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"Low Wages in Developing Countries = Poverty in the U.S."

March 1993 issue of Poverty & Race

by Richard Rothstein

Americans generally recognize that stagnation in Japan and Europe con-tributes to U.S. stagnation because slow growth there closes potential markets for American exports. When their own domestic customer bases grow too slowly, Japanese and European firms try selling goods too cheaply in the U.S. Contemporary disputes in steel and autos illustrate other nations' temptation to export their domestic recessions.

But in policy debates we pay little heed to effects on Americans of slow growth in the developing world. Inadequate Third World purchasing power also results, in an inability to absorb U.S. exports and a need to sell low-priced goods in the American market. Low--wage competition from these nations also puts pressure on our own living standards as domestic manufacturers cut wages and benefits in order to compete. Needlessly slow wage growth in develop-ing nations has been an important cause of increased poverty, unemployment and income inequality in the United States. In Mexico, for example, a 50% loss in the real value of the minimum wage con-tributed to a loss (between 1980 and 1985 alone) of 300,000 U.S. jobs in export industries which could no longer sell to Mexicans whose purchasing power was obliterated. Wage growth in developing nations is therefore essential not only for their own welfare but for the welfare of Americans as well.

The Legal Framework

In the 1980s Congress adopted laws to use American trade preferences as levers to increase wages and living standards in the developing world. These laws require exporting nations to respect "interna-tionally recognized worker rights," but were ignored or only weakly enforced by the Reagan and Bush Administrations.

While specific language varies slightly from statute to statute, in general these laws require nations which benefit from trade concessions or assistance programs to provide workers with:

the right of association

the right to organize and bargain collectively

protections against forced labor

a minimum age for the employment of children acceptable conditions regarding minimum wages, hours of work, and workplace health and safety.

The statutes state clearly that "the definition of worker rights be interpreted commensurate with the development level of the particular country."

While definition of acceptable levels is difficult, it is still required by statute. Yet past administrations never attempted to create definitions. There are, however, available non-discriminatory bases for determining acceptable minimum wage levels for developing nations' export sectors, using indices such as the wage share of Gross Domestic Product (GDP), the wage share of manufacturing value-added, or comparative productivity levels.

One of these statutes is the Generalized System of Preferences (GSP), which offers duty-free status for most products exported to the U.S. from developing countries, unless the exporting country "has not taken or is not taking steps to afford internationally recognized worker rights to workers in the country." The GSP statute must be renewed in 1993.

The International Labor Rights Edu-cation and Research Fund, with support from PRRAC, is developing a proposed methodology for determining "accept-able" minimum wage levels for develop-ing countries. This definition could then be incorporated into the new Generalized System of Preferences. The research has also contributed to recent proposals by the Economic Policy Institute for the supplementary labor standards agree-ment which the United States, Canada and Mexico are to negotiate as part of the North American Free Trade Agree-ment. EPI recommended that the supplementary agreement require gradual increases in Mexico's minimum wage over a ten-year period, resulting in parity with the U.S. minimum.

Mexico's Constitution provides for a minimum wage which "must be suffi-cient to satisfy the normal material, social, and cultural needs of the head of a family and to provide for the mandatory education of his children." Recent Mex-ican administrations have ignored this provision, and, in an effort to attract export industries, have reduced the real value of the minimum, currently equiva-lent to about 55 cents an hour. Mexico's unions, controlled by the ruling party, help attract export firms with a "soli-darity pact" which, since 1988, has continued to hold wage increases below the inflation rate.

EPI has recommended that the Clinton Administration insist in NAFTA's labor standards negotiations that Mexico's minimum wage rise to equivalence with the minimum wage prevailing in the United States. A ten-year timetable is consistent with the most common time-table for tariff elimination which NAFTA provides. Once equivalence has been achieved, procedures should assure that minimum wage levels in the United States and Mexico maintain their real values, adjusting for inflation in each nation. This policy would be consistent with the Clinton Administration's inten-tion to propose indexation of the U.S. minimum wage, after initial adjustment to an appropriate level.

The Minimum Wage Issue

There have been three main reasons for minimum wage legislation in the United States. First, Congress wanted to inhibit manufacturing flight from higher--wage sections of the country (like New England) to lower-wage sections of the country (like the Southeast), solely to take advantage of labor exploitation. Second, Congress wanted to avoid a competitive spiral where higher-wage areas saw their wages decline because of a need to compete with substandard wages in lower-wage areas. And third, Congress recognized, particularly when Fair Labor Standards were first enacted in 1938, that economic growth could not proceed unless workers had adequate purchasing power to consume the goods they produced, and that a minimum wage was needed to assure minimally adequate purchasing power for eco-nomic prosperity.

All three historic rationales apply today to commerce between the United States and Mexico. Historically, the domestic U.S. minimum wage applied only to workers engaged in interstate commerce. A supplemental agreement on labor standards with Mexico should require a ten-year schedule for minimum wage equivalence for workers in the "traded goods" sector, engaged in manu-facturing for the U.S. or Canadian markets. If Mexican development pro-ceeds as expected by NAFTA propo-nents, a growing share of the Mexican economy will be included in the traded goods sector and thus affected by the tri-national minimum wage. In addition, a higher minimum wage in the traded goods sector will create some upward pressure on Mexico's domestic wages, improving income distribution and pur-chasing power for workers throughout the Mexican economy.

It may at fast glance seem that Mexico's wage structure is appropriate for a nation at its level of economic development. After all, the ratio of Mexico's minimum wage to the U.S. minimum wage is roughly the same (14%) as the ratio of the two nations' per capita GDP. But per capita GDP tells us little about income in Mexico's export industries, since Mexico, like other developing nations, has a dual economy where income in the modern sector is much higher than in the traditional sector. If wages as a share of income were compared between Mexico's modern sector and the U.S., data would undoubt-edly show a bigger gap. And there are other benchmarks which indicate that the Mexican wage is now inappropriately low for a nation at Mexico's development level, wanting to enter the U.S.-Canadian market as an equal trading partner.

An appropriate increase could be substantial since labor productivity in Mexico's export sector usually ranges from 80-100% of U.S. productivity rates, while Mexico's minimum wage, as noted, is only 14% of the U.S. minimum. Real manufacturing wages in Mexico fell by 24% while industrial productivity increased by 28% from 1980 to 1989.

Comparison of the wage share of GDP between the U.S. (55%) and Mexico (15%) suggests that Mexican wages should increase to achieve comparability, even without the added inducement of free access to the U.S. market.

If the standard used is workers' earnings as a percentage of manufactur-ing value added (20% in Mexico vs. 35% in the U.S.), an immediate increase would also be in order. In fact, since Mexican export industries are more labor-intensive than U.S. industry, workers' earnings in Mexico's export sector should claim a greater share of value-added than in the U.S., not a lesser share.

A ten-year scheduled increase in the Mexican minimum wage should be rapid enough to provide Mexican workers with significantly increased purchasing power, appropriate to their productivity levels. Yet this increase will still be slow enough to continue to entice new invest-ment. Some Asian nations attract U.S. runaway shops with wage rates much higher than the Mexican standard.

There is precedent for careful incor-poration of low-wage areas into the American market. In Puerto Rico, for example, minimum wage differentials were maintained for forty years so that labor-intensive firms would have incentives to invest in Puerto Rico and create employment there. But differentials were small enough not to create a hemorrhage of U.S. firms relocating solely to take advantage of low wages. (In 1960 the mainland minimum wage was $1 a hour, and the typical Puerto Rican minimum wage was $.80.) The strategy worked, Puerto Rico sustained continued economic growth although its minimum wages were at high levels by Mexican standards. From 1960 to 1989, Puerto Rico's real per capita person income has grown steadily, at an average rate of 3.7%. Island industries have been required to pay the full mainland minimum wage since 1981, and per capita growth has averaged 3.3%. During this same period, Mexican per capita income growth has declined by an average rat of over 1% a year.

What Clinton Could Do

The Clinton Administration has many opportunities to expand American export markets in the Third World, as well as to protect U.S. jobs from unfair low-wage competition, by policies which give greater emphasis to internationally recognized labor standards by Third World trading partners. Addressing inadequate minimum wage policies in NAFTA and in countries benefiting from GSP could support a new international climate in which development and trade become, not ends in themselves but means to improved welfare for citizens of developed and developing nations alike.

Emphasizing the role of wage growth in Third World development strategies could help to stem the growth of poverty in the United States. It could begin to cure the 1980s epidemic in which the contagion of Third World poverty infected the living standards of the poorest American workers as well.

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