The Hindu Business Line : Of missing jobs and outsourcing concerns

THE US economy has been lumbering out of its recession. Industrial production rose 2.4 per cent by end of last year and GDP is said to be growing at an annualised rate of 4.3 per cent. The stock market is on an upswing. All said, healthy conditions for an incumbent president to be re-elected.

However, the fly in the ointment is the jobs situation. The creation of jobs is not keeping pace with an otherwise improving economy. Some are blaming inventory levels as still being high enough that production has not yet kept pace with demand for goods. Productivity is rising and that hides another fact.

Output per worker at non-agricultural businesses had risen to about 9.4 per cent by end-2003. Increased productivity is good news for those concerned with standard of living because companies can earn higher profits and pay higher wages without increasing prices. But it also means that companies could have boosted output without adding to their workforce and that underlies the raging concern about jobs.

Unemployment is at 5.6 per cent, not a healthy level in an election year. Economists have termed the present trend as that of `jobless recovery'. Even the President who promised to create three million jobs last year is not talking much about it.

`The jobs have gone abroad' is a slogan that is increasingly becoming mouthed as an election issue. Regular reports in the newspapers on yet another company that has closed its domestic operations and is hiring overseas does little to belie fears. It used to be in manufacturing and it is now in software.

When the newspaper reporter dutifully writes that instead of paying $60,000 for a software engineer in Boston, the company is moving operations to Bangalore where an equally capable engineer can be hired for $12,000, one-fifth the price, the logic in terms of cost savings cannot be denied.

But the average reader, unaware of the differences in purchasing power, makes a quick calculation and decides that this software engineer in Bangalore must be living at fairly subsistence levels since he is being paid what a minimum wage worker in a fast-food restaurant makes in Boston! This is indeed alarming, he figures, if wages have to adjust downward to that level to prevent job movement.

For many years now, manufacturing units have been closing and production gradually shifting to mainly China and elsewhere. This has happened to whole sectors of the economy, not just to individual companies. Toys, footwear, apparel, and now even furniture industry is almost wholly dependent on imports.

Of course, cheaper imports kept inflation down and the economists said that the public must be prepared for a structural shift taking place in the global economy. They said that the low-skilled jobs should be allowed to move and the economy would be compensated by the higher wage and higher skilled jobs not just staying but growing.

The public is finding it difficult to accept the same reasoning when software jobs move. It is alright to lose the broom-making and apparel-stitching jobs. But aren't these software jobs the higher paying jobs we should be retaining, they ask.

Economic theory is clear in its rationale. By outsourcing manufactured goods or services, productivity of US companies is enhanced as is their profits. This will lead the companies to employ more. Moreover, as foreign incomes grow, those countries' demand for US goods and services will increase.

Mr Mankiw, the economic adviser to the President, got into a soup recently when he justified the outsourcing trend as good for the economy. This statement led to a public outcry and even members of the President's party came out very critical of his remarks.

Meanwhile, another group of economists has taken to pointing out that the old theoretical justification for free trade rested on the assumption that factors of production (that is, capital and labour) do not move across borders. With offshoring, they say the jobs are moving so let's forget the theory. Perhaps, economists need to be kept locked up in an election year.

In an economy that employs over 130 million workers, the loss of about half a million due to offshoring should not be that worrisome. But try explaining that to a worker who has lost his job that the trend is good for the economy.

Messrs John Kerry and John Edwards, aspirants for the Democratic Party nomination, have found this a nice `hot button' issue and have both begun offering their solutions for the jobs situation and they have to do with trade and outsourcing.

They promise incentives to keep manufacturing jobs in the US through corporate tax reduction and tax credits. They want to help workers upgrade their skills. This would not happen if it was a level-playing field, they thunder. These trading partners of ours are not on a level-playing field. Some of them like China are keeping their exchange rates undervalued and that is hurting our competitiveness.

Mr Kerry has promised that he would review all trading agreements that the US has entered into to ensure the "trade agreements are balanced for the American worker". As a senator, he voted in support of the North American Free Trade Agreement, so I had a hard time trying to understand what he was going to review now.

Then I noticed the old issues of labour and environmental standards coming up in his statement. Since our trading partners are not following the same environmental standards they have unfair advantage is a popular theme. Perhaps that is why the US administration has kept away from the Kyoto protocol.

It is difficult to blame the politicians and economists if they seem confused or insensitive. When people are finding it difficult to keep their jobs and the popular TV news programs regularly complain about `Exporting America,' leaders must be seen to be doing something about it. Public policy cannot prevent outsourcing since it is a corporate decision.

The Federal Government and about 30 states have tried to ensure that their contractors do not outsource through legislation. Even though such rules have only a small effect in terms of jobs, it has strong symbolic value. Meanwhile, a coalition of employers' organisations and chambers of commerce have taken the initiative to lobby the government against restrictions on outsourcing.

The business press in the US is faced with the tough job of explaining both sides of the debate. Business Weekcame out with a special report in its issue dated March 1 explaining how software jobs are moving elsewhere and the human issues involved by comparing the stories of a young engineer in the US dealing with an uncertain job market with that of another in Bangalore looking forward to an exciting future.

Yet, in its editorials, the magazine has justified the outsourcing as not a calamity but an opportunity for companies and a challenge for governments to provide appropriate policies to ease the transition.

The resilience of the US markets and the rationality of its policy-makers are being tested all over again. In Europe, the social-democratic governments have found it very difficult to dismantle some of the public welfare schemes that were put in during happier times.

Strong unions have resisted changes in health, retirement and severance benefits. The public has got used to free education at all levels. All this has affected the European economies' ability to adjust to changing global conditions and has been a drag on their growth.

The US economy has been more robust because of the preference of various administrations to allow structural transitions without too much intervention. Let us hope the coming administration sticks to this same tradition.

(The author is professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@suffolk.edu)

More Stories on : Human Resources | Economy | American Periscope | Outsourcing

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
A stormy passage to India

An unfair clamp-down

Industrial clusters: Kerala adopts the Italian model

A reality check on India Shining

Power bargaining on energy trading

Of missing jobs and outsourcing concerns

How corporate governance rating would help

Passing of a banker-economist

Outstanding dues