Who Wins and Who Loses as Jobs Move Overseas?

The New York Times
December 7, 2003
By ERIKA KINETZ

The 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.

The 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?

MR. ROACH 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.

MS. FARRELL 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.

MR. BIVENS 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.

MR. ROACH 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.

The 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.

MR. BIVENS 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.

MR. ROACH 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
forever.

Q. Who wins in offshoring and who loses?

MS. FARRELL 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 they.

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.

MR. HARRISS 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?

MR. BIVENS 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?

MR.
ROACH 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?

MR. ROACH 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.

MR. HARRISS 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?

MR. ROACH 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?

MS. FARRELL 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?

MR. BIVENS 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 progress.

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.