12 April 2004
Recently, the job numbers being reported in the US have been getting better. However, for the long term, outsourcing of American jobs remains a great threat.
Following the sparkling March number of 308,000 new jobs, the US Labor Department reported on 8 April that first-time claims for state unemployment insurance fell 14,000 in the week ended 3 April to 328,000 from 342,000 the week before.
This was the fewest since 320,000 in the week ended 13 January 2001. It brought the four-week moving average of new claims down to 336,750, the lowest since 335,750 in the week ending 25 November 2000.
So the strong economy is finally making a substantial impact on job creation, even in the face of persistent outsourcing of jobs overseas. The key question remains: For how long?
On 2 April, Stephen S. Cohen and J. Bradford DeLong from the University of California at Berkeley wrote an article titled "Our Outsourced Future". In the article, the authors suggested that by 2005 or 2006, the current political debate on outsourcing "will die away".
The article quoted Forrester Research, which estimated that over the next decade some 4 million jobs in business processes are likely to go offshore. "That is 30,000 per month--not a huge amount in an economy of 130,000,000 jobs where we need an average rate of job growth of 150,000 per month in order to hold the unemployment rate steady," the authors wrote. "In context, 'outsourcing' is not a first-order feature of the U.S. labor market."
However, the authors went on to warn: "But concern over outsourcing will return, perhaps very quickly; perhaps it will not be a huge deal for many years. But eventually it will become a huge deal indeed, because though not the number of jobs, it is the wages they pay, that's at play."
"The income gap between Japan...and America in the 1970s was a matter of one-to-two", the authors pointed out. "The income gap between India and America tomorrow will be one-to-ten."
Economists generally accept that globalisation and free trade and investment are good for the world as a whole. Even as wages are forced down and unemployment increases in developed countries, goods and services become cheaper. Eventually, as emerging economies become richer, they add their purchasing power to the global economy, which benefits workers in rich countries as well.
However, in the meantime, for those who are already unemployed due to outsourcing, none of these provides any source of comfort. Cohen and DeLong wrote in their article: "As Paul Krugman puts it, free trade is a salable policy only if accompanied by a well-built social safety net and confidence in full employment...we have not, we do not as a country make the investments in retraining and rebuilding needed to transfer some of the gains from the winners to the losers, and so make the process of economic change truly a win-win one."
So it is important to help the losers, as the pain can be highly concentrated on a relative minority. In the Winter 2004 issue of Region Focus published by the Federal Reserve of Richmond, Karl Rhodes wrote in the cover story titled "Global Gain, Local Pain": "[N]early everyone in the United States has benefited from the globalization of manufacturing. It has provided cheaper products to American consumers, and it has freed up resources for the creation of entire new industries. But globalization also has eliminated hundreds of thousands of jobs in the Fifth District, particularly in the Carolinas and Southside Virginia. The economic pain has been highly focused on small towns where one or two textile plants were the primary employers. Many people in those towns have lost their livelihoods, and they face futures overflowing with uncertainty."
And it is not only manufacturing jobs that are affected. White-collar jobs are leaving too. If it is not China pulling away manufacturing jobs, it is India pulling away service jobs. The twin threats from these populous countries are formidable indeed.
Not that everyone agrees. The Economist has been arguing recently that jobs lost in America "are mainly a cyclical affair, not a structural one." In its 11 March issue, in an article titled "Smile, these are good times. Truly", it argued that "it is implausible now...to think that outsourcing has profoundly changed the structure of the American economy over just the past three or four years. After all, outsourcing was in full swing -- both in manufacturing and in services -- throughout the job-creating 1990s."
Tell that to the Asians. The Economist may not have noticed, but outsourcing in the 1990s, especially to China in the latter half, affected growth and employment in many other Asian countries, and was a factor in precipitating the Asian Financial Crisis of 1997-98.
As for India, her economic ascent has been relatively recent. As Stephen Roach, chief economist for Morgan Stanley, wrote on 2 April in the Global Economic Forum: "After decades of stop and go, the critical mass of a new approach to Indian economic development now appears to have been attained. If I’m right, not only would that have enormous implications for the world’s second most populous nation, but it could have profound implications for the Asian and broader global economy."
Other Asian governments are keenly aware of the competition posed by China and India. As I mentioned in my earlier article titled "US job losses not that surprising", Japan has been frantically trying to slow down the yen's appreciation to stay competitive with China. In Singapore, the government has cut the rate at which employers contribute to the Central Providend Fund to restore the economy's competitiveness, among other measures (see also "Singapore faces lower standard of living").
The US needs to take similar measures too. Allowing the US dollar to weaken has been a start (not that the US government had much say in it). More needs to be done.
In their article, Cohen and DeLong suggested that the US has plenty of time to take the requisite action. "But we will need all this time, because the magnitude of the approaching economic trade shock will be much larger than anything in our historical memory".
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