The stagnation in American incomes of the middle and lower classes has been driven by one main factor: Entry of Chinese workers into the worldwide market for labor. (See here for an explanation.)

The economy faced by everyone is worldwide. Labor and capital flow everywhere they can. The local or national markets are connected or integrated to every other local or national market. When China’s peasant labor force became available for producing goods for a world market, it came into competition with workers all over the world, including Americans. They didn’t need to immigrate to America; American capital could move to China. More broadly, workers and businesses in every continent form one competitive market. Any new entry of a work force into this economy, such as that of China, affects wages everywhere.

The shock of China’s entry has been huge. It takes decades for equalization of wages to occur. This may now have happened or be near happening. A recent Forbes article about Amazon locating a facility in Fall River, Massachusetts tells us that it pays “China-like wages”. It provides details. Not only do workers compete worldwide, but so do land and rents. We are told “Worth noting, a one bedroom apartment in Fall River costs about $1,000 a month. A one bedroom apartment in Beijing is around $930.”

For years, because of the new supply of manufacturing workers, a kind of subsistence theory of wages has applied, perhaps a near-subsistence theory. Hopefully, this period is coming to a close. The subsistence theory is faulty because it neglects growth in capital and accompanying growth in labor’s productivity, which raises real wages. But the shock of large growth in the worldwide labor force has counteracted growth in capital and produced stagnant incomes for middle and lower class workers.

There has been no shortage of debt to finance capital projects. There has been no shortage of new productive ideas that improve productivity. Immigration is not the problem. Fiscal stringency has not been the problem. Tariffs won’t overcome the wage pressures. America’s wars have caused tax rates to be higher than otherwise, and that’s impeded growth in real capital and thus labor productivity and income.

Monetary attempts to spruce up income growth can’t make labor more productive. They’ve created a boom-bust cycle wherein the long-term competitive forces at work show up as a bust whose subsequent recovery is weak. Central bank-induced boom-bust cycles cause workers temporarily to shift into malinvesting industries, which they are forced to abandon when malinvestments are liquidated. This process lengthens the time required for worldwide labor markets to come to equilibrium. Business cycles are not to blame for stagnant incomes but they prolong the agony of ending them. Some people also drop out of the labor force when the return on their labor is low or near subsistence, and this is also one of the effects of the Chinese labor force shock.

This is a problem that cannot be overcome by economic manipulations by governments and central banks. Their attempts are fruitless and counter-productive. Equilibrium in these markets has taken years, apparently. The process is advanced in duration. It will come to a natural end. Then, if capital growth is not impeded by new government missteps, monetary meddling, taxes, regulations, social schemes, socialism, civil strife and wars, income growth may finally resume.

That conclusion should be tempered by the fact that labor forces in other parts of the world may come into competition one with another, as in Central America, South America and Africa.

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