Saturday, November 12, 2011

Greece More Competitive Than Germany?

Perennial optimist Mark Perry tries to spin the news that wages are increasing a lot faster in China than in the U.S. as something positive for the U.S. because this will lead to more manufacturing staying in the U.S.

He is right in the sense that all else being equal lower relative wages in the U.S. will increase the willingness of companies to invest in the U.S. rather than China. However, though lower wages is a potential mean by which to increase employment, it is negative as a self-end. That is especially true to the extent it reflects lower relative productivity, because to the extent to which productivity is also lower it will not increase employment.

This can be illustrated by the fact that average hourly earnings is more than twice as high in Germany than in Greece, but as should be obvious especially these days, that doesn't mean that Greece is more competitive than Germany, because German productivity exceeds Greek productivity even more. And though wages are increasing a lot faster in China than in the U.S., so is productivity.


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