By Denis Kleinfeld
The other day my mother stopped in at the Gap store to buy a pair of jeans and top for my daughter as a gift. I think she spent something like USD29 for the jeans and the top was on sale for USD21. At dinner that night my mother and I were discussing various current political topics. One of the things she mentioned was how terrible it was that American workers were losing their jobs to foreign manufacturing companies. I inquired, of course, as to whether she enjoyed buying clothes at the Gap store so inexpensively or would she prefer paying substantially more money to have the good feeling that they were made by workers in the United States.
The debate over outsourcing and offshoring "American" jobs is brought up by politicians in this current election cycle who are ranting and raving about protecting the American worker only because they want to garner campaign contributions and votes. Union leaders also sound the mantra because less workers in the US find the need to join a union. In actuality, the political and union rhetoric about "Benedict Arnold" corporations and "American jobs" is nonsense. It seems clear to me that if consumer or business goods or services can be produced at a less cost some place else, then people are far better off importing the product or service rather than producing it locally.
Outsourcing is, in fact, a two-way street. An article in The Economist magazine pointed out that, "... more jobs are outsourced to America than the other way around. American workers, in other words, are net beneficiaries of outsourcing (it goes without saying the consumers always were). And in the cross border trade of white collar services, a chief concern, America's surplus with the rest of the world is not shrinking; it is growing."
The fact is that the American economy overall has lost some jobs since the start of the decade but these are not lost because of the structural but because of the cyclical nature of employment. It is natural in the American economy to have two million jobs turnover in any single month. This is what is referred to in employment statistics as the "churn" rate. The churning process creates large number of jobs and allocates both financial and human resources to the areas where they are most productive. Healthy competition, which includes the outsourcing of jobs, then helps to keep prices low so that when my mother shops in the Gap store she can buy her granddaughter a pair of jeans and matching top at prices she can afford.
One difficulty in analysing outsourcing is that no one really knows exactly how many jobs are being transferred abroad versus jobs really being created in the United States. As pointed out in a Wall Street Journal article, "the truth is, nobody knows how widespread the outsourcing phenomena is or will become. The Bureau of Labour Statistics doesn't yet track jobs abroad and companies generally keep reliable data under raps." The article quotes Catherine Mann, of the Institute for International Economics in Washington, who pointed out that the statistics yield considerable confusion. For example, she says it is important to distinguish between jobs lost by a sector of the economy and specific occupations affected within the sector. Also jobs perceived to be disappearing overseas may crop up in a nearby state. As she said, "When someone loses their job in California, it may appear in Bangalore or in Wisconsin. Lots of jobs are moving within the US economy." It's that churn rate thing.
While manufacturing jobs have received the most press, some "white collar" jobs are also being outsourced. The effectiveness of today's outsourcing movement has been due to technology. Another Wall Street Journal article pointed out that the vast fibre optic capacity created during the dot-com boom has reduced international telecommunication cost drastically. This enables the transfer of entire US business processes to qualified, inexpensive English speaking workers, operating half the world away.
While, it is true that there are some jobs, such as coal miners, who will be made redundant and will not find jobs again mining coal, many more jobs are made redundant because of productivity, not because of offshoring. With productivity growing at an annual rate of 3% - 31/2% rather than the expected 2%-21/2%, the reason for the jobs shortfall becomes much clearer. As noted by an article in Business Week magazine, "Companies are using information technology to cut cost - and that means less labour is needed. Of the 2.7 million jobs lost over the past three years, only 300,000 have been from outsourcing according to Forrester Research Inc. People fear that the jobs in high tech and services will disappear just as some jobs in old industry manufacturing did. Perhaps so. But odds are that it will be productivity rather than outsourcing that does them in."
Another article in Business Week pointed out that the attractive cost of new high tech equipment relative to those expenses associated with new hires gives business every economic incentive to boost output by using more machines and fewer workers. Capital to buy equipment is inexpensive relative to the cost of labour. The price of new equipment has continued to decline and low interest rates mean financing is historically cheap. As the Business Week article pointed out, "Meanwhile, the hourly cost of labour has not slowed. Overall compensation is up 4% from a year ago, as soaring costs of benefits offsets slower wage growth."
A curious observation was made in a Wall Street Journal article entitled, "The Future of Jobs" which pointed out that the US almost certainly is not going to run out of jobs even though history shows it will be impossible to predict what new jobs replace those that are destroyed. In fact, the United States may have very well be sucking up jobs from other countries. An article in the SunSentinel newspaper entitled, "Outsourcing - to the US", pointed out that more jobs are imported than exported. While it acknowledged that some companies have exported certain white collar work to low wage countries, "more jobs are coming the other way according to government estimates and trade analysts". The article quotes Daniel T. Griswold, a trade specialist at the Cato Institute (a research organisation in Washington) as saying, "Anyway you slice, the world is creating or transferring more jobs to the US than we are doing to the rest of the world."
In my view, the United States with its belief in the free market system, shows that the United States is the place to do business. Even though the United States is trying to keep jobs at home, it is clear that Europe is trying to build a fortress to keep foreign workers out. This is just typical European political folly. Job protection measures only serve to exacerbate the difficulties of creating jobs. Like a river flowing to the sea, if workers are not allowed to migrate to the jobs then the jobs will migrate to the workers. Or get connected through the internet.
What should be expected, I believe, is that the creation of jobs will look more like a barbell with few jobs being created in the middle and lots of jobs being created at the ends. As a result, there will be a wage gap between the well paying jobs and the lower paid jobs. There is nothing new in this. It has been long recognised that to get a well paying job takes education and skills. I know that in my office, our secretaries no longer just type and answer phones but now are adept at much more complex tasks with the use of technology and thereby command much larger salaries than just a few years ago.
The politicians also overlook the fact that outsourcing has been a very beneficial occurrence. Business Week magazine pointed out that in the 1990s high tech companies farmed out manufacture of memory chips, computers and telecom equipment to Asia. As a result, this lowered the cost of technical gear, raised demand and spread the intellectual technology revolution. My office is a beneficiary of that outsourcing. What happened in technology is that outsourcing cut prices and made the next generation of technology even cheaper and more available. Those workers who adapted to using the new technology were able to make significant wage gains. As a practical matter, while routine service work can be outsourced to such places as Bangalore, jobs that require close personal contact with clients will continue to be a local affair.
While many people like to see things work in a simple efficient manner, the fact is that history shows that economics and jobs growth do not proceed in a linear fashion. Only politicians and other fools confuse predictions of future events with today's reality. As one of my colleagues points out, those who predict history are writing on jello. It seems to be clear, however, that the United States is not only fuelling the outsourcing of jobs but is currently one of the great beneficiaries of that trend.
Source: Offshore Investment Magazine
