The Effects of a Changing Chinese Labor Market

I realize that my posts to this blog tend to be focused on the merits of free trade.  I've spent time discussing price ceilings and floors, and the disincentives produced by trade quotas, tariffs, and price gouging laws.  However, it is an idea that many Americans just don't seem to grasp, or they choose not to, or are even coaxed into ignoring the facts by political pundits and opinion makers promoting their agendas. 

With that said, we are beginning to see how the growth of China is reversing the global trade dynamic.  We already benefit from cheap manufactured goods, but I believe that the world is on the verge seeing China's growth bear a different kind of fruit for the rest of us.  This sentiment is supported by an article in the July 29, 2010 issue of The Economist magazine.  The cover article explores The Rising Power of China's Workers . 

The article, at once, reveals that China's working class is pressing for better conditions, higher wages, and better benefits, while reminding Americans of our own history.  It was only a century ago that American workers were fighting for the same goals.  We reap the benefits of the struggles of our ancestors.  We are able to enjoy a high standard of living, one that allows us to purchase inexpensive manufactured foods produced in emerging markets.

But, it is our penchant for a good deal that is allowing those Chinese workers to fight for rights of their own.  What are the inevitable results?  With higher wages, Chinese-made products will become more expensive.  Traders will look for alternatives and domestic producers will seize a new opportunity to compete.  Chinese workers will use their deeper pockets to purchase products that might have been previously unattainable.  That money we spent on cheap Chinese goods will begin to make its way back to us.  

Now, conservative political leaders, and supporters of American manufacturers will continue to argue that "Buy American" is the best policy.  While it is true that type of policy can have immediate positive impact on a failing economy, the long run consequences are too much to bear.

ECONOMICS LESSON: The Economics of Price Gouging

Given the current economic climate in the United States, many citizens are worried about their financial well-being. When citizens are confronted with rising prices on staple products, necessary items, and generally inelastic goods, they turn to the media, government, or anyone who will listen to their complaints. We see reports in the newspaper, or on television, about "price gouging" and unsympathetic businesses hurting middle class America. But is so-called "price gouging" really a bad thing? Or, is government control of prices really doing more harm than good?

This clip by John Stossel of ABC's 20/20 was made in the wake of Hurricane Katrina. But its message and reasoning are founded in Adam Smith's view of a free market economy, and certainly apply to America's current economic situation. It offers a great introduction to the topic of price ceilings and government intervention in the economy.

So, what is a PRICE CEILING?

• A price ceiling is a legal maximum price that can be charged for a good or service.
• When a price ceiling is set below the equilibrium price, it will cause shortages.
• Price ceilings occur when government is dissatisfied with the outcomes of free markets.
  

The figure below represents an artificial rent ceiling, such as the rent control policies of New York City in the 1950s:

• When government limits the price of rental units to $400 per month, the suppliers are only willing to provide 3000 units. The market, on the other hand, is demanding 6000 units. As you can see, the Rent Ceiling, represented by the red line, has resulted in 3000-unit shortage. In addition, when 3000 units are available to rent, consumers are willing to pay $625 per month. Since the price established by government is only $400, landlords are experiencing a loss of $225 per month, per unit. That is a $675,000 loss per month by all property owners in this market.

• Some questions to think about...

1. What are some additional economic and societal effects of this situation?
2. How might third-parties be affected by this?

Points to Ponder

• Government can also set prices greater than the equilibrium price created naturally by the market. This type of price control is known as a PRICE FLOOR and results in surpluses. Suppliers are willing to supply at the artificially high price, but consumers won't buy.

• Government doesn't have to set a specific price for shortages or surpluses to occur. Interventions such as trade barriers, tariffs, and subsidies can have the same effect.