Oh dear Mr. Cohen

Nick Cohen has done one of the rather predictable little rants about working conditions in China.

The suicides at the vast Foxconn plant in Shenzhen ought to shake outsiders. They ought to make them wonder about the human cost to the 420,000 workers who make those nifty iPhones and iPads which so delight savvy westerners. Workers sleep in corporate dormitories, where an ever-shifting population of migrants makes it hard to form friendships, let alone relationships. The basic pay is $130 a month and overtime is essential. Most work 12 hours a day under the eyes of a fanatical management. One man killed himself after supervisors allegedly tore into him for losing a prototype iPhone.

No, I\’m not about to try and claim that I\’d be happy to work for that sort of sum: no, I\’m not about to try and claim that everything is just hunky dory and that manufacturing workers in China have it easy.

However, I do want to make a slightly different point. That things are indeed getting better.

Firstly, please have a look at this Paul Krugman essay, Ricardo\’s Difficult Idea. Aside from being one of the prime examples of what makes him (on those increasingly rare occasions when he is not being simply a shill for whatever the Democratic Party wishes to do) one of the very finest writers upon economics, he explains beautifully what it is that determines wages:

– Wages are determined in a national labor market: The basic Ricardian model envisages a single factor, labor, which can move freely between industries. When one tries to talk about trade with laymen, however, one at least sometimes realizes that they do not think about things that way at all. They think about steelworkers, textile workers, and so on; there is no such thing as a national labor market. It does not occur to them that the wages earned in one industry are largely determined by the wages similar workers are earning in other industries. This has several consequences. First, unless it is carefully explained, the standard demonstration of the gains from trade in a Ricardian model — workers can earn more by moving into the industries in which you have a comparative advantage — simply fails to register with lay intellectuals. Their picture is of aircraft workers gaining and textile workers losing, and the idea that it is useful even for the sake of argument to imagine that workers can move from one industry to the other is foreign to them. Second, the link between productivity and wages is thoroughly misunderstood. Non-economists typically think that wages should reflect productivity at the level of the individual company. So if Xerox manages to increase its productivity 20 percent, it should raise the wages it pays by the same amount; if overall manufacturing productivity has risen 30 percent, the real wages of manufacturing workers should have risen 30 percent, even if service productivity has been stagnant; if this doesn\’t happen, it is a sign that something has gone wrong. In other words, my criticism of Michael Lind would baffle many non-economists.

Associated with this problem is the misunderstanding of what international trade should do to wage rates. It is a fact that some Bangladeshi apparel factories manage to achieve labor productivity close to half those of comparable installations in the United States, although overall Bangladeshi manufacturing productivity is probably only about 5 percent of the US level. Non-economists find it extremely disturbing and puzzling that wages in those productive factories are only 10 percent of US standards.

Finally, and most importantly, it is not obvious to non-economists that wages are endogenous. Someone like Goldsmith looks at Vietnam and asks, \”what would happen if people who work for such low wages manage to achieve Western productivity?\” The economist\’s answer is, \”if they achieve Western productivity, they will be paid Western wages\” — as has in fact happened in Japan. But to the non-economist this conclusion is neither natural nor plausible. (And he is likely to offer those Bangladeshi factories as a counterexample, missing the distinction between factory-level and national-level productivity).

Wages are not set by the productivity of what a worker is doing. They are set by the productivity of what the worker could be doing if he wasn\’t doing what he is doing. It\’s that old opportunity cost thing again. The price of something is what you give up to get it: in the case of labour it\’s not what the labourer is producing, it\’s what the labourer could be producing elsewhere that determines the cost.

As an example, the barber in Manhattan is using pretty much the same technology as the barber in Mumbai: scissors and a comb to cut someone\’s hair. They process roughly the same number of heads per hour and or day. Their productivity is roughly equal: yet the barber in Manhattan gets a multiple of the wages of the one in Mumbai.

Why?

Because the barber in Manhattan has a near endless number of other jobs which pay high wages as a result of the generally high productivity of labour in Manhattan: the barber in Mumbai has a near endless choice of low paid jobs to move to as a result of the generally low productivity of labour in Mumbai . The wages of each are set not by their productivity, not by what they themselves produce, but by the possible wages and productivity of alternate uses of their labour.

Now let\’s look at what is happening in China:

Just a year after laying off millions of factory workers, China is facing an increasingly acute labor shortage.

As American workers struggle with near double-digit unemployment, unskilled factory workers here in China’s industrial heartland are being offered signing bonuses.

Factory wages have risen as much as 20 percent in recent months.

Or a couple of years back:

For years, Yongjin Group has earned a decent profit selling lamps and furniture to the likes of Wal-Mart (WMT ), Home Depot (HD ), Target (TGT ), and Pottery Barn. But lately the company has seen its margins shrink to 5% — half what Yongjin made when it opened its factory in the steamy southern Chinese city of Dongguan 14 years ago. Why? Labor shortages are forcing the company to boost wages. Last year salaries surged 40%, to an average of $160 a month, and Yongjin still can\’t find enough workers. \”This business needs a lot of labor,\” says President Sam Lin. \”This is a very tough challenge.\”

My apologies that I cannot actually source this but I have seen a report which says that Chinese manufacturing wages have been rising 14%, year on year, for well over a decade. They are now four times higher, after inflation, than they were.

The general productivity of labour in China is rising and therefore so are the wages paid to said labour.

Cohen points out that labour unions are near useless in China: that the government is the same old Communist Party that has been screwing the workers for the past two generations. Neither are, of course, desirable. And yet the conditions, the pay, of the workers continues to improve, get better at a rate not seen in this country for many a generation. This might count as an interesting lesson for those here at home really: it ain\’t the unions or the government which make the working class better off. It\’s competition among capitalists for the profits that the working class can make them which does.

Or, in short, economics trumps politics, each and every time. Which is why this is so absurd:

Like good consumers, we obey too. Not that we should. It would be heartening if people could shake themselves and say that the iPad is just another computer, which we do not need and will not buy unless Apple persuades its suppliers to improve workers\’ conditions. Until we do, the hypocrisy of the Chinese communists is our hypocrisy as well.

It is the very fact that billions of us are purchasing the products of Chinese labour which is improving the pay and conditions of that Chinese labour. For as we do so, the general level of productivity in the Chinese economy is rising, leading to that most desired of all outcomes,. as Paul Krugman points out:

\”if they achieve Western productivity, they will be paid Western wages\”

The more you want conditions to improve in China, the more you should be buying from there.