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Wednesday, May 16, 2007

Robert Samuelson: What Offshoring Wave?

Robert Samuelson says the number of jobs moved offshore is smaller than you think:

What Offshoring Wave?, by Robert J. Samuelson, Commentary, Washington Post: Remember the great "offshoring" debate? It was all the rage a few years ago. Modern communications allowed white-collar work to be zapped around the world. We faced a terrifying future of hordes of well-educated and poorly paid Indians and Chinese stealing the jobs of middle-class engineers, accountants and software programmers in the United States and other wealthy nations. Merciless multinational companies would find the cheapest labor and to heck with all the lives ruined in the process.

What happened? Well, not much. ... In a recent paper, Jacob Funk Kirkegaard of the Peterson Institute for International Economics ... reviewed many studies. His conclusion: "The heated public and political debate . . . has been vastly overblown."

For the United States, Kirkegaard examined a survey on "mass layoffs" from the Bureau of Labor Statistics to see how many stemmed from offshoring. The answer: 4 percent. That included both manufacturing and service jobs.

In 2004 and 2005, the BLS counted almost 1 million workers fired in layoffs of 50 or more. ... Only about 12 percent of layoffs stemmed from "movement of work" -- a category that would include offshoring. But two-thirds of those moves were domestic...

It's true that offshoring doesn't measure the full impact of globalization on U.S. labor markets. That effect would also include trade and investment by multinational firms. Still, with the unemployment rate at 4.5 percent, it's clear that globalization hasn't crippled the U.S. job machine.

One reason for modest offshoring is that it's not so easy to do.... A survey by the consulting firm A.T. Kearney found the following problems: cross-border differences of culture and language...; lack of skills offshore...; customer complaints....

As communications technology improves -- and companies gain experience -- offshoring may increase. Some economists still expect it to explode. ... Alan S. Blinder of Princeton said "offshoring may be..." threatening "tens of millions of American workers." Indeed, some studies examined by Kirkegaard estimated that roughly one-fifth of all U.S. jobs could theoretically be moved abroad. But just because a job can theoretically be relocated doesn't mean that it will be.

Adjustments occur. Developing countries need skilled workers for their own economies, not just exports. ... As the global demand for services -- engineering, programming -- rises, so will the wages of foreign service workers (engineers, programmers, accountants). That will make offshoring less cost competitive. Finally, if countries run big trade surpluses from offshoring, their currencies should rise. That, too, would reduce their cost advantage (and explains why changing China's artificially undervalued exchange rate is important).

Losing a job is a wrenching experience for anyone, but the lesson here is that most job loss has local causes. The offshoring obsession reflects its novelty and the potential threat to white-collar jobs that seemed inherently safe from foreign competition. In our mind's eye, globalization is so powerful that it's sweeping everything before it. The reality is that, though globalization is increasingly important, it's still a weakling compared with the domestic economy...

While the exact numbers of jobs moved offshore can be debated - even the limited description of the study given above raises lots of questions - the point is that most job displacements have been due to technology rather than offshoring. I don't dispute that, though it can be hard to tell one from the other and the general equilibrium effects of such changes are hard to capture and classify correctly. But I think there are some additional points to mention, some of which (the first two) repeat arguments made here recently.

First, Samuelson focuses on white-collar workers being displaced by "well-educated and poorly paid Indians and Chinese". The jobs he is talking about, "engineers, accountants and software programmers," mostly require college degrees. But that is not where most of the costs have fallen so far. As a group, college educated workers have probably gained from globalization. It's lower income workers that have not fared as well and by ignoring this group Samuelson makes the losses sound smaller than they actually are.

Second, he focuses on displacements but that misses a large part of the costs. Job loss is present, but the main cost to low income workers is a degradation in wages and benefits generally. These costs are across the board rather than concentrated within specific groups or sectors.

Third, he claims that China's undervalued currency is important. I'm going to let Paul Krugman answer this one:

Fixing Our Economy By Fixing Up Our Workers, by Paul Krugman, Money Talks: ...A. Aneesh, Santa Fe, N.M.: All your analysis seems to assume that there is no exchange rate effect i.e., currency speculation as well as other more direct measures at currency controls, including petro-dollars. The reason why goods from the so-called third world are cheaper may relate more to this currency differential, which also leads to a higher than necessary wage differential and labor standards will not have much effect there. ... What are you thoughts about it?

Paul Krugman: I blame 700-word limitations. The pressure from China is greater because of the undervalued yuan. However, even with a big rise in China's currency, wages there would still be only 4 percent of U.S. levels, so currency issues are only a small part of the story.

Finally, what will happen to white-collar jobs in the future as digital information technology progresses? After reading Charlie Stross's "Tomorrow's Future Today!," it's clear that no matter what we think might happen ten, twenty, fifty years or more into the future with digital information technology, we are probably wrong. So let's do our best to be ready no matter how it turns out. Fixing health care, which helps workers under most any globalization scenario, would be a good place to start.

    Posted by on Wednesday, May 16, 2007 at 12:42 AM in Economics, International Trade, Technology | Permalink  TrackBack (0)  Comments (29)


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