Professor Paul Palley's
          Economics Seminars

One of the ongoing issues facing the economy is the sense that many people have that they are worse off economically than they should be and the related pessimism they have related to the future. There are immediate reasons for this that is easy to identify including the housing market, credit problems, and an uncertain job market. Other factors are not discussed in the press as often, but they have had a cumulative impact on many households across the country. These problems are related to the declining real or inflation adjusted wages that wage earners have seen over most of the last thirty years and meager gains in real median household income. Many households have seen their incomes increase only because they have two wage earners or they are working more hours. Finally, while in recent memory we are seeing higher rates of inflation that are historically low, it is increases in the costs of food, energy, health care, and education that often more directly focus a person on their finances. Despite all of these issues, though, there is another issue that can be a real problem for some people, causes many to promote isolationism, but can be a real opportunity, and this is globalization.

When many people think about globalization they think about outsourcing and in those terms they then immediately think about something that is negative. Clearly, however, when we think about this further we can identify positives because we know that firms headquartered in foreign countries hire people here as well. This is true because we realize that Honda and Toyota employ many people in the United States to build cars, and foreign firms outsource a lot of work to American financial, legal, engineering, and marketing professionals. There are also many other cases that can be reported. So, outsourcing is a two-way-street, but the scales between who is and is not gaining or losing work will not always be balanced. Given these points, then what is the issue? The issue is declining wage growth and inflexibility in the labor market.

Here is what I mean. Economists identify four factors of production that are necessary to produce every good or service. These are land, labor, capital, and entrepreneurial skill. Each of these except labor is very mobile. Let me explain this point further. Land consists not only of the ground that our buildings are on, but also includes all of the resources of the land. This includes agricultural commodities, sand and gravel, iron ore, gold, copper, and numerous other commodities. Each of these are easily bought and sold, and traded, all over the world. Capital includes plant and equipment, and clearly businesses can readily invest in these items in many different countries around the world. GM can build and sell cars in Asia and Honda can also do this in the U.S. Business owners may also start businesses, invest in businesses, form partnerships, and lend their managerial expertise in much of the world. That leaves only one other more limited input, labor.

Workers can move from job to job, but it is not always as easy as we usually think it is. Clearly people face limited opportunities due to their skill sets; level of education; they may face physical barriers; or have family obligations that limit their mobility. In addition, there are many people who are tied to their benefits like health insurance and will not leave their job because they are afraid that they will lose their insurance or that the insurance plan provided by a new employer will deny them insurance because of pre-existing medical conditions. These issues can make people feel like they are not fully able to participate in the labor market and that contributes to the frustration people feel when they face uncertain economic futures. This is even more pressing in a globalized economy and world where all of the other factors of production except for labor are free to move to maximize their earning potential because work Visas are not fully readily available. Furthermore an expanding global labor force tends to increasingly pressure the wages people can earn as the labor supply increases.

The question then is; what can we do about these limitations workers experience? Improvements in education, efforts to make it easier for people to attend community colleges or other retraining programs, and improving access to work for people with special needs are all positive efforts. The issue related to benefits is far more complex, but clearly it would make it much easier for people to seek and obtain new job and career opportunities if they were confident that they would be able to retain their health insurance and other benefits. Still this does not address the issue of globalization as directly as possible. Those who lose their jobs due to outsourcing would benefit from the ideas expressed above, but there will still be Visa restrictions limiting worker access to jobs. People may move from country to country illegally, but that is problematic for all involved. What we are left with is that each of the factors of production is mobile in a globalized world, but labor is not completely mobile, and the pressure workers feel will not be clearly addressed unless they feel like they can maximize their opportunities. The negative consequences can be the development of protectionist sentiment that in the long-run only reduces the potential for economic growth.