The Effects of Cheap Labor on High Wage Countries; Does Cheap Labor Have an Adverse Effect on Other Countries

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THE EFFECTS OF CHEAP LABOR ON HIGH WAGE COUNTRIES; Does Cheap Labor Have an Adverse Effect on Other Countries

By

Danny Welch
BUSN601 1004 Spring 12

In recent decades, trade has increased between high wage countries and low wage countries. The trade versus Gross Domestic Product (GDP) ratio has increased about 15% since the 1970s with countries associated with the Organization for Economic Cooperation and Development (OECD). This is with a trade openness ratio of around 40% for these countries. Smaller countries had a trade openness ration of over 50% in 2007. (OECD, 2009). Imports from low wage countries has put increasing pressure on unskilled labor markets. The wage inequality has been a topic of debate for some time and has had much empirical research conducted. One potential reason for the difference is the skill biased technical changes that have been experienced over these last couple of decades.

Historically, trade from low wage countries has been small. a freer trade with countries of any income level will directly affect wages and employment, and may cause a disruption to high wage labor markets. (Krugman, 2000). China’s incredible economic growth accounts for the vast majority of growth with the US trade with lower wage economies. This increase in imports from China has not been matched by a demand need for exports from the US. The growth of imports from China is attributed to China becoming a more market oriented economy. The labor influx into the marketplace responsible for making the products were unskilled migrants from rural areas that came to the urban environment where they were exposed to many products that had been banned because they were from foreign markets. When the labor force is very mobile across regions, the export trade of a country may affect workers but not be identifiable in that region. With the growth to China’s economy, there was a shock on the labor demand in the country. Non-college workers are the lowest in the mobility category. A region may experience a sluggish response to the influx of workers due to the cost in moving geographical locations.

A significant increase in imports from low wage countries can have a significant impact on rising unemployment levels and a decreased participation of the work force in a high wage economy. There may also be an incline in the use of government assistance and a decline in wages. China’s increase in exports to high wage countries may be attributed to internal productivity growth and the more open trade atmosphere that reduced the number of barriers for international trade.

China now has one of the best economies in the world. This can be attributed to it becoming more open to trade with more developed, industrialized nations. Having an open investment and trade policy is a powerful force to enhancing the living standards of a country. This has a direct impact to poverty levels and raising incomes in developing countries. Economist praise globalization when speaking of world economies; however, many people believe that globalization actually costs more jobs than it provides. Many companies who move their factory to low wages countries enjoy the cheap labor, but the move results in the loss of jobs for people in a high income country. With this loss jobs in high wages countries, it impacts the economy of the high wage country negatively. There are doubts among many that continuing political support for liberalization for investment and trade is a positive stance for laborers in high wage countries. Some people believe that there is a need to reassess the current phase of globalization to determine if there will be an increase in vulnerability of workers in high wage countries to foreign workers.

For many years, there has been an emphasis on globalization with policy makers and economists. There are two recent developments in global trading patterns that are of concern, large emerging economies and the increased prominence of...
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