Technology, not Globalization, may be

Here's a political hot potato - globalization - good jobs are going overseas while American job growth centers primarily in the low paying service sector. Politicians and industry have been playing the protectionist card for the past 35 years (since cheaper and better Japanese products began redefining industries) under various guises from "buy American" to NAFTA-baiting. Globalization, now a euphemistic term for outsourcing, is the accepted, essentially undisputed reason why Americans think wages are dropping. It provides the leverage for politicians worldwide to advocate trade barriers with less developed nations, under the threat they they will "steal jobs".

This rationale needs a "big balloon pop" because it allows governments to promote policy with popular backing (like protectionist acts that will "protect our future") that may miss the real solution, and may in fact exacerbate the problem... for example, South Korea's government raised property taxes as the salve to cool real estate appreciation, which in the end resulted in a more heated market because not enough residences were being built.

Well, here's a succinct explanation by Columbia professor Jagdish Bhagwati on why technology, not globalization, may be the real culprit for lower wages...

Simply put, technology automates - it's a key tenet of industrialization since the 1800's - so assembly lines, telephone operators, bond traders go by the wayside. In the past, the resulting productivity elevated wages... so why hasn't this happened over the past two decades?

Dr. Bhagwati posits that past technology shifts happened discreetly - assembly lines and television lasted for decades - so the resulting productivity gains were enjoyed with associated higher wages for an extended period of time... those workers displaced by the technology shift had time to adapt. Now, technology shifts are happening so quickly and continually that there is no time to enjoy the productivity gains... it's one sea change after another hitting like a tsunami. And yet, the associated pressure on wages remain. We all feel this in our daily lives.

(You'll need to read the article for Dr. Bhagwati's explanations on why the typical globalization arguments - the weakening of the labor unions as wage guardians due to cheaper foreign labor, etc. - don't hold water)

How does this concept apply to real estate? Well, real estate jobs don't migrate overseas and that is one reason why actual wages in the form of commissions have been increasing proportionately with housing prices over the past ten years. Up to now, no technology shift has "hit" the real estate industry that significantly reduces the standard 6% commission structure. Realtors now feel the "wage pressure" - it's a solid indication that the tsunami has started. The resulting automation is happening on both the Consumer and Realtor sides - Consumers do more of the work and understand more about what they're doing, Realtors will pick up what the Consumer can't manage. Realtors will soon be compensated proportionately lower, but with the less dependent Consumer and with transactions becoming more automated, Realtors will also close more deals faster. Since the number of real estate transactions remain essentially constant over time, total Realtor commissions will drop. It's completely consistent with what Dr. Bhagwati says.

(Read more for implications on the real estate industry)

Thank you Jessica Swesey for the opportunity to share Transparent insights on the Inman Blog!

--Pat Kitano
Transparent Real Estate

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