Who Wins and Who Loses as Jobs Move Overseas?
By ERIKA KINETZ
outsourcing of jobs to China and India is not new, but lately it has
earned a chilling new adjective: professional. Advances in
communications technology have enabled white-collar jobs to be shipped
from the United States and Europe as never before, and the outcry from
workers who once considered themselves invulnerable is creating a
potent political force.
After falling by 2.8 million jobs since early 2001, employment has
risen by 240,000 jobs since August. That gain, less than some expected,
has not resolved whether the nation is suffering cyclical losses or
permanent job destruction.
Last month, The International Herald
Tribune convened a roundtable at the Algonquin Hotel in Manhattan to
discuss how job migration is changing the landscape.
participants were Josh Bivens, an economist with the Economic Policy
Institute, a nonprofit research group in Washington that receives a
third of its financing from labor unions; Diana Farrell, the director
of the McKinsey Global Institute, which is McKinsey & Company's
internal economics research group; Edmund Harriss, the portfolio
manager of the Guinness Atkinson China and Hong Kong fund and the
Guinness Atkinson Asia Focus fund; M. Eric Johnson, director of Tuck's
Glassmeyer/McNamee Center for Digital Strategies at the Tuck School of
Business, Dartmouth College; and, via conference call from Singapore,
Stephen S. Roach, managing director and chief economist of Morgan Stanley . Following are excerpts from their conversation.
Q. How big an issue is job migration?
Offshore outsourcing is a huge deal. We do not have a data series
called jobs lost to offshore outsourcing, but 23 months into the
recovery, private sector jobs are running nearly seven million workers
below the norm of the typical hiring cycle. Something new is going on.
America is short of jobs as never before, and the major candidates for
our offshore outsourcing are ramping up employment as never before. So
yes, I think two and two is four.
This is a big deal in the sense that we see something structural
happening. But I would react to the notion that it is a big deal we
should try to stop or recognize as anything other than the economic
process of change. I think the bigger deal is the fact that we are
going to have very serious curtailment of the working age population.
I'm curious about Steve's assertion that outsourcing can explain the
sluggish employment situation. If you just look at slow growth plus
fast productivity, you've got the sluggish labor market right there.
A pickup in productivity does not have to be accompanied by sluggish
employment. There are countless examples, like the 1960's and again the
1990's, of rapid productivity growth accompanied by rapid employment.
point is that the relationship between aggregate demand and employment
growth looks to me as if it has broken down. That breakdown reflects
not just the rapid growth and maturation of outsourcing platforms in
places like China and India, but also the accelerated pace by which
these platforms can now be connected to the developed world through the
Internet. These are brand-new developments. This is a huge challenge
for service-based economies, like the United States.
How much of the insecurity that people think is caused by service
sector outsourcing is in fact just the business cycle as usual? Every
time there's a recession people want to blame it on some underlying
structural factor, when sometimes recessions are just recessions,
shortfalls in demand that work themselves out.
Over the September to November period, employment has turned up, but
many of those jobs came from the temporary hiring industry. These are
service jobs, contingent workers without benefits and significantly
lower pay scales. We're getting the G.D.P. growth, and by now any
recovery in the past would be flashing green on the hiring front. This
one isn't. With all due respect, I don't know what you guys are talking
about. This is a profoundly different relationship between hiring and
the business cycle. And I think these jobs are, by in large, lost
Q. Who wins in offshoring and who loses?
There is an assumption by protectionists that these jobs are going
somewhere else, and all this money has been pocketed by C.E.O.'s who
take it home. A little more sophisticated version is: It's being
pocketed by companies in the form of profits. One step further and you
say those profits are either going to go as returns to the investors in
those companies, or they're going to go into new investment by those
companies. Those savings enable me, if I am an investor, to consume
more and therefore contribute to job recreation, and if I am a company,
to re-invest and create jobs. That's important because I agree that we
are migrating jobs away, some of which will never return, nor should
MR. BIVENS Within nations, trade tends to
redistribute a lot of income. The gains get pretty concentrated in the
pockets of capital owners. The people who lose out are the blue-collar
workers. Now you've got this class of white-collar workers who are much
more insecure about their job prospects, and their labor market
bargaining power is being undermined. It doesn't mean we need walls all
around the economy, but it does mean we need to get really serious
about making sure all these gains are distributed.
Look at what's gone on in China over the last 10 years: There are 300
million people in those eastern coastal provinces who have seen an
extraordinary pickup in their standard of living. And you're seeing an
economy that is just about to take wing because you now have consumers
who were never able to participate in the economy before. Now it is
people in the developed world who are being left behind. That is very
difficult to resolve.
Q. One key piece of the
win-win theory seems to be that displaced workers do find new jobs.
What does history teach us about how well displaced manufacturing
workers have been reintegrated into the work force?
The best research on what happens to people displaced from
manufacturing is that they eventually find a new job, but they take an
average wage cut of 13 to 14 percent. The people who are hit hardest
are older workers. Also, it's not just the worker who is directly
displaced from a sector that is hurt by international trade, it is also
every other worker in the economy who has a similar skills profile.
Q. For labor, is outsourcing a race to the bottom?
It's a race to the bottom if we spend all our energy trying to protect
existing sources of job creation, as the politicians in the U.S.
Congress are inclined to do. The problem is that globalization is
growing asymmetrically, so initially it creates more supply than
demand. We're living through that asymmetry right now, and that has
caused a potentially dangerous political backlash. The Chinese, for
example, are reluctant to transform their habits from savers to
consumers because they're losing jobs through the reform of their own
economy, and they don't have social security or retirement. Over time
there is a rising tide. But the political process is not that patient.
Q. If protectionism is the wrong answer, explain how the market will solve this. Does government need to intervene at all?
This is classic election-year posturing by a Congress that is basically
responsible for the problem itself and doesn't want to admit it. We
have trade deficits with China and Japan because Washington is running
the most reckless fiscal policy we've seen in the United States since
the late 1960's. They are the problem. It's not the Chinas and Japans
and Indias of the world. Moreover, there are a lot of assumptions being
made, especially by political leaders, that the rapid growth of Chinese
exports and production is the smoking gun of the threat to traditional
sources of job creation. About two-thirds of the export growth China
has realized over the last 10 years has come from Chinese subsidiaries
of multinational corporations headquartered in Japan, the U.S. and
Europe and their joint venture partners. These are our companies. It's
us; it's not necessarily them.
MR. JOHNSON It's
all about innovation and productivity. As long as we maintain those two
engines, we'll continue to have a very high standard of living. Out in
the Bay Area there are plenty of folks who would love to create a
little bit of protectionism around their I.T. jobs, but we are far
better off letting a lot of those jobs go. Low-skill jobs like coding
are moving offshore and what's left in their place are more advanced
project management jobs.
MS. FARRELL We will
require different services, medical devices, all kinds of things to
support an aging population. Fifteen years ago, you would not have been
able to fathom many of the jobs that exist today.
There is not much new radical innovation in Asia of the kind we're
looking at to create jobs in the U.S. Apart from a very few exceptions,
what Asia does well is take the latest innovations and production
techniques, invest in the most recent equipment and then bring in their
powerful advantages in low-cost labor, and start to produce. For the
most part, the benefits to Asia are just going to come with more people
coming off the poverty line and into the global economy.
Q. What happens when China ceases to be an endless pit of poverty?
China for all practical purposes has an infinite supply of labor: 400
million in its urban population and another 900 million in the rural
area. The average wage of a Chinese worker is still 2.5 to 3 percent of
the counterpart in the developed world. Those are disparities that will
be around for a long time.
Q. Can China keep labor costs so low and still grow a critical mass of domestic consumers?
You are still talking about a pretty significant critical mass of
people who are now entering consumption level incomes: $7,000 to
$10,000 G.D.P. per capita. Car sales in China are growing at 26 to 30
percent compound annual growth rates. Televisions, refrigerators,
mobile handsets all have the same kind of J-curve. You only need 10
percent of the population to have a critical mass of income.
Q. What do you see in the future?
Globalization is good at increasing the productive capacity of the
world, but to make sure there are enough jobs for everybody, you need
demand to keep pace with that increase in supply. That's where
globalization presents a real challenge. Government's big roles in the
future are to make sure global demand matches supply, and to provide
social insurance schemes to make sure the living standards of the
workers being left behind aren't sacrificed on the altar of global
MR. ROACH In the future there are two
roads. One is to look backward and hang on to what we think we're
entitled to. The other is to recognize what has made America. Our
virtues lie in a flexible and open, technology friendly, risk-taking,
entrepreneurial, market-driven system. This is exactly the same type of
challenge farmers went through in the late 1800's, sweatshop workers
went through in the early 1900's, and manufacturing workers did in the
first half of the 80's. We've got to focus on setting in motion a
debate that pushes us into new sources of job creation rather than
bemoaning the loss. There are Republicans and Democrats alike who are
involved in this protectionist backlash. They're very vocal right now,
and they need to be challenged.
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