Low Wages Don't Lure U.S. Investments
November 11, 1996
There is a widespread belief among many Americans that U.S. corporations routinely "export" high-paying jobs from here to low-wage Third World countries. For example, Ross Perot opposed the North American Free Trade Agreement mainly because he said it would suck jobs out of America and send them to Mexico, where manufacturing workers make just $1.51 per hour compared to $17.20 here.
The Bureau of Labor Statistics annually calculates wages for manufacturing workers in various foreign countries. Of those countries, 11 had average pay levels higher than the U.S. in 1995.
- Leading the list is Germany, where manufacturing workers made an astonishing $31.88 per hour.
- The average for Europe as a whole was $21.98, while Japanese workers made $23.66 per hour.
- Mexico had the lowest compensation level of the countries with pay rates below ours.
- Also among those at the bottom are the four Asian "tigers:" Korea, Singapore, Taiwan and Hong Kong. Their compensation levels averaged $6.38 per hour, 37 percent of the U.S. level.
- If the Perots of the world are right, then one would expect all of U.S. foreign direct investment to go to countries where labor costs are low. In fact, at least 44 percent of foreign direct investment in 1995 went to countries where labor costs are well above the U.S. level.
Germany, with the highest wages in the world, got more U.S. investment than any of the Asian tigers last year.
The Netherlands was the largest recipient of U.S. investment and, in percentage terms, Sweden had the biggest increase.
In total, the countries with wages above the U.S. received $39.7 billion of the $90.6 billion increase in U.S. foreign direct investment in 1995. Of the 15 countries with wages below the U.S. level, the bulk of U.S. investment went to Canada, the United Kingdom and Australia. By contrast, U.S. investment flowed out of Mexico and Greece, two of the countries with the lowest labor costs. The 10 countries with the lowest wages received a total of just $5.8 billion in U.S. investment, just 6.4 percent of the total.
The reality is that companies are not just looking for low wages. Low productivity can too easily offset any cost advantage. When investing, they also look at things like taxes, government regulation, trade restrictions, access to consumers, ease of transportation and availability of raw materials. While they also look at wages, there simply is no evidence that this is the dominant factor in encouraging U.S. companies to invest abroad.
Source: Bruce R. Bartlett, Senior Fellow, National Center for Policy Analysis, November 11, 1996.
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