The Globalization Excuse

Susan B. Hansen September 22, 2006

Susan B. Hansen is professor of political science at the University of Pittsburgh. She is the author of Globalization and the Politics of Pay: Policy Choices in the American States (Georgetown University Press, 2006). Last week, the Chicago City Council failed to rally enough votes to overturn Mayor Daley’s veto of a “living wage” ordinance. The measure, first passed by the council in July under national media attention, would have required big-box retailers like Wal-Mart and Target to pay a higher minimum wage. Opponents of the minimum-wage hike claimed it would cost Chicago jobs. Businesses wouldn’t be able to compete with other states and cities that don’t have a high minimum wage, they fretted. The evidence suggests otherwise. The old “high wages will make us less competitive” excuse gets trotted out whenever there’s a move to increase the minimum wage. And it works. This year, Congress again failed to raise the federal minimum wage of $5.15, which has not been increased since 1997. And the latest report from the Bureau of Labor Statistics showed that median hourly wages have declined despite gains in productivity. Wages and salaries now make up the lowest share of GDP since 1947, while corporate profits are at record highs. Put another way: Citizen earnings are at historic lows, while corporate earnings are way, way up. To rationalize this lopsided state of affairs, the “global economy” is often blamed. We often hear that in an increasingly integrated world economy, American workers must accept lower wages, fewer benefits and less job security in order to compete with China, India or other developing countries. But what we don’t often hear is that the costs and benefits of globalization represent concrete political choices, not economic inevitability. Many countries—and some American states—have successfully combined international competitiveness with decent living standards for their workers. On the other hand, some places that have cut wages and benefits have not only failed to become more competitive in the international market, but have suffered adverse social and political consequences. My recent research on American states provides evidence to support these claims. In the United States—unlike other more centralized European countries—many policies that influence labor costs are determined at least in part at the state level. Examples include so-called right-to-work laws , legal provisions affecting employment at will, unemployment insurance eligibility and benefit levels, and workers’ compensation. Twenty-two states now have minimum-wage laws above the federal minimum. In America, the cost of labor—that is, workers' wages and benefits—has dropped dramatically over the past 30 years. A comprehensive index of what employers pay for labor per state shows a decline in labor costs of 25 percent since 1970, and economic factors—loss of industrial jobs, international competition—are certainly part of the explanation. But politics matters as well; I found that the best single predictor of trends in state labor costs was voter turnout! States with low and declining labor costs, such as Kentucky, Nevada, and South Carolina, have experienced a falloff in voter turnout. But where ordinary citizens vote in larger numbers, aided by competitive political parties and grassroots labor organizations, labor costs—both manufacturing wages and benefits—have actually increased. In states with referenda, such as Florida and Nevada, ballot measures to increase the state minimum wage have passed with significant majorities. So have international markets punished the states where labor costs have remained high? On the contrary; states leading in manufacturing exports—such as Washington—or foreign direct investment—California and New York— are the states that pay higher wages. But states such as Arkansas, Idaho and West Virginia—which have cut their labor costs most drastically since the 1970s—rank in the lowest quartiles in terms of exports. Higher state labor costs are also associated with faster growth in gross state product, education levels, productivity and personal income. International data support these conclusions as well. According to the World Competitiveness Index, the most competitive country in the world is Finland, and the other Scandinavian “welfare states” with generous unemployment and health care policies also rank in the Top 10. Countries such as Estonia, Ireland, Singapore, and South Korea, which have invested heavily in education, have also attracted high levels of foreign investment. What about jobs and employment? My research showed that trends in state labor costs have little impact on unemployment rates, which remain higher in central cities and in isolated rural areas. Despite its drastic cuts in state labor costs, West Virginia still has the nation’s highest unemployment rates. Job growth is modestly greater in states with lower labor costs. But many of these jobs are part-time, low-paid and offer few, if any, benefits. Thus declines in state labor costs are associated with a number of negative social outcomes: higher rates of crime, poverty, suicide, divorce and births to single mothers. Creating a few more low-paid jobs does not counter these adverse trends. Congress and the presidency, firmly under Republican control, may invoke international competition and “globalization” to justify their refusal to raise the minimum wage and for shifting the tax burden from wealth and capital to workers’ wages. But in many states, political officials have made other choices: to increase the state minimum wage, to enact the Earned Income Tax Credit to benefit the working poor, to expand rather than restrict access to workers’ compensation and unemployment benefits. The global economic system is not a static, immutable force over which we are powerless. Indeed, it is the officials we elect who can influence how the costs and benefits of globalization are distributed.