Viewpoint / Blame It on China

If you want, you can blame China for everything. The "China effect" has effectively more than doubled the global workforce. without hardly any increase in capital, because of the tremendous scale of its production and exports. The result is that labor became cheap while capital became dear. Put more simply, it widened social gaps. It made the rich richer and the poor, who provide the unskilled labor, poorer.

The China effect has impacted the whole of the West: The number of poor has grown from year to year. Once upon a time, the poor were largely confined to the unemployed, but that is not true any more. In Israel, for instance, only 35 percent of those of working age living below the poverty line do not work, while 40 percent hail from families with a breadwinner. Putting aside the impoverished elderly, therefore, almost half the poor do work.

How can this be? The China effect. In a world conquered by cheap Chinese products, unskilled workers are simply raw materials in falling demand.

The commodity effect

Simple raw materials are known as commodities. When there is a surplus supply of a commodity, because of the Chinese, its price drops.

Conversely, the price of skilled labor - educated people - has not been exposed to Chinese competition, so its price continues to climb over the years. The inevitable result is widening gaps between skilled and unskilled workers. In Israel, a land rich in highly skilled high-tech workers, the process is all the more glaring.

The commodity effect of this cheap labor is especially powerful in Israel because of the habit, developed over years, of consuming the commodity directly - in the form of actual man power, not only via goods. First we had Palestinian workers milling in the streets by the thousands, then foreign workers. The China effect is therefore even more acute in Israel than elsewhere.

In the long-run, the way to improve the lot of poor workers passes through education. The more the workers have of this, the better their livelihood will be.

But what can be done in the short- and medium-run? One could restore cuts to wage supplements, but that would merely revive the problem of the other half of the poor in Israel, the ones who are poor because they don't work at all, the ones the state believes it must encourage to work. This encouragement has mostly taken the form of slashing welfare for non-workers.

One could try to raise the cost of unskilled labor through raising the minimum wage. But this would be artificial, falling as it does on the shoulders of the employers, and also would make Israel less competitive against China. Ultimately, the result would be less work as plants closed down and unskilled workers lost their jobs.

Abolishing poverty

Moreover, according to National Insurance Institute figures, only half of unskilled workers receive the minimum wage or less. The rest earn between the minimum wage and the average wage, yet are still poor. These cases usually relate to families with several children and only one breadwinner.

Other, more creative solutions must therefore be found. At least two deserve our utmost consideration.

The first is to recognize that families wanting to leave poverty behind need two breadwinners: the state must place a greater emphasis on encouraging mothers to work.

A mother with five children can hardly ever earn enough by herself to cover child-care costs. The state must help lower that cost. Subsidizing day-care and long school days, with a free meal, are ways to do this.

The second solution is to restore entitlements, but more cleverly, and without calling them "welfare." Instead, call it - negative income tax.

Pay an income supplement to anybody who works but does not earn enough to support their family in dignity. This would target supplements only to the working poor.

Europe has long since adopted this solution: The Bank of Israel also endorsed it warmly this week, in a study by Adi Brender and Michel Strawczynski, who work for the central bank's research department, regarding the effect of negative income tax on impoverished working households. This would be the most effective counter to the China effect, they say.