Smart Machines, Exports and Wage Rates

Television and internet  technologyTyler Cowen identifies 3 key drivers for US exports, and this counter-Luddite view of technology’s effect on wages:

The more the world relies on smart machines, the more domestic wage rates become irrelevant for export prowess. That will help the wealthier countries, most of all America. This logic works on both sides. America is using less labor in manufacturing, but China is too, even as its manufacturing output is rising. The fact that Chinese manufacturing employment is falling along with ours means that both our higher wages and their lower wages are becoming less relevant for the location of manufacturing decisions.

His 3 drivers for the US? Artificial intelligence and computing power, shale oil and gas making the US a fuel power, and the emerging market demand for US products rather than the basics from countries like, unfortunately, Australia.

What is interesting is that the effects he identifies only applies to manufacturing wage rates.

Right now in Australia small and medium enterprises are getting in on outsourcing service functions overseas: graphic design, computing, administration, sales calls, and so on. Agencies and websites are making it easy for ordinary small businesses to get incredibly cheap services in The Phillipines, China, India, Slovenia, Romania and elsewhere.

Analytic functions like share and market analysis have long since followed back office administration to overseas providers.

That outsource competition for what has up to now been local business-to-business service provision is going to have a big effect on service pay rates. No-one is talking about that.

So, counter to expectation, we may well be entering a world where manufacturing wages stay high (if with very reduced employee numbers), while business service wage rates fall.

A few people could be in for a shock.


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