Proinnsias Breathnach: The extraordinarily blinkered and simplistic preoccupation of Irish economists with labour costs was once again in evidence in a book review by Michael Casey, former Chief Economist of the Central Bank, published in the January 4 issue of the Irish Times. Reviewing Graham Turner’s No way to run an economy (Pluto Press), Casey offered the following observation: “multinationals are now more or less beyond the control of the authorities and will shift production to any country in the world to avail of lower wage costs”. This gives the impression that the main consideration of multinational companies (MNCs) in choosing overseas locations is wage costs.
In fact, when one strips out investment in oil-rich economies such as Saudi Arabia and the United Arab Emirates, tax havens such as the Cayman and Virgin islands and the traditional four Asian tigers (Hong Kong, Taiwan, Singapore and South Korea – still included among the “developing economies” by the World Bank etc), the proportion of global foreign direct investment stock located in low-wage economies is of the order of 15%, and even in these cases, much of the investment is oriented towards serving local markets (China, India, Mexico, Brazil) rather than exploiting cheap labour. The fact is that the vast bulk of overseas investment by MNCs is located in high-wage economies, demonstrating that low wages are, at best, a minor factor in influencing multinational investment patterns.
In the same book review, Casey offers a second observation which is so off the mark as to be downright risible: “The lack of demand in the US economy is also due to the compression of wages. This was caused by multinationals leaving en masse for cheap-labour countries.” That someone who is currently a board member of the IMF could offer such a simplistic and erroneous view of what is a highly complex phenomenon is actually quite disturbing.
The idea that US multinationals have been relocating jobs en masse to low-wage economies is simply not true. For a start, the great bulk (70%) of employment in US MNCs is actually located within the USA itself. An even greater proportion (80%) of overseas employment in US MNCs in located in other developed countries. This is reflected in the fact that (according to UNCTAD data) the average overseas employee of a US MNC earned almost $38,000 in wages/salaries in 2005 i.e. 86% of the average salary of all US employees in that year. These are crude averages, but the orders of magnitude are nonetheless indicative. When one allows for overseas investments by US MNCs which are primarily designed to serve local markets, it is likely that the search for cheap labour accounts for less than ten per cent of all overseas employment in US MNCs.
In 2005, overseas employment in US MNCs was the equivalent of 8 per cent of total employment within the USA itself. This suggests that, if all jobs relocated overseas to access cheap labour were to be repatriated, it would increase employment in the USA by less than one per cent. Clearly, such relocations have had, at best, a marginal impact on US wage levels. If Michael Casey is looking for causes for the compression of US wage rates (which are lower now in real terms than they were forty years ago), he might do better to look at other factors such as large-scale immigration of unskilled workers from abroad, low education and skill levels among large swathes of the indigenous population, anti-trade union legislation and the absence of the social protections for marginal groups which are found in more civilised societies elsewhere.
Dr Proinnsias Breathnach
Proinnsias Breathnach joined the Geography Department at Maynooth University as its second member in 1972. Officially retired 2010, he remains research active with Emeritus status.
His research interests are economic geography, national and regional economic development, transnational investment, informational economy and dairy cooperatives.