Race to the bottom?

A question from Yahoo! Answers:

What happens to wages worldwide when we reach the bottom of the “race to the bottom”?

In economics there is this concept that Capital (in the form of multi-national corporations mostly) will continually seek the lowest cost labor to increase the return on their capital. Some call it the “race to the bottom.” Capital moved from the Northern US to the Southern US, from the Southern US to Mexico, Mexico to China….you get the idea. It may be in 50 or 100 years, but what happens to wages when there is no place cheeper for Capital to go? It seems to me that without the threat of “take these lower wages or we will move to _____,” corportations will start to pay higher wages globally. What do you think? Of course my next quesiton is: can we raise the bottom by increasing funding for development?

You are exaggerating. A lot. You are right when you say that capital moves where it expects the greatest return on investment, but you are forgetting that this is a RISK-ADJUSTED return we are talking about. And there is more to returns (and way more to risks) than just cost of labor. Even in the notoriously footloose textiles, wages rarely account for more that 20% of production costs…

You say, “capital moved from the Northern US to the Southern US, from the Southern US to Mexico, Mexico to China”. The reality is the exact opposite. Capital is moving INTO the U.S., even from China. Just take a look at the U.S.’ international investment position:


Between 1989 and 2005, the cumulative net capital inflow into the U.S. amounted to more than two trillion dollars.

The real reason for the race to the bottom has nothing to do with international trade. The real culprits are technology and demographics. People on the street think that manufacturing jobs move from U.S. to China, while in reality China is losing manufacturing jobs faster than the U.S. (between 1995 and 2002, manufacturing employment in the U.S. declined by 11%, in China, by 15%). The world as a whole is losing manufacturing jobs. Manufacturing gets progressively easier over time, as workers are replaced by machines. Elderly care, in contrast, doesn’t. Moreover, with population aging, there are more elderly people around to care for. The world is slowly turning into a nursing-home economy…

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