Adam Smith Waylaid

The equation for Adam Smith’s “Comparative Advantage” lines up like this: the average wage in China is $.90 per hour, as opposed to $22.00 per hour in the US. If you’re an auto parts supplier and your profit margins are down another 4% for the third consecutive year in a row, your options lay in sharp relief.

Implicit in all discussions of efficiency (and the logical underpinnings of unfettered immigration) is the idea that there is no barrier to ever lower costs, no barrier to ever-better efficiency. This is what has become a mantra, an idea whose converse is viewed as heresy amongst economists. Like Moore’s law and the certainty of the Big Three in the 1950’s that next year would be like this year, plus 10% – might this be a fatal assumption? This is more than academic. If we get this wrong the entire bargain the western democracies have made with their populace is shot. No longer does improving oneself with education mean much when my $100,000 per year coding job can be moved to Hyderabad and done as competently by a worker who is paid $18,000 per year. But there are no pensions in Hyderabad and there are minimal environmental regulations in Bangalore. There are no workplace safety rules resembling those in the U.S. and there is no public infrastructure to be paid for that resembles anything to found in Tokyo, London or Sunnyvale – and there’s no universal public education to pay for. The software outsourcing companies in India have to supply their own water, supply their own security and supply their own power. How do you compete with a country where infrastructure has been privatized and has not yet made that bargain with its citizens?

Even Moore’s law will be running up against the wall of Quantum theory in the next ten years as ever shrinking microprocessors slam into Heisenberg’s and Schrödinger’s creepy equations (what do you do when circuits become smaller than the electrical pulses they carry?) But might Economics have its own wall that the drive for ever-lower costs is bound to hit? What do you do when your costs are an order of magnitude below what they were five years before? That means your supplier’s costs have also been reduced by a similar amount. What are they paying their employees in 2004 compared to 1999? Is it the same? If it is, how many employees are being paid that wage today as opposed to 1999?

Adam Smith never envisioned aggregated T1 lines with C++ and Java code flying across two oceans at the speed of light, minus the microsecond ping-time-overhead of the Cisco routers playing traffic cop. If my customer needs help they can call my call-center in North Carolina. Or they can call my call-center in Shanghai. There is little difference between the two since my call center in Shanghai has employees who speak flawless English with a modest accent and know Microsoft 2000, Oracle or SAP as well as my employees in Raleigh -- who are paid ten times as much.

In Economics an externality exists whenever there is a separation of costs and benefits. When a business dumps toxic waste into a nearby river and downstream residents are riddled with cancer, the costs of that cancer are an externality. The business is able to lower its costs and pass those lower costs onto its customers while never having to pay for the treatment of cancer patients that it would have to otherwise have to incur.

We have laws in this country against dumping and pollution for this very reason – making sure the costs of certain dangerous behaviors are prevented. But a company that chooses to outsource jobs overseas avoids many of these costs, some of which include:
1) High wages, 2) Organized labor, 3) Social Security or Medicare payments, 4) Unemployment tax, 5) Health benefits for workers, 6) Child labor laws, 7) OSHA or EPA costs or regulations, 8) Retirement or pension costs.

But what about the company that does not export its jobs, but instead stays in its home country and takes advantage of illegal immigrants as employees? How many of these advantages does it incur? What happens if these illegal immigrants are granted guest-worker status within the U.S., as the Bush administration has proposed? How many of these same obligations will be skirted -- will our experiences with a previously illegal labor force just be codified and institutionalized?

The experiences of the construction industry in the American Southwest over the last decade show how an addiction to low wage, illegal immigrant labor can become institutionalized. As illegal labor became a larger and larger part of the various construction trades a common complaint among general contractors was that no one in the industry could afford to not break the law and hire undocumented workers. At least four costs off the above list have been already skirted in certain industries here in the U.S. Agriculture, for example, the largest employer of immigrant labor (legal and otherwise) has historically been able to pay extremely low wages, endure little in the way of organized labor and avoid paying health benefits for workers, as well as retirement or pension costs. In the case of illegal immigrant labor, none of those benefits are demanded, or can be demanded, due to the threat of deportation. If immigrant labor was given guest-worker status, this same group would gain some pricing advantage, but how much? Enough to bridge the current wage gap between legal and illegal labor? Judging from some of the organized boycotts the United Farm Workers in the Sonoma Valley over healthcare benefits not being extended to legal farm workers, one gets the impression that the question might be moot, or at the very least, a difference that is only a matter of degree.

The free movement of labor is an idea that has been embraced one time or another by both Labor and business interests, but for different reasons – the former found it attractive because of the opportunity for worldwide trade unionism, and the latter because of the assumed lower labor costs and more efficient allocation of workers. However, at this time, the free movement of labor has primarily been embraced by business interests. Publications such as the Wall Street Journal call for the complete removal of any and all immigration barriers while Labor is a major player at anti-globalization protests wherever they are held. Strangely enough, in what can be seen as a rear-guard action to increase faltering influence and membership, the Service Employees International Union's has in recent years included illegal custodial workers in Los Angeles as part of its organizing efforts. In the past, unions have viewed illegal workers as a threat to their wage and benefit gains and until recently it would have been inconceivable to see them included in any organizing drive. If this type of organizing expands its scope, wage and benefit floors might be buttressed somewhat for illegal labor and moving it towards some type of parity with legal wages. If so, the logical extension might be for illegal labor to become less and less attractive over time.

In the past conventional wisdom would argue that wage decay would only occur in lower skilled trades, that new higher skilled jobs would more than make up for what was being lost on the lower end. But, as we have seen in the programming field, this is no longer the case. We are now seeing the greatest divide between the perceived interests of corporations and workers (and by extension, society as a whole) since the violent labor unrest of the early 20th century. As business interests find they now can suture themselves to a labor supply 6000 miles away, this fissure will continue to grow wider.