December 1, 2011 / 7:14 PM / 8 years ago

Workers of the Western world - Freeland

NEW YORK (Reuters) - Branko Milanovic has some good news for the squeezed Western middle class - and also some bad news.

Good news first: The past 150 years have been an astonishing economic victory for the workers of the Western world. The bad news is that workers in the developing world have been left out, and their entry into the global economy will have complex and uneven consequences.

Milanovic’s first conclusion is contrarian, at least in its tone. After all, with unemployment in the United States at more than 9 percent and Europe struggling to muddle through its most serious economic crisis since the Second World War, Western workers are feeling anything but triumphant.

But one of the pleasures of Milanovic’s work is a point of view that is both wide and deep.

Milanovic, a World Bank economist who earned his doctorate in his native Yugoslavia, has an intuitively international frame of reference. Both qualities are in evidence in “Global Inequality: From Class to Location, From Proletarians to Migrants,” a working paper released this autumn by the World Bank Development Research Group.

Milanovic contends that the big economic story of the past 150 years is the triumph of the proletariat in the industrialized world. His starting point is 1848 when Europe was convulsed in revolution, industrialization was beginning to really bite, and Karl Marx and Friedrich Engels published the Communist Manifesto.

Their central assertion, Milanovic writes, was that capitalists (and their class allies, the landowners) exploited workers, and that the workers of the world were equally and similarly oppressed.

It turns out that Marx and Engels were pretty good economic reporters. Surveying the economic history literature, Milanovic finds that between 1800 and 1849, the wage of an unskilled laborer in India, one of the poorest countries at the time, was 30 percent that of an equivalent worker in England, one of the richest. Here is another data point: in the 1820s, real wages in the Netherlands were just 70 percent higher than those in the Yangtze Valley in China.

But Marx and Engels did not do as well as economic forecasters. They predicted that oppression of the proletariat would get worse, creating an international - and internationally exploited - working class.

Instead, Milanovic shows that over the subsequent century and a half, industrial capitalism hugely enriched the workers in the countries where it flourished - and widened the gap between them and workers in those parts of the world where it did not take hold.

One way to understand what has happened, Milanovic says, is to use a measure of global inequality developed by François Bourguignon and Christian Morrisson in a 2002 paper. They calculated the global Gini coefficient, a popular measure of inequality, to have been 53 in 1850, with roughly half due to location - or inequality between countries - and half due to class. By Milanovic’s calculation, the global Gini coefficient had risen to 65.4 by 2005. The striking change, though, is in its composition: 85 percent is due to location, and just 15 percent due to class.

Comparable wages in developed and developing countries are another way to illustrate the gap. Milanovic uses the 2009 global prices and earnings report compiled by UBS, the Swiss bank. This showed that the nominal after-tax wage for a building laborer in New York was $16.60 an hour, compared with 80 cents in Beijing, 60 cents in Nairobi and 50 cents in New Delhi, a gap that is orders of magnitude greater than the one in the 19th century.

Interestingly, at a time when unskilled workers are the ones we worry are getting the rawest deal, the difference in earnings between New York engineers and their developing world counterparts is much smaller: engineers earn $26.50 an hour in New York, $5.80 in Beijing, $4 in Nairobi and $2.90 in New Delhi.

Milanovic has two important takeaways from all of this. The first is that in the past century and a half, “the specter of communism” in the Western world “was exorcised” because industrial capitalism did such a good job of enriching the erstwhile proletariat. His second conclusion is that the big cleavage in the world today is not between classes within countries, but between the rich West and the poor developing world. As a result, he predicts “huge migratory pressures because people can increase their incomes several-fold if they migrate.”

I wonder, though, if the disparity Milanovic documents is already creating a different shift in the global economy. Thanks to new communications and transportation technologies, and the opening up of the world economy, immigration is not the only way to match cheap workers from developing economies with better-paid jobs in the developing world. Another way to do it is to move jobs to where workers live.

Economists are not the only ones who can read the UBS research - business people do, too. And some of them are concluding, as one hedge fund manager said at a recent dinner speech in New York, that “the low-skilled American worker is the most overpaid worker in the world.”

At a time when Western capitalism is huffing and wheezing, Milanovic’s paper is a vivid reminder of how much it has accomplished. But he also highlights the big new challenge - how to bring the rewards of capitalism to the workers of the developing world at a time when the standard of living of their Western counterparts has stalled.

Editing by Jonathan Oatis

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