Cheap Foreign Labor

Dr. Russell is Professor of Management, University of Wisconsin at La Crosse .

An Egyptian fellow-student at the University of Geneva once gave me a most persuasive argument for using tariffs to protect jobs. "We Egyptians must impose heavy duties on American products," he said, "because our workers are not as well educated and trained as yours. And the American workers have far more capital equipment to work with than ours. To expect the Egyptian workers to compete against yours is like expecting a man with a shovel to compete against a man with a bulldozer. Thus to protect Egyptian jobs, we have no real choice but to raise tariffs high enough to equalize the costs between American and Egyptian production."

His intriguing argument ignores the fact that most of the world’s trade occurs only because of cost differences—labor and otherwise—and would largely disappear if costs were made equal. Even so, my fellow-student was closer to reality than are our Congressmen who claim that high-paid American workers can’t compete against "cheap foreign labor."

First, let’s look at this issue from the economic viewpoint, i.e., labor cost per unit of output. In that realistic sense, the typical American employee (or farmer) is the lowest paid worker in the world. True, his hourly pay is three and four times that of his Russian counterpart. But his average hourly productivity is five and six times as much. The primary reason for this high productivity is the constantly increasing amounts of equipment the typical American uses in his work.

As my Egyptian friend pointed out, it’s true the American worker is better educated and trained than his European and African counterparts. I’m convinced he also works harder and more effectively, even when he’s doing manual labor. And he accepts directions better than his counterpart in other nations. But in the final analysis, if he didn’t have easy access to machines and other labor-saving devices, he wouldn’t produce much more than the Egyptian peasant.

The result of this abundance of capital is that even at a pay rate of 40 and 50 dollars a day, the American worker still generally provides the cheapest labor in the world. For example, a worker in the capital-intensive United States who uses his machines to produce 500 "units" for $50 pay is far cheaper than an Asiatic worker with little equipment who produces only 25 "units" for $5 pay.

Most American businessmen, however, continue to use the erroneous hourly wage comparison and thus continue to demand protection against cheap foreign labor. But foreign businessmen themselves are increasingly showing by their actions that American labor is indeed a bargain.

That’s why foreign direct investment in the United States is increasing at a yearly rate of around 20 percent. The total foreign investment in productive facilities in the U.S. is now well in excess of $30 billion and it is climbing steadily. Among these foreign owners of American factories and related productive facilities are such well known companies as Volkswagen from Germany , Volvo from Sweden , Montecatini Edison from Italy , Hanson Trust a conglomerate from Britain , Michelin tires from France, Matsuchita from Japan , and Canadian Pacific. Their United States factories are staffed with American workers who are usually paid hourly wage rates considerably higher than the rates paid to the workers of those same companies at home. While there are many reasons for this increasing foreign investment, here are the three that are most often advanced by the foreign managers and investors themselves: Crippling governmental regulations in their own countries, low cost of capital in the U.S., and the chance to increase profits by using the disciplined, highly productive, and relatively cheap labor provided by the American worker. Cheap, that is, when the total labor cost per unit of production of the American worker is compared to that of his European and Asiatic counterparts. The fundamental reason these workers don’t have much is they don’t produce much. As Aldo Cardarelli, head of European operations for General Telephone and Electronics said, "In Italy, the costs of labor at our plant outside Milan are pretty much the same as at our Huntsville and Albuquerque plants, yet their output in the U.S. is more competitive." He concludes, "The answer has to be in the productivity of the workers."’

A basic reason advanced by the management of Britain ‘s Imperial Chemical Industries for investing $70 million in a herbicides plant in Texas is the freedom they have in the U.S. in hiring, firing, and moving workers from one job to another. That essential key to efficiency and productivity has now been pretty well abolished in Great Britain .

The number one French cement manufacturer, Lafarge, is now investing heavily (with American partners) to expand production facilities in the United States . The reason advanced by Lafarge Chairman, Olivier Lecerf, is the decreasing efficiency and low profits in France due to governmental regulations on prices, labor policies, and welfare programs.

Alfred Hartmann, Vice Chairman of Swiss pharmaceutical maker F. Hoffmann-La Roche and Company, a major investor in the U.S. , makes this startling prediction: Because of the relatively low costs of American production, more and more foreign companies will produce in the United States for export to other markets all over the world.

This trend is confirmed by the Federal Reserve Bank of Chicago (International Letter, July 23, 1976): "Labor costs in manufacturing, as measured by labor cost per unit of output in terms of domestic currency, rose sharply in industrial countries in 1975. The trend has been the product of substantial increases in hourly compensation rates and declining rates of output per hour." Only one industrial nation ( Germany ) showed a better record than the United States during 1975 in this vital economic measure of costs of production.

Clearly, we’ve got a good thing going in the U.S. with our low capital costs and high wage rates—and the high productivity that goes with them. To maintain this advantage, our business, labor, and government leaders would be well advised to have always before them this question: Is the proposed law or policy likely to increase or decrease productivity? If decrease, reject it. If increase, support it and feel sorry for those disadvantaged foreign workers who earn such low wages that they believe they must hide behind tariffs to protect their jobs.


1"Why Foreign Companies Are Betting on the U.S. ," Business Week, April 12, 1976, page 50.