The global proletariat, as we have already seen, has never been as large as it is today. And yet the share of wages in domestic income has declined in both the South and the North. According to the ILO, since the early 1990s, the “share of domestic income going to labor … has fallen in nearly three-quarters of the 69 countries with available information.” The decline has been more pronounced in emerging and developing countries than in imperialist countries. In Asia, the decline in the labor share fell by about 20% between 1994 and 2010; moreover, the pace of decline accelerated in recent years, with the wage share falling by more than 11 percentage points between 2002 and 2006. On both sides of the North-South divide, labor’s share of national income has fallen steadily throughout the neoliberal era; this decline has accelerated since the turn of the millennium, and it has done so even faster in emerging markets than in rich countries, starting from much lower levels.
Smith writes, “The wages paid to workers in the South are influenced by factors that have no bearing on the productivity of those workers. It is factors arising from labor market conditions and broader social structures and relations that affect the reproduction of labor power, including the suppression of the free international movement of labor and the creation of a huge relative surplus population in the global South. This tears a huge hole in the shaky edifice of mainstream economics.”
Typically, wages in less developed countries are converted to U.S. dollars in official statistics, at prevailing market exchange rates. In doing so, it is usually the case that the greater the difference in development between a given country and the U.S. (whose dollar is used as the reference currency), the greater the distortion. When adjusted for purchasing power parity, which is used to allow comparison of real wages, North-South wage differentials are reduced to about half of what is reported by market exchange rates, depending on the country. Smith is aware of this shortcoming.
Thus, the decline in wages as a share of domestic income is generally more pronounced in emerging and developing countries than in advanced countries. For example, declines in the labor share in emerging and developing countries have been very large – in Asia, by about 20% between 1994 and 2010. In China, the wage share has fallen by nearly 10 percentage points since 2000. Africa’s working people saw their share of national income fall by 15% in the two decades since 1990. The smallest decline still occurred in Latin America, where the wage share fell by 10% since 1993. The slower decline since then reflects the redistributive policies introduced by Latin America’s leftist governments to combat extreme poverty. Meanwhile, the wage share in advanced economies has also trended downward since 1975. However, the decline has been much more moderate than in emerging and developing economies.
But mainstream economic theory denies this reality. This leads to the notion that workers in China are getting their “fair share” of wages given their level of productivity. Smith quotes Martin Wolf from his 2005 book, “Why globalization works,” in which he praises the benefits of globalization. Wolf writes, “It is correct to say that transnational corporations exploit their Chinese workers in the hope of making a profit. It is equally accurate to say that Chinese workers exploit transnational corporations in the (almost universally fulfilled) hope of receiving higher wages, better education, and more opportunities.”
The declining share of labor presents a difficult question for mainstream economists because it contradicts what has long been considered certain, at least for developed capitalist nations, that labor’s share of gross national product is constant. This “fact” is often attributed to Nicholas Kaldor, who argued in a 1957 essay that “the share of wages and the share of profits in national income show remarkable constancy in developed capitalist economies”; this is because real wages automatically grow at the same rate as labor productivity, so that distributional shares remain constant over time. The capitalists’ preferred measure of productivity is unit labor cost, i.e., the cost of labor required to produce one additional unit of output. Yet competitiveness is a central goal of capitalists and governments alike, and this is achieved when labor productivity rises faster than wages. Jesus Felipe, a researcher at the Asian Development Bank, writes, “In standard analyses, the lower unit labor costs are, the more competitive an economy is considered to be. Therefore, many measures to lower UICs are basically measures to lower labor’s share of income.”
Both labor globalization and technological progress have reduced labor’s share of domestic income, and qualitative analysis shows that the two factors are inextricably intertwined and mutually reinforcing. In this context, information and communication technology has not only enabled enormous labor savings within imperialist economies, it has also entailed a key role in facilitating the integration of markets, the fragmentation of production and its relocation to different places in the world. This sector is essential to the outsourcing of production to low-wage countries, with cheapening in logistics and communications itself partly the result of low-wage outsourcing.
Mainstream economists argue that in recent decades, within each industry, capital productivity has risen faster than labor productivity due to a global decline of about 25% in the relative price of capital goods, especially in the communications and logistics industries, leading firms to substitute capital for labor. Smith, on the other hand, argues that the alleged 25% decline in the relative price of investment is greatly exaggerated, using U.S. government data that has been subjected to highly questionable “hedonic adjustments”; for example, the price of a computer will decline even if it actually remains the same but its speed doubles or the resolution of the screen improves.
For Smith, this methodology is based on a confusion between a change in the use value of a commodity with a change in the exchange value of a commodity, which allows mainstream economists to portray the increased productivity of labor – that is, the increase in the quantity of objects created by a given amount of labor power – as an increase in the productivity of capital. This is both right and wrong. First, with respect to productivity, Smith also distinguishes between physical quantities and price valuations. Labor productivity can be defined in two opposite, mutually exclusive ways: in terms of the productivity of use values and the productivity of exchange values. The former is a universal definition of labor productivity that applies in all societies and modes of production; the latter is specific to capital.
But there is also the productivity of capital, which stands for a more efficient use of machines and technologies. And this leads to price reductions. While the physical quantities involved remain unaffected by price changes, the profits in money do not. It is therefore wrong to identify the physical surplus with profits realized in money. Once prices change, monetary profits and physical surplus are no longer identical. And once production has taken place, productivity advances will make it possible to buy new inputs at lower prices in the future. But the capitalist didn’t buy the inputs in the future, he bought them in the past. And he has to get back what he paid for.
The fall in the value of the capital invested, which results from the falling prices of the capital goods invested, is a deduction from production, so that the rate of profit priced out systematically deviates from the physical rate. Temporal factors such as price movements play a role in the falling rate of profit.1) Technical progress reduces the monetary magnitude of profits through its impact on past investments. (2) This “moral wear and tear,” as Marx called it, is not caused by physical deterioration or “material devaluation,” but it is solely a consequence of lower prices, which in turn are a consequence of technical progress. (3) The greater the technical progress, the greater the decline in profits related to the present capital stock.
Smith argues that at least the acceleration of the decline in the labor share in the last decade has not been accompanied by an acceleration of investment-specific technological change; on the contrary, investment-specific technological change slowed in the last period. In fact, for him, there is a weak negative relationship between the change in equipment prices and payroll shares across industries. This is the opposite of what one would expect if capital deepening were the driving force of the decline in payroll shares. Instead, the declines in payroll shares are greater in industries that face a greater increase in competitive pressure from imports. Smith thus does not assume that international wage differentials are determined by international differences in labor productivity, a doctrine that leaves a number of paradoxes and anomalies unresolved, but for him is remarkably successful in making the exploitation of workers by capitalists and of poor nations by rich nations disappear without a trace. On the one hand, this is true, since for many occupations labor productivity is the same in developed and less developed countries (think, for example, of a bus driver); on the other hand, its change has certain price effects that also affect the distribution of profits and wages.
Benanav argues similarly to Smith, however, with respect to the unemployment rate. For Benanav, the decline in output growth rates as a sign of deindustrialization cannot be explained by technological terms alone. Since the end of the 20th century, one can even speak of a global wave of deindustríalization, Benanav says. With the exception of China, which is not entirely spared from deindustrialization either, however, global employment increased by only 0.4% between 1991 and 2016, while the global labor force, much of which is not employed, increased sharply. Fewer and fewer workers worldwide are producing more and more, but not, as automation theorists assume, because of technological progress, but because output growth rates have fallen relative to productivity growth rates.
Since the 1980s, cross-country studies have also indicated rising inequality in wages and earnings across skills. In many countries, the wages of high-skilled workers have risen, while the wages of low-skilled workers have grown relatively more slowly, fallen, or stagnated. Even in the U.S., the real wages of low-skilled workers have fallen while the wages of high-skilled workers have risen significantly. the same scenario exists in Latin America and much of Asia.
Alan Freeman points to another important factor influencing wage differentials, namely the ever-increasing suppression of international mobility of unskilled labor and the migration of skilled labor to high-wage countries. A country that does not pay global wages will find that its skilled labor force systematically migrates to those places in the world that are willing to pay higher wages, and whose objections to immigration mysteriously evaporate when confronted with skilled labor that they never had to pay to train. Still, this is not the main cause of the widening wage gap. Detailed analysis by the ILO shows that this trend is driven primarily by falling wages for the lowest-paid workers, as opposed to rich countries, where the driver is rising wages for the highest-paid. These two groups of nations represent two distinctly different ways in which wage inequality is rising. In the first group, wage inequality is growing because of a deterioration in the lowest wages, while in the second group, top wages are rising faster than other wage groups. The report also identifies a third type “in which both changes occur simultaneously, leading to a ‘polarization’ of wage incomes.”
For the neoliberal era, it is undeniable that absolute wage differentials between imperialist and developing countries have increased. Assessing the evolution of relative wages is much more difficult, because average wages do not take into account the sharp increase in wage dispersion between high-skilled and low-skilled occupations. One way around this is to look at international wage differentials within occupations.
The improved growth of developing countries over the past decade, which has disproportionately benefited capitalists and benefited middle classes and skilled workers, has been driven by the confluence of three factors: a particularly intense and broad-based wave of outsourcing during the decade leading up to the onset of the global crisis; the increased flow of capital fueled by low interest rates in imperialist economies; and the “commodity supercycle”-a period of rising food and commodity prices that began in 2002 and was fueled in large part by China’s rapidly growing demand. Yet investment flows remain volatile, influenced by declining consumer markets in imperialist countries and China’s strong growth fueled by a huge expansion of debt, much of which went to finance unproductive investment, with the result that China’s leaders are struggling to avoid a “hard landing.”
Smith then returns to the relationship between labor costs and productivity. Unit labor costs calculated with aggregate data are no more than the share of total output multiplied by a price effect. While this is also true at the firm (product) level, at the aggregate level one cannot calculate unit labor costs without assuming an aggregate price deflator that includes a purchasing power parity adjustment. For mainstream economists, a specific feature of unit labor costs is that the numerator, reflecting the labor cost component, is expressed in nominal terms, while the denominator, representing output or productivity, is measured in volume-based terms. This implies that when comparing unit labor cost levels across countries, the level of wages is converted using the official exchange rate. In contrast, output or productivity refers to a volume measure, as it resembles a unit of quantity of output. Therefore, for comparisons, output is converted to a common currency using a purchasing power parity instead of the exchange rate to adjust for differences in relative prices across countries.
For Smith, the paradox arises from the fact that the living labor that produces commodities is not itself traded across national borders; the commodity of labor power is internationally immobile. Moreover, labor power is the only commodity that is not produced by capitalists; they buy it from its owner. Capitalists are therefore only interested in the price of labor power, which is normally the cost of its (re)production. On the other hand, the goods produced by this living labor are traded across borders, if they were not, there would be no reason to calculate their international competitiveness. This is not directly determined by their actual national- or sector-specific production costs, but by the exchange value they achieve in global markets, i.e., by their average socially necessary production costs. Finally, it is confusing to say that output or productivity refers to a volume measure; rather, output is equal to value added, and productivity is value added per worker; both are measures of value, not quantity.
In the next chapter, Smith examines what he sees as the fundamental driver of the globalization of production, namely global labor arbitrage, or, to put it another way, the substitution of relatively high-paid workers in imperialist countries for low-wage workers in China, Bangladesh, and other nations in the global South. In doing so, he attempts to explain global labor arbitrage in terms of Marx`s law of value.
By uprooting hundreds of millions of workers and peasants in the countries of the South, neoliberal capitalism has accelerated the expansion of a vast pool of super-exploitable labor. The suppression of free movement across borders, in concert with this vastly increased supply, has led to a dramatic widening of international wage differentials between developed and developing countries that far exceed price differentials in any other global market. In the process, two for Northern companies, profits can be increased by outsourcing production to low-wage countries on the one hand, and by immigrating migrant workers for exploitation in their own countries on the other.
In an era of oversupply of goods, companies lack influence over pricing as never before, so they must ceaselessly search for new efficiencies. And wages continue to be a major factor in this.
Computerization has not only revolutionized production, it has also increased the possibility of outsourcing and thus the importance of the labor component of production costs. Rather than becoming insignificant as a result of technological change, labor costs continue to be an important determinant of production costs and the decision on where to locate production. For Smith, wage arbitrage is the main driver of outsourcing decisions by transnational firms. He quotes Anwar Shaikh at this point, who points out that while cheap labor is not the only source of attraction for foreign investment, because cheap raw materials, a good climate, and a good location for certain industries are also important, cheap wage labor, on the other hand, remains a general social feature of underdeveloped capitalist countries, one whose effects extend to all areas of production.
Smith attempts to substantiate this with Marx` theory on surplus value. For Smith, capitalism began with the exploitation of labor through absolute surplus value (the lengthening and intensification of the working day). As capital developed, there was an increase in relative surplus-value production, the introduction of labor-saving technology to reduce the value of labor power while maintaining the same length of the workday. In the 21st century, Smith argues, at least, the super-exploitation of workers in the global South occurs less through an expansion of absolute and relative surplus value and more through the reduction of wages below the value of labor power.
In Capital, Marx recognized this as an important form of surplus value, but argued that capitalism could siphon off surplus value even without this form of exploitation. Marx believed that factors counteracting the tendency of the rate of profit to fall included not only a rising rate of surplus value or falling costs of technology or even increasing foreign trade and the financialization of capital, but also the lowering of wages below the value of labor power (super-exploitation in Smith’s words). Marx, however, excluded this factor in his abstract analysis of the laws of motion of capital: “Like many other things that might be brought in, it has nothing to do with the general analysis of capital, but has its place in an account of competition, which is not treated in this work. Nevertheless, it is one of the most important factors in checking the tendency of the rate of profit to fall.”
Now, however, according to Smith, all three modes of appropriation of the surplus are in progress today, the third being most significant in the South because the imperialist North considers this the best and easiest way to appropriate surplus value there. It should be noted here, however, that in addition to super-exploitation, the methods of absolute surplus value and the use of the latest technology to save labor (relative surplus value) also continue to exist in the global South. Foxconn may fob off its workers with low wages, but it also uses the latest technologies.
And one thing must always be pointed out, even against Smith: Marx mostly assigned financial instruments exclusively to the sphere of circulation, analyzing their function separately from the functioning of the technologies or physical means of production that store past wealth while enabling future demand for produced goods. For Marx, when it comes to value (analogous to energy and matter), there seems to be mostly a kind of conservation principle, whereby the growth of real accumulated wealth can never be greater than the profits produced and realized in industrial production in a given period (multiplied by the rate of surplus value discounted by the rate of investment), so that any increase in the value of physical capital or constant capital in the form of the financial instruments does not occur for him at all, or is considered purely fictitious wealth. For Marx, therefore, the real growth of an economy can never be greater than the industrially produced profit. But this can no longer apply to contemporary capital, the financial system and its financial instruments, because the assets themselves are means of financing in order to set in motion and expand the investments in “real industry”.