The Labor Force Demography of Income Inequality

I ended yesterday's blog about income inequality with the promise of more demographic complexities. These relate to the issue that I have discussed in the very first chapter of my book for several editions now (and will continue to do so in the forthcoming 12th edition). This has to do with the impact of post-WWII demographic change on globalization, especially globalization of the labor market. After the war, the technology to reduce death rates, particularly infant and child mortality, was spread around the world. Developing countries began to increase in size because the death rate was dropping much more quickly than the birth rate. Here was a burgeoning market for goods of various kinds that were largely being manufactured by firms in the US and Europe. For about three decades after the war this provided the impetus for well-paying manufacturing jobs in the rich countries (the "good old days"). Then those kids in the developing countries grew up and wanted jobs. In countries where governments had wisely invested in the education of their youth (e.g., China, Taiwan, and South Korea), a labor force was coming into existence that was sufficiently well educated to take on increasingly mechanized manufacturing jobs, and at a cost far less than commanded in the rich countries. 

The most talked about consequence of this demographic shift has been the so-called hollowing out of the middle class in the US and Europe, since many of these workers had been able to achieve reasonably high wages. The flip side of those relatively high wages, however, was relatively high prices for goods. These high prices kept the real cost of living higher than might otherwise have been, and, in essence, kept the standard of living lower than it might have been. By moving the manufacturing of many consumer goods to lower wage developing countries, the price of goods is considerably lower than they would be if manufactured in the US or in most European countries and so the real standard of living is actually higher than before. This is, I think, one of the adjustments that one has to make to historical data of the kind that Piketty is analyzing, in order to understand that real incomes (i.e., what you can buy with what you bring in) for most people may not be worse than they used to be, and are probably better than they used to be. If you make $4K per month and the basket of goodies you want to buy costs $3K, you are better off than if you make $5K per month, but those same things cost $4.5K.

These changing demographics of the global labor market are associated, of course, with the globalization of the capital market. These two dynamic shifts in where money is made and who makes it shifts the calculation of income inequality because we are no longer talking about a single economy. We are all wrapped up in the economies of other nations, and that creates "externalities" and "distortions," as economists like to call these real world complications. As a small example, we know that communities in Latin America are having their local economies distorted and turned into something far less equal than before by remittances sent back to the family members by overseas migrants. The person who is cooking your meal at a local restaurant in the US may be a wage earner in the US, but may at the same time be on the way to becoming a capitalist in the home country by using some of that money to buy real estate or a business in the country of origin. That is globalization at work.