Convergence in Global Manufacturing Compensation Costs: An International Trade Perspective/

Abstract

The potential for convergence in compensation costs across countries and over time is an important issue in the economic literature. Central theories of macroeconomics and international trade point toward convergence in wages, which can be tested by looking for evidence of convergence in cross-country data. Economic agents have a substantial interest in whether these theories hold true in practice, including multinational corporations seeking low-cost locations for global manufacturing operations. The first paper in this study explores the empirical evidence for convergence in global compensation costs in the manufacturing sector. Evidence of convergence in compensation costs is apparent for selected groups of countries, with three distinct convergence clubs identified. These clubs are used in the second paper to identify the factors contributing to similar compensation cost outcomes within each group. The study is undertaken in the context of a multiple-cone Heckscher-Ohlin trade model. In that framework, GDP per capita and compensation costs should grow at a similar pace for countries whose factor endowments place them within a cone. Gaps between GDP per capita and compensation cost growth would be observed for countries in transition from one cone to another, and should be associated with shifts in the composition of trade and of implied capital/labor ratios. The regression results provide support for a multiple-cone view of the data. Finally, a country-specific exploration of compensation costs is undertaken for Mexico, which has demonstrated weaker than average compensation cost growth compared with other developed and developing countries. Two explanatory factors are considered that are often cited with regard to Mexican manufacturing performance: competition from Chinese trade, and Mexico's intra-industry trade with the U.S. The results show that each of these factors has a negative relationship to Mexican wage growth for some manufacturing subsectors, but neither variable provides a universal explanation for weak Mexican compensation growth. These papers provide some evidence for convergence in global compensation costs, particularly among countries producing a similar mix of goods due to their resource endowments. However, there is little evidence that the compensation cost gap between the highest and lowest cost countries will be closed over the foreseeable future.