December 7, 2003

Who Wins and Who Loses as Jobs Move Overseas?

By ERIKA KINETZ

he 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.