Wage Convergance

Reaction to Wage Convergence

Wage convergence is a something that my company (especially my group) pays a great deal of attention. Our group is responsible for the outsourcing and offshoring of some our company’s products. Our company has decided to spend significant resources in several other countries around the world (China, India, Taiwan, etc…) in order to regain profit margin on products that are historically high labor to manufacture without adding capital.

In order to analyze the worthiness of moving the product line, we must understand wage convergence and the concept of ‘global labor cost’ arbitrage. In short, this is the practice of taking manufacturing jobs to whichever country has the lowest wages per unit of output, that has reached a minimum level of economic, political, and infrastructure support. In today’s world economy, I believe this is a great concept. This allows for more developed countries to obtain their goods at a cheaper rate than what they may produce the same good, while sending money to lesser developed countries for labor where there was no previous demand.

Another question posed, is the idea of welcoming the ‘pro-consumption rebalancing’ of the Chinese economy. For the past two decades, China has been on the receiving end of much of the rest of the world’s manufacturing jobs, as China has been able to produce labor at a much cheaper rate. I believe we should welcome the rebalancing of the Chinese economy, as this will bring this particular economy up to a point to where they are consumers and not just producers. This will shift the low labor wage to another country which will allow for that country’s economy to flourish as China’s has done.

The final point to consider, is it possible for the global economy to put to work all of the cheap labor? I believe the answer is no (at least, not in the near future). In the paper “Economic Development with Unlimited Supplies of Labor” by Arthur Lewis, the Lewis Turning Point...