BusinessWeek
MARCH 22, 2004 * Editions: N. America | Europe | Asia |
This is from the March 22nd issue of BusinessWeek and is the most intelligent commentary on job outsourcing that I have read to date. BusinessWeek online invites its readers to email a particularly good column or commentary to others hoping to pique the interest of someone who might then like to subscribe. Though I am sure this is copyrighted, they don't mind us sharing so long as they get credited.
Guest Commentary: The Harsh Truth About Outsourcing
It's not a mutually beneficial trade practice -- it's outright labor arbitrage
by Paul Craig Roberts, a former Assistant Treasury Secretary in the Reagan Administration and a former BusinessWeek columnist.
Economists are blind to the loss of American industries and occupations because they believe these results reflect the beneficial workings of free trade. Whatever is being lost, they think, is being replaced by something as good or better. This thinking is rooted in the doctrine of comparative advantage put forth by economist David Ricardo in 1817.
It states that, even if a country is a high-cost producer of most things, it can still enjoy an advantage, since it will produce some goods at lower relative cost than its trading partners.
Today's economists can't identify what the new industries and occupations might be that will replace those that are lost, but they're certain that those jobs and sectors are out there somewhere. What does not occur to them is that the same incentive that causes the loss of one tradable good or service -- cheap, skilled foreign labor -- applies to all tradable goods and services. There is no reason that the "replacement" industry or job, if it exists, won't follow its predecessor offshore.
For comparative advantage to work, a country's labor, capital, and technology must not move offshore. This international immobility is necessary to prevent a business from seeking an absolute advantage by going abroad. The internal cost ratios that determine comparative advantage reflect the quantity and quality of the country's technology and capital. If these factors move abroad to where cheap labor makes them more productive, absolute advantage takes over from comparative advantage.
This is what is wrong with today's debate about outsourcing and offshore production. It's not really about trade but about labor arbitrage. Companies producing for U.S. markets are substituting cheap labor for expensive U.S. labor. The U.S. loses jobs and also the capital and technology that move offshore to employ the cheaper foreign labor. Economists argue that this loss of capital does not result in unemployment but rather a reduction in wages. The remaining capital is spread more thinly among workers, while the foreign workers whose country gains the money become more productive and are better paid.
Economists call this wrenching adjustment "short-run friction." But when the loss of jobs leaves people with less income but the same mortgages and debts, upward mobility collapses. Income distribution becomes more polarized, the tax base is lost, and the ability to maintain infrastructure, entitlements, and public commitments is reduced. Nor is this adjustment just short-run. The huge excess supplies of labor in India and China mean that American wages will fall a lot faster than Asian wages will rise for a long time.
Until recently, First World countries retained their capital, labor, and technology. Foreign investment occurred, but it worked differently from outsourcing. Foreign investment was confined mainly to the First World. Its purpose was to avoid shipping costs, tariffs, and quotas, and thus sell more cheaply in the foreign market. The purpose of foreign investment was not offshore production with cheap foreign labor for the home market.
When Ricardo developed the doctrine of comparative advantage, climate and geography were important variables in the economy. The assumption that factors of production were immobile internationally was realistic. Since there were inherent differences in climate and geography, the assumption that different countries would have different relative costs of producing tradable goods was also realistic.
Today, acquired knowledge is the basis for most tradable goods and services, making the Ricardian assumptions unrealistic. Indeed, it is not clear where there is a basis for comparative advantage when production rests on acquired knowledge. Modern production functions operate the same way regardless of their locations. There is no necessary reason for the relative costs of producing manufactured goods to vary from one country to another. Yet without different internal cost ratios, there is no basis for comparative advantage.
Outsourcing is driven by absolute advantage. Asia has an absolute advantage because of its vast excess supply of skilled and educated labor. With First World capital, technology, and business knowhow, this labor can be just as productive as First World labor, but workers can be hired for much less money. Thus, the capitalist incentive to seek the lowest cost and most profit will seek to substitute cheap labor for expensive labor. India and China are gaining, and the First World is losing.
-Stan
-----Original Message-----
From: DesignerCouncil [mailto:[log in to unmask]] On Behalf Of Brooks,Bill
Sent: Thursday, April 01, 2004 10:09 AM
To: [log in to unmask]
Subject: Re: [DC] tech jobs overseas...
http://www.msnbc.msn.com/id/4631368/
the latest figures
'In three years the U.S. has lost 400,000 service and 1 million manufacturing jobs to offshoring, Goldman Sachs says. Some 3.3 million white-collar jobs (and $136 billion in wages) will flee the U.S. in the next ten years, Forrester Research says. All told, up to 14 million U.S. jobs are vulnerable to offshoring, say researchers at the University of California, Berkeley. Another problem:Even when American employers don't move jobs to India, they have virtually stopped creating them in the U.S. when the tasks can be done more cheaply abroad. The U.S. service sector is 6.2 million jobs shy of the hiring that typically accompanies an economic recovery at this stage, in part because of the move overseas, says Stephen Roach, chief economist at Morgan Stanley.'
What's disturbing is the list of hottest jobs for the next few years...
http://stats.bls.gov/emp/emptab4.htm
Looks like mostly service jobs...
They do see growth in computer software and 'consulting' jobs...
http://stats.bls.gov/emp/empfastestind.htm
I didn't see PCB designers in there anywhere.... unless they come under the 'consulting' heading...
Bill Brooks
PCB Design Engineer , C.I.D., C.I.I.
Tel: (760)597-1500 Ext 3772 Fax: (760)597-1510
-----Original Message-----
From: [log in to unmask] [mailto:[log in to unmask]]
Sent: Thursday, April 01, 2004 9:18 AM
To: [log in to unmask]
Subject: Re: [DC] tech jobs overseas... [mx]
One more comment... maybe "outsourcing" will cease to be an issue soon.
Some companies (that will remain nameless here) are already creating "design centers" in 3rd world countries. So the political problem is solved; "We didn't outsource your job, we redistributed the existing workload within the existing organization and can no longer justify your continued employement."
But you wanted good news.... sorry about that.
"Allen T. Maddox"
<allen.t.maddox@GAI-TRONIC To:
[log in to unmask]
S.COM> cc:
Sent by: DesignerCouncil Subject: Re:
[DC] tech jobs overseas...
<[log in to unmask]>
04/01/2004 11:45 AM
Please respond to
"(Designers Council
Forum)"; Please respond to
"Allen T. Maddox"
In my passive observation in my neck of the woods I've seen a few different trends that are scary.
1) Sure, tech jobs are going overseas (Eathlink moved 400 customer service jobs from Lancaster PA to Indonesia). Most of the folks I've seen laid off in the technical fields are pursuing other careers now. My brother for one went over a year with out even an interview. He got his CDL and is driving a school bus now (lucky basturd gets a company car and goes home for lunch and gets snow days off). He doesn't make near the money he use to.
2) We temporarily lost a guy due to illness. He was out for a couple months. By the time we found a contractor to sub in, he was back. There aren't as many guys out there looking for work in this field.
3) The guys who I run into are in their late 40's, at least. No new young guns.
4) I see a lot of labor force being taken by new immigrants. Now hear me out on this first. I don't live in a "boarder town". I'm in the middle of Pennsylvanian Dutch Country. There's a bunch of folks from South America and Asia taking jobs that were traditionally held by Amish, because their cost of living is so low the Amish held these jobs cheap. I don't begrudge immigrants coming to the land opportunity, but, they seem to be doing a disservice to themselves and previously establish cultures by working so cheap.
5) I see what the statistics are calling cost of living increase and I don't agree. Sure interest rates are down, but, there are more things you "need to have" to maintain an expected life style, i.e. cable or dish TV, cell phone, ISP. Sure I have health insurance, but the co-pay, employee contribution keep going up and the insurers acceptable coverage is going down. Need I go on?
6) I'm being continually told that I'm at the top of my pay scale. A pay scale that has a buying power in today's market is less that my buying power 5 to 10 years ago. Sure, going back to school is a option, but for what? By the time I complete yet another degree part time, will it be useful for a guy in his 60's competing with new grads in their 20's.
Getting off my soap box. Boy it felt good to get that off my chest.
Somebody give me some good news. I need a shot of positive information.
Allen Maddox
Sr. PC Board Designer
GAI-Tronics, Corp
610-796-5854
PO Box 1060
Reading, PA 19607-1060
[log in to unmask]
www.gai-tronics.com
>>> [log in to unmask] 03/31/04 03:57PM >>>
My $0.02:
I think outsourcing is inevitable. Tech jobs are no different than tennis shoes as far as outsourcing goes. As a spender, you try to get the best bang for your buck.
If the 'intangibles' (quality, customer satisfaction, etc.) drive the bottom line down, you won't outsource for long; the job will come back in-house. But if a beancounter can show that 5% of the customer base will go away because they aren't happy speaking to a service rep with an accent, but that overall profits will increase anyway, I'm guessing most companies will choose to maximize profits. (If the average company is that concerned with customer satisfaction, how did these automated phone systems ever make it into virtually every business in America? Press 1 to answer...)
Anyway, I agree that some jobs will come back. But they may go away again later as the out-source learns how to deal with the issues that lost them the business. It'll be interesting (like a wreck on the highway is
interesting) to see which jobs ultimately show a better pay-off staying in-house and which don't.
Some jobs may cycle back and forth forever. Having worked in Big Automotive for the last 20+ years, you see cycles and fads. Matrix management.
Centralize, De-centralize, Re-centralize. These guys need to be near the customer - they need to be near the factory - need to be near R&D.... It's just that now the globe is the gameboard instead of the U.S.
If you want something (your job) to stay in-house, find a way to quantify the cost of outsourcing-related communication problems, which is what most tech outsourcing problems boil down to, one way or another. Demonstrate why outsourcing will actually drive the bottom line down, not up. Be prepared to make your case repeatedly (every time somebody different comes in anywhere above you in the food chain). Hope that the inevitable test cases prove you right.
I do think the best way to survive long-term is to become part of the new process, which will include more and more outsourcing. Someone has to tell them what we want and see if we got what we wanted., etc.....
It's all about the money.
-Chris (el CID)
"Brooks,Bill"
<[log in to unmask]> To:
[log in to unmask]
Sent by: DesignerCouncil cc:
<[log in to unmask]> Subject: Re:
[DC] tech jobs overseas...
03/31/2004 12:42 PM
Please respond to
"(Designers Council
Forum)"; Please respond to
"Brooks,Bill"
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