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The global labour glut

The global labour glut
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First Published: Mon, Apr 09 2007. 12 36 AM IST
Updated: Mon, Apr 09 2007. 12 36 AM IST
Another year, another mad rush for H1-B visas. The US immigration authorities were swamped by visa applications in early April. The US issues 65,000 H1-B visas every year, which are used by technology companies to move engineers around. Newspapers report that the US government received 150,000 applications in the first few days of this fiscal year.
The scramble to get H1-B visas is a symptom of a little-understood mega trend—the globalization of labour. A lot has been written on the globalization of capital in recent years, from mammoth corporate deals struck across national boundaries to the way hedge fund money sweeps in and out of markets. But far less attention has been paid to the fact that labour, too, is now a global commodity.
The traffic in technology elves clutching their H1-B visas is the most well known facet of the globalization of labour. But the call centre worker in Gurgaon who solicits new credit card customers across the world or the shop floor worker in China’s Guangdong province who helps make television sets for export are also part of a global labour force, though they may never move out of their respective towns. Today, consumers in one country can access workers in another either through trade, outsourcing or immigration. H1-B visas and the movement of people are just a small part of a far bigger story.
The International Monetary Fund (IMF) estimates in its new World Economic Outlook, parts of which were released on 5 April, that the effective supply of labour has quadrupled between 1980 and 2005, largely because the populous and growing countries of Asia and East Europe have joined the global economy. While IMF does not give a headline number for how much the global labour force has grown by since 1980, we know that around three billion Indians, Chinese and East Europeans have entered the global economy in the past 25 years.
At the same time, the amount of capital available has not increased too much. It is easy to figure out the consequences of the global labour glut. The bargaining power of labour is bound to decline—and it has.
To put it in slightly more technical language, the global capital to labour ratio must have dropped very steeply in recent years. Harvard University economist Richard Freeman wrote in 2005: “I estimate that the entry of China, India and the former Soviet bloc into the global economy cut the global capital/labour ratio to just 55% to 60% (of) what it otherwise would have been.” And he was assuming only a doubling of global labour supply, rather than a quadrupling.
With so much extra labour on offer, is it any surprise then that the share of labour in the gross domestic products of many western economies has dropped? There are many reasons why our times are described as a new golden age of capitalism—the triumph over communism, a blaze of innovation and newer methods of production, for example. But the increase in the global labour force is perhaps the most important reason why the returns on capital have been so strong in recent decades.
Some western Marxists believe that this is a new form of Karl Marx’s famous 19th century prophecy, about how a reserve army of unemployed will keep exerting downward pressure on wages. Lower wages and growing inequality, said Marx, will squeeze consumer demand and condemn economies to live with frequent recessions—and these economies will eventually face a collapse.
New-age radical economists insist that the Chinese and Indians are a new reserve army of unemployed. Their very presence reduces the bargaining power of workers in the West, keeps real wages stagnant and pushes up inequality. This is the first stage of a new crisis of capitalism.
Though attractive, this is a faulty thesis because it pays little attention to what is happening in our part of the world. Here, real wages are rising. So it is possible the share of global labour in global GDP may not have come down, as the income gains of Asian workers cancel out the income losses of American and European workers.
Standard economic theory—what has been called Samuelson-Stopler theorem—also predicts that trade liberalization helps the factor of production that is relatively abundant. The West has abundant capital while India and China have abundant labour. So, in the current round of globalization, the main beneficiaries have been western capital and eastern labour.
How long will this last? Says Freeman: “Even considering the high savings rate in the new entrants—the World Bank estimates that China has a savings rate of 40% of GDP—it will take 30 or so years for the world to re-attain the capital/labour ratio among the countries that had previously made up the global economy.”
That’s a long way off.
Ramesh Ramanathan’s column, Möbius Strip, will run on Wednesday. Your comments are welcome at cafeeconomics@livemint.com
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First Published: Mon, Apr 09 2007. 12 36 AM IST
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