New York Manhole Covers, Forged Barefoot in India – New York Times

In the revealing story above, the NYT reports on the manufacture of the New York’s thousands of manhole covers, which it turns out come primarily from a foundry in the Indian state of West Bengal. An NYT photographer discovered the Indian factory, and his photos prompted the report here:

Eight thousand miles from Manhattan, barefoot, shirtless, whip-thin men rippled with muscle were forging prosaic pieces of the urban jigsaw puzzle: manhole covers.

Seemingly impervious to the heat from the metal, the workers at one of West Bengal’s many foundries relied on strength and bare hands rather than machinery. Safety precautions were barely in evidence; just a few pairs of eye goggles were seen in use on a recent visit.

In AP Economics, we have begun learning about resource markets, where firms hire the productive resources needed to produce their output. Land, labor, and capital are all needed to produce any output; the combination of these resources a firm will use depends on several factors, including the productivity and the prices of the resources. When the price of labor is low, firms tend to use more labor and less capital. In developing countries, especially those with a large, unskilled workforce (like India), firms are likely to specialize in the production of labor-intensive products, such as the manholes found in American cities like New York.

The scene at the Indian foundry sounds like something from the Middle Ages:

The temperature outside the factory yard was more than 100 degrees on a September visit. Several feet from where the metal was being poured, the area felt like an oven, and the workers were slick with sweat.

Often, sparks flew from pots of the molten metal. In one instance they ignited a worker’s lungi, a skirtlike cloth wrap that is common men’s wear in India. He quickly, reflexively, doused the flames by rubbing the burning part of the cloth against the rest of it with his hand, then continued to cart the metal to a nearby mold.

Once the metal solidified and cooled, workers removed the manhole cover casting from the mold and then, in the last step in the production process, ground and polished the rough edges. Finally, the men stacked the covers and bolted them together for shipping.

Why are New York’s manhole covers being made over 8,000 miles away, anyway? Wouldn’t it make more sense for American cities to buy such items from firms making them right here in the United States? To understand this question, we need to consider the principle of comparative advantage, which says that a nation should specialize in the production of the products for which it has the lowest opportunity costs.

Manhole covers manufactured in India can be anywhere from 20 to 60 percent cheaper than those made in the United States, said Alfred Spada, the editor and publisher of Modern Casting magazine and the spokesman for the American Foundry Society. Workers at foundries in India are paid the equivalent of a few dollars a day, while foundry workers in the United States earn about $25 an hour.

Bengali laborers working in India’s foundries most likely face the trade off of an agrarian existence or maybe another factory job in the pre-industrial economy of the impoverished region, alternatives presenting a much low opportunity cost than American workers whose alternatives include jobs offering much higher productivity. The productivity of a worker depends on the quality and quantity of capital available, the level of training and education of the worker himself. Clearly, Indian workers have less access to capital, lower quality capital, and much less training and education than their American counterparts.

The result is that jobs that require large inputs of low-skilled labor, such as the manufacture of manhole covers, end up being “off-shored” to remote corners of South Asia. The added cost of shipping thousands of ton of iron around the world is more than made up for by the lower resource prices (thus costs of production) in the West Bengali foundries.

Discussion Questions:

1. Why do the Indian foundries use such large inputs of labor, and relatively little machinery?
2. What factors might reduce the demand for labor in the Indian foundries?
3. How does a firm know if it’s using the right combination of capital and labor in its production?

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The following post was written by an AP Economics student at Zurich International School

We all know about market failure on the product side: A good or service is under or over produced in the free market because of externalities that cause the marginal social benefit (MSB) to no longer equal the marginal social cost (MSC). Instead, the good or service is at another equilibrium where the MSB is equal to the marginal private cost (MPC). In such a case, the government may intervene by either taxing or subsidizing the good or service, or even by taking control of production in order to bring the values to the social equilibrium point (MSB=MSC).

Now let’s take a look at how this plays out in the human resources market.

In the human resource market firms tend to pay close to the same salary to people of the same rank or position. This can lead to market failure. An employer might have positive or negative externalities. Their location may be near public transport and in a beautiful location. Or it might be situated right next to a sewage treatment plant. When firms offer the same salary for the same position, their externalities may lead to labor surpluses or shortages, i.e. to market failure.

A firm with negative externalities will have a shortage of workers since the qualified workers can work elsewhere for the same amount. A firm with positive externalities will have a surplus of applicants. The number of people will want to work at such firm will exceed the positions available. The firm could profit from this situation by becoming more selective, accepting only those candidates of superior quality. However, there can also be additional costs to the company if its externalities attract a surplus of applicants. There would be additional costs for processing and reviewing the many applications received. In a world of perfect competition where employee qualifications would be the same, the firm with positive externalities would reduce the wages it offers. This would reduce labor costs and decrease the number of applicants, reducing thus administration costs too. A firm with the negative externalities would have to do the inverse: raise wages in order to increase the number of workers. In reality of course, employee qualifications differ and the firm with positive externalities may get a flood of applications from candidates even those with insufficient qualifications.

There are many examples of positive and negative externalities, not only location. These can range from a positive (or negative) brand to a positive (or negative) reputation in how the company treats employees, such as by having flexible hours or supplying recreational or sporting facilities. When a person is looking for a job, externalities can play a decisive role.

Case Study: John the Consultant

Let us look at John the Consultant as an example. Like most applicants, John is looking for a good salary but he also wants to enjoy his work environment.

John gets three job offers: One from a fairly standard consulting firm, one from a tobacco company, and another from a sports TV network (with great offices with fabulous views).

When he was originally applying, John thought he would jump at opportunity to work at the sports network. The network had been his favorite since he was a child. He loved the thought of working in sports and television.

But then he took a closer look at the actual offers. The sports network offered him a salary that did not even come close to his expectations. The consulting firm’s offer was like its offices: just the standard fare. On the other hand, the tobacco company’s financial offer was mind-blowing.

Why is this so?

The tobacco company’s labor market might look like this:

Here, due to ethical concerns with the product, too few people would be interested in working at the tobacco company if it paid the average wage. Its cost to hire an additional worker (let’s call it the Private Marginal Resource Cost (PMRC)), is higher than the market average (AMRC). This is why it is necessary for the firm to increase wages in order to increase the quantity of labor to the optimal level. To be noticed is that their new quantity of labor is still below the market average. If the firm wanted to raise labor up to the market average, it would have to further increase wages, which would be extremely inefficient since there will be a point at which the cost of the additional workers will outweigh the value they represent.

A sports network company might look like this:

The sports network company, if it offered average wages, would have a surplus of workers. Here the AMRC is higher than the PMRC. In such case, the economically wise action is to decrease wages, thereby decreasing the quantity of labor to the optimal amount. To be noticed again is that its optimal amount is still higher than the market average. If it further decreased wages to reach Q_A there would be a dead weight loss. (Pragmatically speaking, the firm would not hire a surplus of workers; it would stick to Q₂, but even then normal wages would be inefficient, since it could get the exact same quantity of labor at lower wages.)

Now John has the choice of taking less money along with the positive externalities, or more money when there are negative externalities. The externalities turn into opportunity costs. And this creates a dilemma.

Firms have long known the gist of this concept. Most large corporate firms have made serious efforts to increase employee satisfaction in the hope that it will become a positive externality. Yet since the vast majority of employers have done similarly, various types of extra benefits have become standard for the market. However there are still companies that stand out from the rest. For example Google has placed a high priority on creatively generating employee satisfaction and creating a work environment conducive to cooperation and innovation. It has excelled in these domains by so much that their employees are glad to take a lower paycheck than the market average for the privilege of working there.*

Now all this is a prime example of how externalities are corrected through the profit incentive. In contrast to the product market (where a company may not bear the full cost of a negative externality it causes, such as pollution, and government intervention can become necessary), no government interference is usually necessary in the human resource market. There it is the firm that notices and corrects the difference in employee wages in relation to externalities. Most companies have learned to put a price on externalities, and equilibrium is restored.

*As an example, according to the Financial Times Feb 7, 2011, Google now receives an astonishing 75,000 applications a week.

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2. Shanghai American School and the imperfectly competitive market for international teachers
3. An introduction to consumption externalities from a Singapore perceptive

Also posted at economic and eLearning – digging a little deeper

The Danish people are a notably generous and happy group of people and for many years they have had the most extensive welfare system in the world. Danish citizens pay nearly 50% income tax, which allows its citizens to enjoy a high quality of life, free education, healthcare and lavish unemployment benefits.

Click here to view the embedded video.

Since the Global Financial Crisis in late 2008 unemployment in Denmark has more than doubled from 1.7% to 4.2% now. This is still far below levels in other parts of Europe, such as Spain with 19% unemployment. The Danish government is however evaluating the level the unemployment benefits, as the government budget tightens. An unemployed worker in Denmark is entitled to an unemployment benefit which is between 70-90% of their prior salary. Currently they can receive this compensation for up to four years.

High unemployment puts two specific strains on the governments budget during a recession. There are decreased tax receipts as workers are forced out of work, but at the same time expenditure on transfer payments to the unemployed workers will simultaneously increase. Therefore a swift rise in unemployment in the recent recession, lead to some governments such as the United Kingdom falling into a deep budget deficit very quickly. The opposite effect occurs in an economic boom where transfer payments fall and tax revenue increase, leading to a swelling of the budget surplus.

Policy makers in Denmark are therefore planning to trim the generous safety net provided to its workers,

Having found that recipients either get work right away or take any job as their checks run out, officials are also redoubling longstanding efforts to move Danes more quickly out of the safety net.

“The cold fact is that the longer you are out of a job, the more difficult it is to get a job,” Claus Hjort Frederiksen, the Danish finance minister, said during an interview. “Four years of unemployment is a luxury we can no longer allow ourselves.”

New York Times – Liz Alderman – 16th August 2010

Statistics from Denmark show that in the Global Financial Crisis of late 2008, 100,000 Danish people were registered as unemployed. Approximately 62% of these people found another job within two months, and only 6% of these people had been unemployed for longer than two years. This highlights the fact that Denmark has a very flexible labour market. Meaning in simple terms, that workers can freely move between jobs, and can be hired and fired more easily than in comparable European nations such as Germany or Sweden. The flexibility and security of the Danish system is nicknamed “flexicurity”. The following comments highlight the elements of the flexicurity culture.

“It’s no surprise the government is saying that programs that are highly expensive and give a Rolls-Royce treatment to citizens have to be trimmed,” said Iain Begg, a professor at the London School of Economics. “So the search will now be on for labor market policies that deliver more people in work with less money, which has an inevitable air of the holy grail about it.”

In Denmark, employers have carte blanche to hire and fire, and in most cases laid-off people are guaranteed about 80 percent of their wages in benefits, a figure capped for high earners. In turn, they must participate in retraining and job placement programs tailored to get them back to work, which the government has intensified.

Each year, a remarkable 30 percent of Danes change jobs, knowing the system will allow them to pay rent and buy food so they can focus on landing a new position. About 80 percent belong to unions, which manage the workplace, help run the unemployment insurance program and press the laid-off into retraining.

New York Times – Liz Alderman – 16th August 2010

If 30% of workers are willing to change jobs each year, this would have a positive effect on the economy. This proportion is high because workers are not scared into becoming unemployed and poor. Some like myself, would consider the opportunity cost of receiving 80% of my previous wage and an unemployed holiday a great trade off. Of course, workers also consider issues such as social dislocation, loss of skills in the decision making process and are therefore keen to get back into work as quickly as possible.

Within Denmark and the flexicurity system; it would suggest that workers are prepared to accept new challenges and develop skills that are required in new jobs. This also opens up jobs to younger graduates each year. During a recession the same system allows firms to reduce thier demand for labour quickly and to restructure the business to the new economic climate. The supporting welfare structures in Denmark which help unemployed people with training and job applications is an important spoke in the system. These elements are considered labour market supply side policies.

Discussion Questions:

1. Describe the concept of “social safety nets”
2. If the Danish government continued to allow up to four years unemployment benefit, what could be the potential impacts on the Supply of Labour within Denmark?
3. Describe why Denmark has the one of the lowest Gini Coefficient scores in the world (0.29, CIA Factbook 2007)
4. How does labour flexibility or the Danish system of flexicurity, improve economic growth?
5. Evaluate the relative merits of Denmark having one of the highest income tax rates in the world.

Related posts:

1. When Spain’s unemployment problem gets ugly
2. Unemployment and How To Avoid It! You May Not Need Another Degree!
3. 3 million job openings! Good news… or is it?

Related posts:

1. America’s Immigration Problem – the human cost
2. Immigration and American labor markets – opposing views
3. America: Land of the free, home of “jackass” economists

Young Americans Going To China For Jobs – the Huffington Post

I remember my 9th grade history class, when we learned about how so many thousands of Chinese immigrated to the American west to build the railroads. My textbook had a picture that looked like this:

Well, that was 130 years ago. Today, the world is a very different place. America, once the land of opportunity, has shed hundreds of thousands of jobs a month for 18 months straight. Unemployment, near 10%, has driven the economy into its deepest recession since the 1930s, trade is grossly imbalanced, as are federal budgets, and national debt has inched ever closer to 100% of GDP. All in all, things are pretty gloomy.

Someday, ninth grade history students may look in their textbooks and read a different story about the early 21st Century. In the future, they may see pictures like this in their history books:

That’s right, today the land of opportunity is China, and hundreds of thousands of foreigners, including thousands of Americans, are packing their bags for the “Middle Kingdom” in search of work.

Young foreigners… are coming to China to look for work in its unfamiliar but less bleak economy, driven by the worst job markets in decades in the United States, Europe and some Asian countries.

Many do basic work such as teaching English, a service in demand from Chinese businesspeople and students. But a growing number are arriving with skills and experience in computers, finance and other fields.

“China is really the land of opportunity now, compared to their home countries,” said Chris Watkins, manager for China and Hong Kong of MRI China Group, a headhunting firm. “This includes college graduates as well as maybe more established businesspeople, entrepreneurs and executives from companies around the world.”

Some 217,000 foreigners held work permits at the end of 2008, up from 210,000 a year earlier, according to the National Bureau of Statistics. Thousands more use temporary business visas and go abroad regularly to renew them.

Some foreigners see China not just as a refuge but as a source of opportunities they might not get at home.

Konstantin Schamber, a 27-year-old German, passed up possible jobs at home to become business manager for a Beijing law firm, where he is the only foreign employee.

“I believe China is the same place as the United States used to be in the 1930s that attracts a lot of people who’d like to have either money or career opportunities,” Schamber said.

There’s a lot of talk in America today, on the news, on the radio, in the papers, about whether the US economy will ever return to “normal”. Unemployment is nearly 10%, and some economists think it may take years for it to fall below 10% once more.

I guess the good news is, if Americans start heading to China in ever larger numbers to find work, the number of people looking for work in the US will fall, leading to lower unemployment. Of course, that’s not how the US wants to bring down unemployment, nor is it good for the nation’s long-run growth potential if high skilled workers go abroad to find jobs. But it does raise a very important question: Will America be the land of opportunity in the future? Or will its tired, huddled masses become the “boat people” of the 21st Century, seeking employment on distant shores.

Full disclosure here: I myself have only worked as a teacher abroad, including in China! And to be honest, it is because the demand for my skills is clearly greater overseas than it is at home! My income is far higher abroad than I could earn in an American public school, and my services and skills are valued much greater in the international setting, particularly in Asia!

Related posts:

1. Does economic growth = economic development? Not for China’s rural poor…
2. America: Land of the free, home of “jackass” economists
3. “China Chokes”: A look at the effects of China’s massive economic growth

Help Wanted: Why That Sign’s Bad – BusinessWeek

This week’s cover story in Business Week magazine tells an interesting story about unemployment in America. Listen to the podcast or follow the link above to read more of this story:

Surprising statistic: In the midst of the worst recession in a generation or more, with 13 million people unemployed, there are approximately 3 million jobs that employers are actively recruiting for but so far have been unable to fill. That’s more job openings than the entire population of Mississippi.

Sound like good news? It’s not. Instead, it’s evidence of an emerging structural shift in the U.S. economy that has created serious mismatches between workers and employers. People thrown out of shrinking sectors such as construction, finance, and retail lack the skills and training for openings in growing fields including education, accounting, health care, and government. At the same time, the worst housing bust in decades has left the unemployed frozen in place. They can’t move to get work because they can’t sell their homes.

In IB and AP Economics we teach that there are three types of unemployment an economy may experience, ranked roughly in order from the least undesirable to the most undesirable (from a macroeconomic perspective):

• Frictional unemployment: This accounts for people who are “in between jobs” or fresh out of college looking for their first jobs.
• Structural unemployment: This is caused by the changing structure of an economy. As America’s manufacturing sector shrinks and its education and health care sectors grown, those whose skills lie in manufacturing become structurally unemployed.
• Cyclical unemployment: This is also called “demand-deficient” unemployment because it is caused by a fall in aggregate demand or overall spending in the economy.

America today is clearly experiencing all three types, but due to the particular circumstances of the recession, the American worker is finding it it harder than ever to match his skills with an appropriate job. Below are some of the industries with the most and the fewest job openings today:

Most openings:

• Education
• Health care
• Government
• Energy (such as wind, oil, natural gas)
• “Analytics” (i.e. business data analysis by firms such as IBM)

Fewest openings:

• Construction
• Manufacturing

Unfortunately for the large numbers of unemployed construction and factory workers, the kinds of skills required to work in the fields with the most job openings are prohibitively different from those learned in their previous industries. In addition to a mismatch of skills between the industries in which jobs are being lost and those in which labor is in demand, there is also a geographic mismatch in the labor market. Below are the states with the least and the most job openings:

Most job vacancies (states with large energy sectors: oil, natural gas and windmills)

• North Dakota
• Wyoming

Least job vacancies (states with large manufacturing and construction sectors)

• North Carolina
• California
• Michigan

Historically, the geographic factor has not posed an issue to American workers, and when jobs opened up in one part of the country, Americans would pack up and move where necessary to find work. Today, however, with the collapse of house prices, more and more Americans find themselves stuck with a house they can’t sell in a part of the country where they can’t find a job.

To paraphrase the podcast above, “the US in danger of looking like Europe. The European job market has been described as ‘sclerotic’; people don’t respond to want ads because of the generous long-term unemployment benefits offered by European governments. Europeans have historically been geographically immobile due to nationalist ties to their home countries.” Today, the US job market reflects some of the same “sclerosis” as that of Europe.

America is facing the perfect storm of unemployment. At the same time that the economy is undergoing its most significant structural change since the Industrial Revolution brought millions of American workers from the farm fields into factories, it is facing the most significant decline in private sector spending (consumption, investment and exports) since the great depression. Put this together with the relative immobility of the American worker caused by the housing crisis, and unemployment has climbed to its highest level in three decades.

This interesting story ends with a glimmer of hope for the American worker:

To fight this sclerosis, the White House is using $3.5 billion of the stimulus for training, while boosting support for community colleges. Classes for factory workers seeking entry-level health-care careers have shown some success.

The truth is, displaced workers may have to move down a few rungs as they switch careers because their skills are irrelevant in their new roles… Many laid-off Wall Street financial engineers still haven’t absorbed that, says Fred Wilson, a partner in Union Square Ventures, a New York venture capital firm. “For them to take a job that pays a lot less, they have to make a meaningful change in their lifestyle. And that is an issue.”

Employers need to bend as well, recognizing that the candidates they’re seeking may not exist. Mark Mehler, co-founder of CareerXRoads, a staffing strategy consulting firm in Kendall Park, N.J., tells employers: “You’re hiring potential….You’ve got to train them.”

A mismatch of work and workers is never a good thing. But smart policy—combined with realism on the part of employers and job seekers—can minimize the disruption.

Discussion Questions:

1. In what way may structural unemployment be a sign of a healthy economy, rather than a sick one?
2. Part of the Obama stimulus package includes increased benefits for unemployed Americans. How may this pose an obstacle to reducing unemployment in America?
3. Historically, the natural rate of unemployment in most European economies has been higher than that of the United States. Why is this?
4. Do you think America’s NRU will return to its historic level (4-6%) when the economy eventually recovers from the current crisis? Why or why not?

Related posts:

1. Some good news for Swiss businesses and workers during hard economic times
2. Exports, good – Imports, ALSO GOOD!
3. Will the economy self-correct?

The $165 M in AIG bonuses that we have heard so much about this past week should have, in my opinion, been paid and then defended by Congress and the President!

As a former CFO, I can say with certainty that I have never paid an employee a bonus for poor performance. To underscore this point, I am 100% against any publicly-traded company ever making any bonus payment to an employee for poor performance regardless of the circumstances. The recently paid AIG bonuses are not an exception to my strong conviction. The true facts surrounding the $165 M in AIG bonus payments have not been made clear to the American public. Moreover, our cowardly American leadership (President, Treasury Secretary, Congress, AIG CEO) refuse to do what is right and defend the bonuses because, in my opinion, of their fear of public opinion.

The $165M in recently paid AIG bonuses, funded with a portion of approximately $170B in taxpayer “bailout” funding, are not PERFORMANCE bonuses being paid to the same AIG executives that got us into this financial mess in the first place. That is what most of America mistakenly believes. In fact, the senior executives, including the CEO, whose decisions caused the company’s collapse, are long gone. Moreover, the top 7 officials currently at AIG have agreed to forego all bonuses. The recent bonus payment outrage also excludes the next 43 highest ranking AIG leaders whose bonus payments are appropriately being linked to restructuring the company and paying back the taxpayers the $170B that has been already sent to bail them out.

So what exactly are these bonus payments for that all of America has gone mad over? The $165 Million in recent bonuses paid to AIG employees were RETENTION or STAY bonuses and not performance bonuses. AIG employees assigned to unravel the mess were offered retention bonuses to stay and work out the problems of AIG’s Financial Products division which has already been announced to be shut down. These retention bonuses were paid to incent remaining and new workers to stay until the billions of dollars of derivatives, still at risk, were unwound. Using basic common sense, which is why retention bonuses have been paid for decades, no reasonable, talented worker would agree to work in a discontinued division receiving hate mail and death threats without receiving a retention bonus. A retention bonus helps keeps top employees working on problems of a division being shut down rather than them resigning and moving on to another company.

As Congress tries to recover these just recently paid bonuses, either through the AIG employees paying them back or having them be taxed close to 100%, the tax payer is already losing as these employees working out the problems that they did not create are already starting to resign. Yes, America and the taxpayer will not save $165 M but rather lose far more than we save as those working the issues are resigning.

So, why didn’t the new AIG CEO, Edward Liddy, defend the $165 M in retention bonuses in front of Congress this past week and explain to Congress that these were not performance bonuses paid to the people that got us into this mess? Why didn’t Tim Gheitner, U.S. Treasury Secretary, defend his decision to allow the retention bonus payments as outlined in the recently passed stimulus bill? Why didn’t Ben Bernanke, Chairman of the FED, defend the retention bonuses that were know by him since last summer? And of course, where was our Harvard-schooled president when we needed his articulation skills the most as he could have clearly explained and defended these payments so we would not have to rehire new employees for all of the AIG employees who are now turning in their resignations for having to repay their contractual retention bonuses?

In summary, our U.S. government has increased the exposure to the American taxpayers by not supporting the AIG retention bonuses being paid to the workers that did not create the problem and who are assigned to fix up the mess. This is cowardly leadership, in my opinion. It is an easy path to for our leaders to keep the AIG bonus discussion at a very surface level and say “bonuses shouldn’t be paid to business leaders that fail”. Well, of course, everyone agrees with that! But that is not what is being paid at AIG.

Related posts:

1. McJobs in America – under threat!
2. America: Land of the free, home of “jackass” economists
3. Private Market Compensation: AIG CEO vs. Kobe Bryant

Two items consisting of good news from the local English language news in Switzerland. The first article says that small and medium-sized enterprises, in other words family owned businesses, are likely to come out of a global economic slowdown relatively unscathed and healthy.

Swiss SMEs are well placed to survive the economic recession. – swissinfo

Family-run firms in Switzerland are well set to survive the global recession having put long-term growth before quick profits in the good years, a report concludes.

Such small- and medium-sized enterprises (SMEs), which account for more than 88 per cent of all Swiss companies, are also cushioned by an aversion to taking on too much debt but still face succession problems.

The survey of 300 Swiss family-owned SMEs found that 68 per cent of companies are less motivated by making money than in maintaining the good name of the firm.

Some 83 per cent of owners put the healthy state of their company down to risk aversion and 39 per cent said long-term planning was crucial to success.

Swiss family business consultant Hakan Hillerström contributed to the study by Barclays Wealth and the Economist Intelligence Unit.

“Often, without a stock market listing, family businesses are insulated from the need to meet the short-term demands of investors and so are better placed to ride out volatility than their listed peers,” he said.

Second is a story about the mobility of skilled labor in Switzerland. When global demand for one of Switzerland’s most famous exports, watches, falls, Swiss watch makers are snatched up and employed by other industries in which demand is actually increasing during the recession: namely, rail car engineering and construction. Similar skills are required of workers in both industries, watches and rail cars. I suspect demand for rail cars has increased because of the multiple fiscal stimulus packages being initiated around Europe, many of which include funding for infrastructure expansion, including upgrading and expanding rail networks.

I am impressed by the flexibility of labor markets in Switzerland in times of economic hardship. Such labor mobility as demonstrated below helps Switzerland weather economic woes more easily than it would if workers laid off from one industry could not easily find employment in others, such as is the case in many countries.

Enterprises in Vaud to exchange workers to beat redundancies. – swissinfo

Skilled workers from the Swiss watchmaking industry could soon find themselves building locomotives instead.

A new project to meet the challenges posed by the financial crisis has been launched in the French-speaking canton of Vaud, with the backing of the major trade union and employers associations, as well as the cantonal government.

The idea is that businesses experiencing a temporary shortfall in orders will be able to lend their workers to others facing a shortage of labour.

“It’s pretty ridiculous to pay people to sit around and do nothing,” Yves Defferrard of the Unia trade union told swissinfo. “But when they have no work for them, employers can often think of nothing better than to lay them off. That’s the wrong way to manage a crisis. It’s what happened in the downturn of 2000.”

Related posts:

1. 3 million job openings! Good news… or is it?
2. Fiscal stimulus, the Swiss way
3. Stability – the greatest Swiss virtue?

Why Are Large Companies Losing More Jobs Than Small Ones? – TIME

This is a fascinating, short article from TIME. Before reading it, see if you can answer the multiple choice question below:

Q: Why do small companies lay off proportionately fewer workers during a recession than large companies?

A) Because small firms are less likely to be in the industries hardest hit by a recession (such as manufacturing)?
B) Because small firms are less focused on maintaining profits to satisfy greedy shareholders?
C) Because small companies are able to hang on to employees and even hire new ones during a recession because of all the talent being laid off by big firms.

Still thinking? Well, it’s likely that all three are true to some extent. But it’s the third one that seems most intriguing as a student of economics. Here’s what the article says:

…small companies hire disproportionately more early on in an economic recovery because it’s easy for these firms to find good workers while unemployment is still high—and easy for workers to come across small companies since there are so many of them. Once the economy is chugging along at full-steam and the labor market is tight, larger companies regain the advantage, since they’re likely able to offer more money—and poach from smaller outfits.

Seems pretty straight forward, right? Sure, but the fact that small firms are likely to hire when unemployment is high supports one side in a long-running economic debate over the economy’s ability to “self-correct” in times of recession.

As any student of Macroeconomics learns early on, there are two dominant theories of macroeconomics, both which are represented in the aggregate demand/aggregate supply diagram that we learn and use in AP and IB Economics.

The two models below represent the two opposing views of macroeconomics. First we see the Keynesian model, which shows that when overall demand in an economy falls, unemployment increases drastically and output tanks, plunging the economy into a deep recession. This is primarily because of the “inflexible” nature of wages, meaning that even when unemployment rises, workers are unwilling to accept lower wages and firms therefore are unwilling to hire more workers.

According to Keynesians, the only way to get the economy out of the recession is by increasing overall demand through heavy doses of government spending (case in point, the $775 billion stimulus in the US).

Next is the Classical AD/AS model with a vertical long-run aggregate supply curve. The implication of the vertical AS curve is that regardless of the level of overall demand in the economy, output will always return to the full-employment level, and thus unemployment will always return to its natural level. The major assumption underlying the Classical model is that wages are in fact flexible in times of recession. As unemployment rises, workers will accept lower wages since they’d rather be making less than making nothing at all. As wages fall firms will begin hiring more workers, increasing overall output and decreasing unemployment until full-employment output is restored.

The implication of the model on the right is that government is NOT needed to get the economy out of a recession, because it will self-correct due to the new hiring and production by firms in response to falling wages in the labor market.

The reason this article stood out to me was that it seems to offer some evidence in support of the flexible-wage, Classical model of macroeconomic self-correction. There has been surprisingly little talk among news anchors, pundits and politicians about the likelihood of the US or ANY economy suffering in the global slowdown “self-correcting” as the Classical model would suggest it should. But the fact that small businesses are less likely to lay off workers in a recession and more likely to begin hiring them due to the large number of workers being laid of by big companies offers at least an inkling of evidence in support of the Classical model of flexible wages and macroeconomic self-correction.

Discussion Questions:

1. Why is laying off workers the first thing big companies do when faced with falling demand for their products? Why don’t they shut down factories instead?
2. What pressures does a publicly traded company (one that sells stocks to investors) face in times of recession that a small, privately owned business does not?
3. When the global recession is finally over, do you think more people or fewer people will be working for small companies (less than 50 people) than before the recession? What would you rather work for, a small firm or a large one? Why?

Related posts:

1. IB Review – Neo-classical vs. Keynesian views of inflation
2. Facts and the Phillips Curve: new evidence of the short-run trade-off between unemployment and inflation
3. Keynesian/Classical debate enters the realm of hip hop

This post is in response to my colleague and fellow WW blogger Steve Latter’s recent post titled “Private market compesation: AIG CEO vs. Kobe Bryant”. It’s always enlightening to read Steve’s excellent posts, which really put things in perspective. With regards to CEO pay, it is a bit ironic that while Americans are all worked up about the high pay of its top executives, no one’s up in arms about the exorbitant salaries received by America’s professional athletes!

However, I wonder if Steve’s claim that limiting professional athletes’ pay would send the country’s top basketball players packing for leagues in other countries is true. A while back I blogged an article that asked the question of whether Lebron James would be offered a contract from a European club. James claimed that in order for him to even consider playing in Europe, he would require an offer of at least $50 million per year, more than double what he makes playing for Cleveland.

ESPN.com – Source: LeBron would consider European offer of $50M a year or more

…the Cleveland Cavaliers’ strongest competition for LeBron James’ long-term services could be the deep-pocketed new kid on the block — Europe.

A person close to James said Tuesday that the Cavaliers’ superstar would strongly consider playing overseas if he was offered a salary of “around $50 million a year.”

James’ current contract expires after the 2010-2011 season, but he can opt out after the 2009-2010 season, and while several NBA teams are working to create salary cap space for his impending free agency, none could offer a contract beginning at even $20 million a year.

So, would Kobe be on the next plane to Lithuania if the US government (or the NBA) limited his pay to $5 million? I doubt it. That brings us to the more urgent question: Would America’s top business executives begin shipping their families and all their belongings off to Jakarta or Dhaka, Delhi or Singapore, London or Paris, if the US government attempted to limit the compensation packages of its executives? Maybe, but there are many reasons to work and live in the United States beyond the salaries offered by firms for their top executives. And upon a little research, it turns out that European executives’ pay packages have in fact been under regulation by governments for quite some time, and as a result, the incentive for American executives to jump ship for European firms should US executive compensation come under regulation may not be as strong as Steve implies.

Executive pay in Europe | Pay attention | The Economist

How excessive is bosses’ pay in Europe? It has certainly risen sharply in the past ten years, as European firms have had to compete globally for talent. Foreign bosses now run seven of the firms in France’s CAC 40 index and five of Germany’s DAX 30. American-style bonuses and long-term incentive plans are now the norm.

European firms now benchmark pay against international peer groups in their own industries, rather than against domestic rivals, according to Piia Pilv, a pay expert at Mercer, a consultancy. But they still pay a fraction of the sums trousered each year by American executives. According to Hay Group, a management consultancy, the median European executive earns just 40% as much as his equivalent in America (see chart).

Most importantly, European companies appear to be more determined than American ones to link pay to performance. “Firms in Europe have tended to put more stringent conditions on long-term incentive awards than in America,” says Richard Bednarek, global director of executive remuneration for Hay Group. In America grants of shares are often not tied to performance, whereas European firms generally attach performance criteria to any grant of shares, typically depending on a comparison with a peer group. Such schemes often do not pay out at all, says Mr Bednarek. Dan Vasella, boss of Novartis, a Swiss pharmaceutical giant, and a favourite target of pay activists, earned SFr17m ($14m) in 2007, down 33% from 2006, because he missed his targets.

Clearly, the incentive to head to Europe as a result of increased scrutiny of executive compensation in the US is not as great as it would be if there did not already exist a threefold gap between US and European executive pay.

The liberal in me wonders if there is such a thing as “unfair” CEO compensation. The free market advocate in me points to other markets governments have attempted to control prices in, and the clear inefficiency that such regulation creates. Governments limiting executive pay, in theory, should have a similar effects to rent controls, or price ceilings in other markets. The quality and quantity of apartments available under rent controls declines, and price ceilings on other goods often result in shortages, meaning there’s not enough to go around among consumers… the quantity demanded exceeds the quantity supplied.

In the case of CEO pay in America, limiting compensation should, in theory, result in a shortage of highly qualified executives willing to head up American firms. But let’s be honest, even if the government placed highly stringent limits on the compensation of the country’s executives, the average executive in America would still likely be earning more than his counterpart in Europe. And since the average American CEO earns something on the order of 250 times what the average worker in his firm gets paid, increased regulation of CEO pay only help narrow this enormous gap slightly, but the incentive to make it to the top will still be strong among American workers.

Conclusions? It’s a tough issue. I want to have faith in the free market, in the price mechanism, in the efficacy of laissez faire economics. But the moral hazard of “golden parachutes” is a real concern. Should an American CEO be rewarded if he fails in his job? Steve makes the case that this “insurance” policy is necessary to attract the best and brightest to the firms willing to pay them most. Then again, something about the way the free market has created such a huge gap between executive pay and the pay of the average worker, and the threefold gap between America’s CEOs and Europes makes me think, “forget the free market, we need to get this insanity under control.”

Related posts:

1. The problem with price controls in Europe’s agricultural markets
2. Immigration and American labor markets – opposing views
3. America Has Gone Mad! (The AIG Bonus Payments Should Be Defended!)

Bush pushes Congress to vote on Colombia trade pact. – Apr. 14, 2008

Click on the graphs for full-size versions

The benefits of trade, while visibly demonstrated by two basic economic models, the production possiblities curve and a simple supply/demand diagram, are not as straightforward when politics is involved. Case in point: the Bush administration has been trying to push through a free trade deal with Columbia, one of our key allies in a region ripe with anti-American sentiment. The White House views the trade deal as a win-win for the American economy:

The administration insisted the deal would be good for the United States economically because it would eliminate high barriers that U.S. exports to Colombia now face, while most Colombian products are already entering the United States duty-free under existing trade preference laws.

On the surface it appears the US has nothing to lose from extending trade relations with Columbia, since few if any American jobs will be lost by such a deal; so why are some Democrats resisting the trade deal?

In explaining their opposition, Democrats have cited the continued violence against organized labor in Colombia and differences with the administration over how to extend a program that helps U.S. workers displaced by foreign competition.

As is so often the case, what’s best for the economy does not seem to be what’s in the best interests of Americans. Our values extend, in some cases, beyond our pocketbooks. The White House argues that the US/Columbia free trade agreement only promises to increase demand for American products while doing little to affect domestic employment. The fact that most Columbian imports are already tariff-free probably confirms this. But the Democrats oppose this deal on the grounds that it would appear that America endorses the anti-labor activities of the Columbian governments.

Labor is a touchy political issue in America, where union membership among workers has fallen from around 40% in the 1950′s to around 13% today. As Columbia and other developing economies become integrated into the global economy, there is increasing pressure for governments to liberalize their domestic labor markets, weaken unions, lower wages in order to attract more investment from abroad, lower the costs of production, thus increase the quantity of their exports demanded abroad. Labor market flexibility and liberalization is certainly an important step in attracting investment and demand to developing countries, but if it comes at the expense of the well-being of the citizens of a poor country, then perhaps standing against such anti-labor actions is a just cause.

The free trade deal with Columbia poses more of a moral dilemma than an economic one. From America’s stand-point, it appears to be a win-win situation. But from the perspective of international labor standards, approving a trade deal with Columbia threatens to undermine another set of American values: those of human rights.

Click here to view the embedded video.

Discussion questions:

1. Why do you think the White House is so adamant about pushing through the trade deal with Columbia?
2. Are the Democrats correct to oppose a deal that could create jobs in America while at the same time make more goods available to Columbian consumers at lower prices?
3. Should America be trying to dictate the labor standards of its trading partners? Why or why not?

Related posts:

1. Mankiw on free trade in politics
2. McCain vs. Obama on the costs and benefits of free trade
3. Free Trade Debate: to what extent has globalization based on free trade contributed to global economic growth and development?

FT.com / World – American dream hit by dollar’s decline

Ever wonder if there was a connection between the strength of a country’s currency and the flow of immigrants into that country? No? Me neither… but interestingly it appears that there is a direct relationship between these variables. The weaker a country’s currency, the fewer immigrants cross its borders to find work. Here’s why:

Migrant workers are choosing to move to Europe, Australia or Canada instead of the US in order to protect the purchasing power of the money they send home to their families, according to one of the world’s leading experts on remittances.

The shift is a result of sharp falls in the value of the US dollar against other international currencies, many of which have been boosted by the rise in commodity prices.

This news may make some American’s happy, since it could mean more opportunities for the American workers who may have lost their jobs during the current recession. This, however, may not be the case. It turns out that much of the decline in immigrant workers is in high skilled fields for which demand for workers in the US remains high even in times of recession. According to the article, “the trend was especially notable among skilled workers, such as doctors, nurses and information technology specialists”.

A decline in the inflow of high skilled workers may actually make Americans worse off. I have blogged about the shortage of American workers in fields such as engineering, software design, and natural gas rig technicians,and I don’t think many Americans would argue that health care in America is already too cheap, so I suspect that more doctors and nurses would be desired.

A weak dollar has many effects on America. In some ways, it makes the country better off. As I have blogged about here, a weak dollar should lead to more balanced trade, a boom for US manufacturers, and an increase in exports, all related, of course, to the relative decline in prices of US goods to foreign consumers. But a weak dollar may in fact do more harm than good, one reason for which is explained here: skilled foreign workers whose talents are in strong demand in the US are moving more and more to European markets to find work.

Anti-immigration hawks may be cheering, but American consumers may start rearing as high-skilled labor shortages drive up wages and prices in the markets Americans most depend on today: health care, energy and technology.

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Related posts:

1. Does the weak dollar help US manufacturers?
2. The US dollar’s decline in value may cause more harm than good for the US economy
3. Reflections on the weak dollar

At Charter School, Higher Teacher Pay – New York Times

A New York charter school opening this year will start teachers’ pay at $125,000. The school’s creator and principal believes that quality teachers, not technology, are what will lead to results for students at his school.

The school’s creator and first principal, Zeke M. Vanderhoek, contends that high salaries will lure the best teachers. He says he wants to put into practice the conclusion reached by a growing body of research: that teacher quality — not star principals, laptop computers or abundant electives — is the crucial ingredient for success.

“I would much rather put a phenomenal, great teacher in a field with 30 kids and nothing else than take the mediocre teacher and give them half the number of students and give them all the technology in the world,” said Mr. Vanderhoek, 31, a Yale graduate and former middle school teacher who built a test preparation company that pays its tutors far more than the competition.

This is certainly an interesting experiment. American schools have struggled for decades to improve results through the implementation countless programs and policies. Lately, one emphasis has certainly been on technology; but this article makes an interesting point: all the technology in the world won’t make a difference if it’s not in the hands of an excellent teacher.

The best basketball players in the NBA make millions more than the average ones. The most skilled doctors are rewarded with the highest salaries. Top lawyers earn hundreds (if not thousands) of dollars an hour while one from a third rate law school toils for $65,000 a year in a county prosecutor’s office. So what’s different about teaching? Why do all teachers in a particular district with a particular number of years experience get paid the same salary? Could you ever imagine all the lawyers in a particular city making identical salaries? The idea is absurd. Clearly the top law firms will pay for the top lawyers, which in turn enables that law firm to achieve the best possible results for its clients.

Yet the vast majority of teachers in America find themselves stuck in a system rooted in an outdated belief in equity, egalitarianism, fairness, whatever you want to call it, where pay is based not on talent, ability, skill, expertise, and all the attributes that determine one’s pay in a competitive labor market like medicine, law, and professional sports; rather the older you are and the more time you’ve “served”, the greater your financial reward. Is it a coincidence that America is known for its cutting-edge medical field, its skilled litigators, and world-class professional athletes. Could someone describe to me the reputation of American public schools? No? I understand, it’s a depressing subject.

In economics we teach the importance of incentives, which when used properly encourage individuals to improve their human capital in as many ways as possible. In other words, if I am rewarded for excellence, I will strive for excellence in my profession. The only incentive in education, it seems, is to grow old and gray, because that’s how I will make more money. Easy for teachers whose only goal is to make it to retirement, right? Without a doubt. Effective for students in a society falling ever further behind other countries in academic achievement? Hardly.

Ironically, some of the teachers most skilled in the application of new technologies and versed in the latest pedagogies are those who grew up learning with those technologies in their own education in a constructivist, student-centered environment. In other words, the youngest, most tech-savvy, who just happen to earn the lowest salaries (practically subsistent in some parts of the country).

Mr. Vanderhoek may be proven wrong. Perhaps it is more technology, more standardized tests, more powerful teachers’ unions, that America’s children need to begin achieving the results that Indian, Chinese, Singaporean, Korean, Japanese, even European students are achieving in the maths, sciences, and other subjects. But if he’s right, then $125,000 (2.5 times the national average for public school teachers) may prove to be just what’s needed attract the kinds of teachers that can achieve results. What if this school does succeed? Will it matter? Or will America’s public schools forever reward teachers not for performance and qualifications, but simply for getting older?

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Related posts:

1. Excellence and teacher pay: A New York charter school is not the only school paying teachers $100,000+!
2. Shanghai American School and the imperfectly competitive market for international teachers

Irrational choices | Free exchange | Economist.com

The debate over the impact of immigration on American wages is a hot one. As seen in the video below of immigration opponent Lou Dobbs, many in America view the free-market, open boarders ideas of certain economists with outright disdain and hatred. Among these “anti-immigration hawks” is economist George Borjas:

“(Anti-) immigration hawks like George Borjas have estimated that wage competition from immigrant labour may reduce native, unskilled worker earnings by something like 7 percent.”

Among economists, however, such views are rare:

“Other researchers dispute such figures, arguing that immigrant impact on native, unskilled workers wages is minimal and is strongly positive for skilled labour. In either case, it’s clear that the gains enjoyed by the migrants themselves significantly exceed domestic worker losses.”

One argument often made by open-border advocates is that granting migrants legal status benefits not only the immigrants themselves, but the nation as a whole. Legal workers can be taxed and thus become contributing members of society, whereas illegal workers run the risk of being exploited, payed below legal wages, and in addition are unable to be regulated and taxed by the government. As explained in the article above:

This suggests that by regularising the status of incoming labourers and taxing off a portion of the surplus they earn from migrating we could compensate domestic workers for any harm they experience. To that tax revenue, we could also add the massive amounts of money currently spent fighting immigration–billions of dollars per year, and growing. It’s almost certain that under such a regularisation and redistribution approach all parties involved would be better off than they currently are.

The argument above is compelling, to say the least. It acknowledges that immigration may indeed have a negative effect on American workers, as hawks like Lou Dobbs so virulently argue. Unlike Dobbs’ xenophobic, racist views, however, the concept above actually attempts to mitigate the negative impact on American workers of immigrants entering the work force. By granting immigrants legal status and collecting taxes on their wages, the government earns valueable tax revenue that can be used to give a helping hand to those workers whose jobs were lost or whose wages were reduced due to immigration. In addition to taxes on immigrants’ wages, the government can put the billions it’s currently spending on “border security”, trying to keep immigrants out, towards such programs for affected workers as well.

What could the government do for workers harmed by immigration? It can help displaced workers by subsidizing professional training or continued education, in order to give them the skills they need to find employment in a job where they will earn higher wages. Even a simple check in the mail may be enough to satisfy a worker who lost his job to an immigrant, giving him much needed help to get him back on his feet. From the American worker’s perspective, such a payout may or may not be viewed as an adequate trade-off for losing a job; but surely it would soften the harmful impacts of more open borders.

Clearly there is a demand for more low-skilled workers in America than in Mexico and other Latin American countries. The relative wage rates between the US and these countries send a clear market signal from firms (the demanders of labor) to households (the suppliers of labor). In a truly free labor market, immigration simply represents the efficient allocation of resources, as labor shifts from a market where it’s in low demand to one where it’s in high demand. Maybe it’s time for America to stop talking about ways to keep foreign workers out of the country, rather, start figuring out ways to make their transition into the American workforce easier and faster, so that they can become contributing, legal members of America’s economy, who pay taxes and pitch in just like the rest of the country’s workers.

Maybe “anti-immigration hawks” like Lou Dobbs just forget sometimes that almost everyone in America today is an immigrant in a sense. No one kept us out then. When the hope and promise of a better life beckoned, our forefathers arrived in America by the millions. The arrival of immigrant workers today is not that different, and the economics of immigration seem pretty much indisputable: it benefits everyone (firms get cheaper labor, households enjoy lower prices and more jobs for high-skilled workers, the government gets more tax revenue) and harms very few.

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Related posts:

1. America’s Immigration Problem – the human cost
2. Updated: Immigration – NOT and economic debate…
3. Shanghai American School and the imperfectly competitive market for international teachers

Recently, in AP Economics, we have been learning about Labor markets; in IB Economics we’ve been focusing on the benefits and costs of international trade and global economic integration. As students of market economics, it is ingrained in us that economic liberalization, the freeing of markets, enabling resources to be allocated based on the price mechanism; these are all are good things. Removing barriers to the free movement of products and resources across national and political boundaries should eventually result in greater world output, and subsequently increases in living standards and wealth for the citizens of all free trading countries.

Nations will produce the products for which they have a comparative advantage, and trade with their neighbors for those products for which they don’t. Resources will flow from markets in which they are in low demand to those where they are in high demand. Prices in both product and resource markets will rise and fall, allocating scarce resources to the markets where they are needed most.

So why, in an era where the benefits of free trade and free flow of productive resources seem so visible around the world, do Americans seem so susceptible to views like those exhibited in the video below:

Click here to view the embedded video.

America has been the champion of trade liberalization and global economic integration since the world embarked on the wide-spread adoption of free market principles in the second half of the last century. We used to pride ourselves on our principles of freedom that were bringing wealth and prosperity not only to ourselves, but to the poor countries of the world that embraced our economic fundamentals. Korea, Japan, followed by the Southeast Asian Tigers, the Middle East, Latin America, the countries of the former Soviet block, China, India, even parts of Africa have opened their minds and economies to the principles of free trade. Slowly but surely, market liberalization seems to be lifting the world’s poorest nations out of poverty.

At the heart of this growing world prosperity lies a fundamental belief in the free flow of resources across political boundaries. Labor markets, when left unhindered by government, should achieve equilibrium through a shifting of workers from areas where labor is in low demand to areas of high demand. A basic example of this movement is the immigration of workers from Mexico and Latin America to the United States. Mexico is a country where demand for labor remains low relative to its northern neighbor, the US.

The main determinant of Mexico’s low demand for labor is the country’s relative lack of capital and technology, resulting in low productivity at home relative to the productivity in America, where a large capital stock and cutting edge technology result in high worker productivity, thus high wages. In addition, American workers have a relatively high level of education, which prepares them for jobs for which training and expertise are necessary, resulting in a shortage of workers in low-skilled labor markets in several parts of the US. Often, this drives wages for low-skilled workers above the minimum wage.

As the champions of free trade and market economics, it should come as a surprise that so many Americans today seem outraged by immigration and the resulting injection of labor into the American work force. In a discussion with my Econ class yesterday, I asked students to critically analyze the benefits and costs of immigration for the American economy. I asked them to put aside any social or cultural considerations, analyzing only the economic effects of the increase in the labor supply that results from immigration. Here’s a summary of our discussion:

Economic costs of immigration:

• Lower wages for low-skilled workers: This may include high school drop-outs, teenagers, or anyone without any post-secondary education.
• Higher unemployment: This point was disputable, however, because only in labor markets where the equilibrium wage rate falls below the minimum wage would increased labor supply result in unemployment. As we discussed, in many American labor markets, the minimum wage is “non-binding” or ineffective because the equilibrium wage is higher than the minimum wage. In this case, an influx of low-skilled workers would not create unemployment, only lower the equilibrium wage rate closer to the federal minimum wage.

Economic benefits of immigration:

• Lower wages for low-skilled workers: Wasn’t this a cost? Yes, but it’s also a benefit, here’s how: Wages are a cost to firms, so lower wages mean lower costs for firms. In competitive product markets, where the price paid by consumers is close to the cost faced by firms, lower costs means lower prices. Lower prices are good for all American consumers, as it means higher real wages. Lower wages in unskilled labor markets may be offset by a lower price level in the nation as a whole.
• Less likelihood that jobs will be “outsourced” or “off-shored”: By allowing more low-skilled workers into America, it’s more likely that firms who are forced to minimize their costs will keep their factories or operations within America’s borders, instead of opening up shop in Mexico, India or China, as so many firms have done in recent decades due to the shortage of low-skilled workers at home.
• More tax revenue for the US government: American firms are more likely to remain in the US with a large supply of cheap labor, meaning the government can continue to collect taxes from them. More workers means more income tax (assuming immigrant workers are employed legally).
• More efficient resource allocation: Labor is a resource. Prices act as a mechanism for allocating resources. When wages in the US are higher than those in other countries, it is a signal that the US demands more labor. Immigration to the US is no different from an economic standpoint than any resource shifting from a market where it’s not in demand to one where it is in demand. Also, American workers, who in general have a higher level of education and training than most immigrants, are freed up to pursue careers in more productive sectors of the economy, leaving the “low-skilled”, “menial”, jobs to immigrants.
• Greater incentive for Americans to stay in school: We did not talk about this one in class, but it seems plausible. As the supply of low-skilled workers increases with immigration, wages in such labor markets will remain low. Low wages mean American households are willing to supply a lower quantity of labor; in other words, Americans are more likely to stay in school, seek higher education and more training to prepare themselves for a job in a labor market in which more advanced skills are required.

Despite the clear economic benefits of immigration as outlined above, many Americans have become isolationist in their view of globalization and free trade. CNN news anchor Lou Dobbs is one example. In his nightly news show, Dobbs spreads his anti-immigration, anti-globalization message to millions of American households, spurring Americans to join his cause: closing America’s doors to the rest of the world, “protecting” Americans from the threats posed by immigration, outsourcing, off-shoring, globalization in general. New York Times columnist David Brooks had this to say about Lou Dobbs in his recent column, Follow the Fundamentals:

Lou Dobbs is winning. He’s not winning personally. He’s not going to start winning presidential awards or elite respect. But his message is winning. Month by month the ideas that once prevailed on the angry fringe enter the mainstream and turn into conventional wisdom.

Once there was a majority in favor of liberal immigration policies, but apparently that’s not true anymore, at least if you judge by campaign rhetoric. Once there was a bipartisan consensus behind free trade, but that’s not true anymore, either. Even Republicans, by a two-to-one majority, believe free trade is bad for America, according to a Wall Street Journal/NBC poll.

Once upon a time, the fact that hundreds of millions of people around the world are rising out of poverty would have been a source of pride and optimism. But if you listen to the presidential candidates, improvements in the developing world are menacing. Their speeches constitute a symphony of woe about lead-painted toys, manipulated currencies and stolen jobs.

Dobbs and the millions of Americans who support his view share a common opinion of us economists: we are “jackasses” and “idiots” for believing what we do about free trade, immigration and globalization.

What do you think?

1. Is Dobbs message valid?
2. Should America do more to “protect” its citizens from the threats of the global economy and the immigrants who want to come join our labor force?
3. After watching the video above, what do you think about free market economics?
4. Has Dobbs convinced you that we’re all a bunch of “jackasses” because of our idiotic views of the benefits of economic liberalization and free markets?

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Related posts:

1. America’s Immigration Problem – the human cost
2. Does free trade really mean lower prices? A debate between two economists much smarter than me
3. The politics of free trade vs. protectionism