Americans are overpaid

(breakingviews.com) -- U.S. workers are overpaid, relative to equally productive foreigners doing the same work. If the global economy is ever to get back into balance, that gap needs to be closed.

Of course, U.S. workers should earn more than their peers in China, Moldova, or Vietnam. The Americans take advantage of the higher productivity that makes their country rich: better education and infrastructure, abundant capital and a more developed work ethic. But how much higher should U.S. wages be?

The answer depends in large part on two measures: the difference in productivity in making goods that can be traded across borders, and the quantity of such tradable goods. Both measures point to a narrowing wage gap.

There are so many factors working to push up productivity in poor countries. Fast development, cheap capital, and more efficient shipping all help make foreign factories more competitive. Cheap global communication through the Internet reduces all sorts of costs and makes it easy to trade many more goods and especially services.

The global wage gap has been narrowing, but recent U.S. labor market statistics suggest the adjustment has not gone far enough.

One indicator is unemployment, which has risen unexpectedly rapidly in this downturn. The 7.3 million jobs lost are more than treble the 2 million of the next worst post-war recession, in 1980-82. Some of that huge increase reflects the turbulence of an unusually sharp decline in GDP, but there could be another factor: the recession has revealed many workers are paid more than they are worth.

Another possible sign is the huge surge in reported productivity, which has begun while output was still declining. That suggests that some production is being outsourced altogether, often to lower-paid foreign workers.

The big U.S. trade deficit -- cut in half but still at alarmingly high levels -- is another sign of excessive pay for Americans. One explanation for the attractive prices of imported goods is that U.S. workers are paid too much, relative to their foreign peers.

Global wage convergence is great for the poor but tough on the overpaid rich. It's possible to run the numbers to show that U.S. manufacturing workers should take average real wage cuts of as much as 20% to get into global balance.

The required cut may be smaller. But if U.S. wages get stuck above global market-clearing levels, as in the 1930s, the result could well be something approaching 1930s levels of unemployment.

Pretty well anything would be better than that. A combination of moderate inflation to reduce real wages and a further drop in the dollar's real trade-weighted value might be an acceptable combination.