adjusted for inflation, said Tom McMullen, a Hay analyst based in Chicago.
“The U.S. employee has been running in place” compared to counterparts in other parts of the world, McMullen said. “The easiest place to make a buck is in the developing markets.”
The global trend, with wages in developing nations making impressive percentage gains while those in developed nations are under pressure, has by no means led to level pay across the globe. In fact, there is far more room for convergence: In China, an average worker makes the equivalent of $8,700 a year, compared with $47,000 for a U.S. counterpart.
But the move toward a more level playing field is clear – and statistics are only now beginning to catch up with the phenomenon, Joerres noted.
As U.S. pay has slipped, President Barack Obama earlier this year began to press for an increase in the federal minimum wage from $7.25 an hour to $9 by 2015.
Whether Obama succeeds or not, Joerres said he expects the pace of global wage-flattening to accelerate. “If you are sitting in Asia, right now you’d be having a very heated discussion about labor arbitrage: Who’s got it? Who doesn’t?”
Already, China’s wages are looking pricey to some, compelling global conglomerates to bypass it and look elsewhere. Even Vietnam is becoming passe, Joerres said. Central African nations are quickly becoming the new frontier.
China Motor Corp. recently invested $1 billion to establish a manufacturing plant in South Africa. Canada’s Bombardier Aerospace invested $200 million in a production facility in Morocco. Nestle SA opened a new plant in Nigeria.
Joerres foresees a time when international wage rates will be tracked in real time like stock quotes. Wages are shifting too quickly for some managers to lock in long-term strategies with any confidence. Typical investments in new equipment or plants operated on horizons of at least five to seven years, he said.
“Who can predict what will happen in the next five years?” he said. “This is a tension-filled time because of the global pressures. You have to reinvent yourself in flight. You don’t get to land and go into a hangar.”