Transcript Outsourcing-Globalization

NS3040
Fall Term 2015
Outsourcing/Globalization
Outsourcing/Globalization
• A recurring issue in international economics involves the
effects of globalization on the U.S. economy, especially
as it relates to jobs.
• Several articles explore the issue from different
perspectives:
• Daniel Drezner, The Outsourcing Bogeyman – conservative view
– outsourcing good – increases efficiency
• Alan Blinder, Offshoring: The Next Industrial Revolution? –
liberal view – outsourcing a threat, but probably inevitable, big
but not necessarily good, changes lie ahead
• Michael Spence, The Impact of Globalization on Income and
Employment: The Downside of Integrating Markets – balanced
view – globalization brings threats and opportunities
• While none advocate protectionism, each has a
somewhat different set of policy recommendations.
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Drezner: Outsourcing I
• Wants to make the point that:
• Outsourcing a variant of comparative advantage at work –
increases efficiency and makes the country stronger
• Simply involves subcontracting a business function to outside
supplier
• Claims critics of outsourcing/offshoring don’t have the
big picture:
• “Believing that outsourcing causes unemployment the
economic equivalent of believing that the sun revolves
around the earth: Intuitively compelling, but clearly
wrong.”
• Feels biggest problem with outsourcing is the political
backlash that may result in protectionism or other
government action reducing the competitiveness of
American firms.
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Drezner: Outsourcing II
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Main propositions:
• Many of the figures on job loss are exaggerated or seem dire, but when
look at % of labor force, rather small
• While manufacturing jobs have fallen, pretty much a global
phenomenon – can probably explain using models such as product cycle
– shifting comparative advantage, not outsourcing per se.
• Many companies that outsource operations upgrade remaining workers
to higher value jobs
• Need to look at insourcing. For each dollar spend on outsourcing to
India the U.S. gains $1.12 to $1.14 in benefits
• Because companies are more efficient and have higher profitability with
outsourcing, they actually expand jobs by increasing investment
• When job loss occurs, best to cushion process rather than resort to
protectionism
• Because outsourcing companies actually expand, the normal worker
protections not in place – need to develop job insurance
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Blinder: Offshoring I
• Also looks at offshoring/outsourcing as changing
comparative advantage
• Longer run view than Drezner, so sees greater impact
from outsourcing/offshoring.
• Compares the current wave of IT innovation as
eventually having the impact as the agricultural and
industrial revolutions
• With industrial revolution, if you could put it in a box,
your job was insecure and likely lost with time
• With the IT revolution and offshoring, if you can send
it over a wire, your job is insecure and will be likely
gone with time
• Sees the economy rapidly evolving to point where the
best jobs will be in personal services – areas that the
product can not be put in a box or the service
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delivered over a wire – still some problems.
Blinder Offshoring II
• Complicating factor is Baumol’s Law or the cost disease of
personal services
• Stems from the fact that many personal services,
productivity improvements common in manufacturing or
agriculture are either impossible or highly undesirable
• Not good to play Mozart faster, school bus drivers can’t
speed – professors shouldn’t talk twice as fast or cram more
students into a classroom
• Prediction of Baumol’s law – the prices of personal services
will rise relative to the prices of manufactured goods and
impersonal services because costs fall more rapidly in other
sectors
• Constantly rising relative prices have predictable
consequences
• Because demand curves slope downward, the demand for
personal services will decline.
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Blinder Offshoring III
• Should mean decreasing relative demand for many
personal services and increasing relative demand for
many goods and impersonal services over time
• Main exceptions are personal services:
• that are strong “luxury goods” (people get richer then want
more of them) and
• those few goods that are considered “inferior goods) – as people
get richer whey want fewer of them
• With regard to offshoring changing trade patterns
will keep most personal service jobs at home while
many jobs producing goods and impersonal service
migrate to the developing world.
• Given that the demand for many increasingly costly
personal services is likely to shrink relative to demand
for ever cheaper impersonal services and
manufacturing goods – major changes in the economy7
Blinder Offshoring IV
• One adjustment reallocating labor from one industry to
another
• Another will show up in real wages
• As more and more rich country workers seek employ in
personal services, real wages for those jobs are likely to
decline unless offset from rising demand
• Thus wage prognosis is brighter for luxury personal service
jobs – (plastic surgery and chauffeuring) than ordinary
personal service jobs (cutting hair and teaching elementary
school)
• One implication – historically have felt more education
better than less – may no longer be the case for some
personal services
• Will need to rethink our whole education system to make
sure it is producing graduates for the jobs that are likely to
be available.
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Future Jobs I
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Future Jobs II
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Spence: Impact of Globalization I
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Less concerned than Drezner and Blinder with offshoring and
outsourcing per se. Focuses on broader impacts of globalization
and shifting comparative advantage
Expands on some themes we looked at in the income distribution
paper – role of education and impact on income distribution
Main points:
Until about a decade ago, effects of globalization on the
distribution of wealth and jobs were neutral
Advanced economies growing at rate of 2.5% and in most of them
the breadth and variety of employment opportunities at various
levels of education seemed to be increasing
As the developing countries became larger and richer
• economic structures changed in response to forces of comparative
advantage
• they moved up the value change
• now developing countries increasingly produce kind of high value added
component that 30 years ago were exclusive purview of advanced
economies
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Spence: Impact of Globalization II
• These trends are likely to continue with impacts on the
advanced countries even more intense
• By relocating some parts of the international supply chains,
globalization has been affecting the price of goods, job
patterns, and wages almost everywhere
• In advanced economies it is redistributing employment
opportunities and incomes
• For most of the postwar period U.S. policymakers assumed
that growth and employment went hand in hand – largely
the case
• But the structural changes in the global economy today and
its effects on the U.S economy mean that for the first time,
growth and employment in the U.S are starting to diverge
• Major emerging economies becoming more competitive in traditional
U.S. areas
• Job opportunities in U.S. are shifting from sectors experiencing the
most growth to those experiencing less
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Spence: Impact of Globalization III
• The result:
• Growing disparities in income and employment across
U.S. economy
• Educated workers enjoying more opportunities
• Workers with less education facing declining employment
prospects and stagnant income
• Spence argues the U.S. government must
• develop long term policy to address these distributional effects
and their structural underpinnings and
• restore competitiveness and growth to the U.S. economy
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Spence: Impact of Globalization IV
More detailed patterns:
• Between 1990 and 2008, number of employed workers in
U.S. grew from 122 million to about 149 million
• Of roughly 27 million jobs created during that period, 98
percent were in the non-traded sector – goods consumed
domestically
• Largest employers in the U.S. non-tradable goods were
government (22 million jobs in 2008) and health care
industry (16 million in 2008)
• Together the two industries created ten million new jobs
between 1990 and 2008 or just under 40% of the additions
• Meanwhile employment barely grew in the tradable sector
of the economy
• Tradable goods accounted for more than 34 million jobs in
1990, but added only 600,000 jobs between 1990 and 2008
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Spence: Impact of Globalization V
• Dramatic, new labor saving technologies in information
services eliminated some jobs across
• But employment in U.S. has been affected even more by
fact that many manufacturing activities, principally lower
value added components have been moving to emerging
economies
• Trend causing employment to fall in virtually all of
manufacturing sector except at the high end of value added
chain
• However, employment is growing in other parts of tradable
sector – finance, computer design and engineering, and top
management at multinational enterprises
• Like top end of manufacturing these expanding industries
and positions:
• generally employ highly educated people and
• are in area where U.S has a comparative advantage and can compete in
the global economy
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Spence: Impact of Globalization VI
In sum:
• The employment structure of the U.S economy has been
• shifting away from the tradable sector, except for the upper end of the
value added chain
• shifting toward the non-tradable sector
• Problem because non tradable sector likely to generate fewer
jobs than is expected of it in the future
• Moreover the range of employment opportunities available in
the tradable sector is declining which is limiting choices for
U.S. workers in middle income bracket
• Unlikely employment in the government and health care in the
U.S. will continue to grow as it did before economic crisis
• Actually remarkable the U.S. did not have much of an
employment problem until the crisis
• If non-tradable sector continues to lose its capacity to absorb
labor and tradable sector does not become an employment
engine, U.S. will have a long period of high unemployment
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Spence: Impact of Globalization VII
Other Side of the employment trends
• Unlike employment, value added in the tradable and nontradable sectors has increased at a similar rate since 1990
• In non-tradable sector which experienced rapid
employment growth value added grew slightly faster than
employment – value added per employment increased
modestly – 0.7 percent since 1990
• On tradable side where employment levels barely increase,
value added per employee rose very swiftly
• Whereas in non-tradable sector value added per employee
grew from $72,000 to over $80,000 between 1990 and
2008, in tradable it grew from $79,000 to $120,000
• VA grew by about 12 percent in non-tradable sector but
close to 57% in tradable sector
• VA translates into personable income, dividends for
shareholders interest on investment
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Spence: Impact of Globalization VIII
Picture clear
• Employment opportunities and incomes are high and
rising for the highly educated people at upper end of
tradable sector of U.S. economy
• They are diminishing at the lower end
• Every reason to believe these trends will continue
• As emerging economies continue to move up value
chain and they must in order to keep growing,
• the tradable sectors of advanced economies will require less
labor and
• the more labor intensive tasks will shift to emerging economies
• Highly educated US workers already shifting toward
high value added parts of U.S. economy – returns on
education are rising
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Spence: Impact of Globalization IX
• Highly educated and only them are enjoying more job
opportunities and higher incomes
• Competition for highly educated workers in tradable
sector spills over to non-tradable sector
• Raises incomes in the high value added part of that
sector as well
• But with fewer jobs in lower value added part of
tradable sector, competition for similar jobs in the
non-tradable sector is increasing
• This in turn further depresses income growth in the
lower value added part of the non-tradable sector
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Spence Impact of Globalization X
• Implications:
• Evolving structure of global economy has diverse
effects on different groups of people in US
• Opportunities expanding for highly educated
throughout the economy
• In the tradable sector because global economy is growing
• In non-tradable sector because that job market must remain
competitive with the tradable sector
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But opportunities shrinking for less well educated
Developments not a market failure – externalities
Not economically inefficient – more efficient
Problem – everyone benefits from lower priced goods
However people care greatly about chance to be
productively employed and the quality of their work
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Spence: Impact of Globalization XI
• Problems with globalization
• Ample labor available in various skill and educational categories
throughout tradable sector globally
• Companies have little incentive to invest in technologies that
save on labor or otherwise increase the competitiveness of the
labor-intensive value-added activities in advanced economies
• In short, companies private interest (profit) and the public’s
interest (employment) do not align perfectly
• Conditions not permanent if
• Growth continues to be high in emerging economies
• In two or three decades there will be less cheap labor available
there
• Still two or three decades along time
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Spence: Impact of Globalization XII
• Spence feels even though public and private interests are
not perfectly aligned today – not perfectly opposed either
• Relatively modest shifts at margin could bring them back
in sync
• Would not require great changes to restore employment
growth in tradable sector of U.S. economy
• Specifically
• Right combination of productivity-enhancing technology and
completive wage levels could keep some manufacturing
industries
• Or at least some value added piece of production chains in the
U.S. and other advanced countries
• Involves more than market forces
• Most also involve labor, business government
• Germany good example of cooperation of these groups. 22
Spence: Impact of Globalization XIII
• Germany managed to retain its advanced manufacturing
activities in industrial machinery by removing rigidities in
labor market
• Making a conscious effort to privilege employment over
rapid rises in incomes
• Wages may have increased only modestly in Germany,
but income inequality is markedly flatter there than US
where it is higher than most other industrial countries.
• Combination of initiatives necessary:
• Education important, but can’t be the whole solution
• Need better infrastructure
• Tax structure needs to be reformed – simplified and reconfigured
to promote competitiveness, investment and employment
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