Transcript Point_Made - University of California, Berkeley

Dwight Jaffee
Haas School of Business
University of California, Berkley
Global Strategies, Local Impact:
Offshoring and the Domestic
Real Estate Market Connection
©2004, D Jaffee, Page 1
Agenda
► Macroeconomics (points I will argue)
 The jobless recovery is not foreign outsourcing;
 Foreign outsourcing creates valuable economic
changes;
 Foreign outsourcing is thus a benefit, not a threat,
to US;
 The real threat is comparative advantage in the new
information age—called the New Trade Theory;
► Microeconomics
 We may lose about 3.3 million office jobs a year,
gross;
 How does this impact the market for office
buildings;
 Don’t forget India’s office building market!
©2004, D Jaffee, Page 2
Comparing Current and Last Recovery:
Real GDP Relative to Cyclical Trough
2001 Cycle
1991 Cycle
1.080
1.070
1.060
Recovery
Recession
Real GDP Relative to Trough
1.050
1.040
1.030
1.020
1.010
1.000
0.990
1991 and 2001 GDP Recoveries are Similar.
0.980
0.970
0.960
T-3
©2004, D Jaffee, Page 3
T-2
T-1
Trough T
T+1
T+2
T+3
T+4
T+5
T+6
T+7
T+8
Comparing Current and Last Recovery:
Employment Relative to Cyclical Trough
1.020
Employment, Relative to Trough
1.015
"Jobless" Recovery =2.7 Million "Missing" Jobs
1.010
1991 Cycle
1.005
1.000
Recession
Recovery
0.995
2001 Cycle
0.990
T-3
T-2
T-1
Trough
T
T+1
T+2
T+3
T+4
T+5
Quarters Relative To Trough Date
©2004, D Jaffee, Page 4
T+6
T+7
T+8
T+9
Real GDP, Employment, and Labor Force:
(Index: 1947-1 = 1.00)
Real GDP
Total Employment
Labor Force
7
6.5
6
5.5
5
4.5
4
3.5
3
2.5
2
Summary:
Bad news is 6% unemployment rate (mostly not outsourcing);
Good news is 250% increase in productivity (output per worker);
Good news wins by landslide.
Sources of productivity growth:
Investment in physical capital;
Investment in human capital;
Investment in R&D;
Spread of information technology;
Domestic outsourcing;
Foreign outsourcing.
1.5
19
47
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49
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01
20
03
1
©2004, D Jaffee, Page 5
Cyclical Pattern of Productivity Growth
Real GDP/Total Employment, 1947-1 = 1.00; Shaded areas are NBER Recessions
2.50
2.25
In recessions, productivity often falls,
In recoveries, productivity generally rises.
Recovery since 2001 exhibits very fast rise
in productivity (jobless growth).
2.00
1.75
1.50
1.25
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
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1991
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1994
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1996
1997
1998
1999
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2001
2002
2003
1.00
©2004, D Jaffee, Page 6
Falling computer prices
from foreign outsourcing was
basis of high-tech boom.
Lost jobs in high-tech
manufacturing replaced 3 to
1 by high-tech services jobs.
High-tech goods trade
deficit offset by services.
Retraining of workers is
necessary and solvable.
©2004, D Jaffee, Page 7
Foreign Outsourcing of Imported
Inputs Benefits Manufacturing
Total Manufacturing
High Tech
40%
35%
Share of 30%
Imported 25%
Inputs in 20%
Total
15%
Inputs
10%
5%
0%
1987
Source: Bardhan, Jaffee and Kroll,
Globalization of a High-Tech Economy, Kluwer.
©2004, D Jaffee, Page 8
1992
1997
How The Transition from
Outsourcing to New Jobs is Achieved
► Job losses from outsourcing always come first.
► But new jobs will be created:
 Beneficiaries of reduced costs far outnumber
the victims. (US steel industry has tiny
workforce compared to industries using steel):
 In dynamic economy with technological
advances, workers want to retrain, and firms
want to expand;
 The record since 1947 speaks for itself
(unemployment rate has fallen during the
“jobless factory” revolution of last 50 years).
©2004, D Jaffee, Page 9
High-Tech Service Jobs Amply
Replace Manufacturing Jobs
2200
2000
1800
1600
1400
1200
1000
800
600
400
19
87
19
88
19
89
19
90
19
91
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92
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93
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99
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00
20
01
20
02
Employment, Thousands
High-Tech Manufacturing Employment
High-Tech Service Employment
Source: Bardhan, Jaffee, and Kroll,
Globalization of a High-Tech Economy
©2004, D Jaffee, Page 10
What About Impact of Foreign
Outsourcing on US Wage Rates?
► In simple cases, foreign outsourcing must raise
US income levels:
1) International trade is voluntary;
2) International trade improves world productivity;
3) Higher foreign productivity does not reduce US
productivity.
► In real cases, with multiple factors of production,
specific factors or specific industries may suffer.


©2004, D Jaffee, Page 11
Foreign outsourcing is ¼ source of falling relative
wages of US production workers (rest is domestic);
Argues for need to retrain, but not to hide (which
will clearly lower US incomes).
A Foreign Outsourcing Parable
► An American entrepreneur announced he had discovered a
new technology to create high-tech goods at half the price,
using only American wheat.
 As his goods streamed into the market place, he was hailed as
the epitome of US ingenuity and entrepreneurship.
 Of course, some production workers had to retrain, but
consumers, wheat farmers, and the US economy on net clearly
benefited.
► Alas, an enterprising reporter broke into the locked factory,
to discover that the US wheat was just being shipped to
China in trade for the goods.
 Politicians then denounced him as a fraud, closed his shipping
centers, and were presumably happy when the goods prices
doubled.
► Moral: Economists treat technological change and foreign
outsourcing as similarly useful, but politicians may not.
©2004, D Jaffee, Page 12
The New Wave of Foreign Outsourcing
► Just as we finished book, news of “jobless recovery”
and service job foreign outsourcing hit the street.
► 300,000 jobs lost to outsourcing is small part of jobs lost
in recovery (mainly due to rising domestic productivity).
► But there is key issue: does service job outsourcing
have same happy ending as manufacturing job
outsourcing?
► Alarmists say this time is different:
 Where will the new jobs come from this time?
 We now stand to lose the high-paying jobs that
are the heart of our comparative advantage.
► I hope to convince you that service outsourcing will be
just as beneficial as manufacturing outsourcing.
©2004, D Jaffee, Page 13
Services, Next Step for Outsourcing
(Price Deflators for Goods and Services
Components of GDP (1947 = 1.0)
©2004, D Jaffee, Page 14
Goods Sectors: Real GDP and
Employment (Index: 1947-1 = 1.00)
Annual compound growth rates:
Real GDP
3.4%
Employment:
0.2%
Productivity:
3.2%
Source: BEA and BLS (with farm
employment correction).
©2004, D Jaffee, Page 15
Service Sectors: Real GDP and
Employment (Index: 1947-1 = 1.00)
Annual compound growth rates:
Real GDP
3.5%
Employment:
2.5%
Productivity:
1.0%
Source: BEA and BLS
©2004, D Jaffee, Page 16
Forces Generating Expanding
Outsourcing of Information-Based Jobs
► Rapidly Globalizing World 
Open economies; easy to link foreign production.
► Large Wage Disparities 
Economic incentive to transfer information jobs.
► Technological and Broadband Advances 
Feasible to transfer information-based jobs.
► Expanding Competition, US & Abroad 
Firms must adopt low-cost production centers.
©2004, D Jaffee, Page 17
The New Foreign Outsourcing:
Occupations Rather Than Industries
► Occupations “At Risk”:
 No face-to-face customer service requirement,
Low social networking requirement;
 Information the major component of the “product”,
Work via remote communications, Internet;
 Low set-up barriers;
 High wage differentials.
► “At-Risk” is not “En-Route”:
 We estimate 14 million jobs in occupations at risk.
 We estimate 3.5 million jobs (= 25% of 14 million)
over next 10 years) will actually go abroad.
©2004, D Jaffee, Page 18
At-Risk Occupations
► Computer and Math Occupations
 (Made up of 14 occupations)
► Medical
 Radiologic Technicians
 Medical Transcriptions
► Legal
 Paralegals, assistants
► Business/Fin Support
 Claim Adjusters
 Cost Estimators
 Benefits Specialists
 Management Analysts
 Accountants/Auditors
 Budget Analysts
 Credit Analysts
 Financial Analysts
 Insurance Underwriters
 Tax Preparers
©2004, D Jaffee, Page 19
► Office Support
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Switchboard/Telephone Operators
Bill and Account Collectors
Billing/Posting Clerks
Bookkeeping/Accounting Clerks
Payroll/Timekeeping Clerks
Procurement Clerks
Brokerage Clerks
Correspondence Clerks
Credit Authorizers, Checkers
Customer Service
Representatives
Interviewers (ex. Loan, Eligibility)
Loan Interviewers/Clerks
Order Clerks
Human Resources Assistants
Production Clerks
Computer Operators
Data Entry
Desktop Publishers
Insurance Processing Clerks
Statistical Assistants
Globalization and the
“Convergence” of World Economies
► As globalization unifies the world’s markets for
goods and services, it is natural to expect a
comparable convergence in the cost of factors of
production (wages and profits), and then income.
Comments:
 Wage convergence occurs only if human capital
is the same; education can retain advantage.
 Profit convergence requires same entrepreneurial
talent (including venture capital assets).
 US business culture (rule of law, risk-taking,
acceptance of losses etc…) very hard to replicate.
 Foreign gains are not US losses.
► Key Point: Convergence is issue of next 50 years,
not next 5 or 10 years.
©2004, D Jaffee, Page 20
The Real Risk from Foreign Outsourcing
► With the information economy and globalization, a
country’s comparative advantage in high-tech
industries can be lost (this is “new” trade theory,
unlike traditional theory based on labor and land).
► Key Point: US must maintain its position through
Education, R&D expenditures, &
Entrepreneurship.
 The foreign outsourcing of phone centers to
India, if anything, aids and abets these
endeavors.
 There is no sign that Silicon Valley, or other US
high-tech centers, are losing their unique skills
and resources.
©2004, D Jaffee, Page 21
Estimating Office Demand Losses Due
to Foreign Outsourcing
► Total US office space is about 13 billion square feet.
► Estimate of loss within at-risk categories:
3.5 million jobs (= 25% of 14 million)
► ULI reports about 250 feet2 per office worker.
 Implies 875 million feet2 of lost office demand.
 Implies 6.7% of lost office space occupancy.
► Alternative estimates:
 Energy Information Administration uses 400 feet2 per
worker;
 M. Leanne Lachman uses 150 feet2 per worker.
► These are gross losses; assume the workers disappear;
 History confirms this is only short-run issue;
 And the short-run is determined mainly by cyclical factors.
©2004, D Jaffee, Page 22
Office Demand At-Risk to Outsourcing
By Metropolitan Regions and Occupations
20%
15%
10%
5%
Bo
st
on
C
hi
ca
go
D
al
la
s
D
et
ro
it
H
ou
st
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o
sA n
ng
Ph
el
es
ila
de
lp
hi
N
a
ew
Y
or
k
W
as
h
D
C
nt
a
A
tl a
U
S
0%
Office Support
Computer and Math Professions
Business & Finance Support
Legal and Medical
Source: FCREUE from Bureau of Labor Statistics data.
©2004, D Jaffee, Page 23
Office Demand At-Risk to Outsourcing
Percent of Total Employment
By Geographic Regions and Occupations
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
140,260
143,820
14,031,890
US
1,669,820
CA
Office Support
Computer and Math
SJ MSA
San Francisco
Business/Finance Support
Medical/Legal
Source: FCREUE from Bureau of Labor Statistics data, 2002 data.
©2004, D Jaffee, Page 24
US MSAs with Highest Shares of Jobs in
At-Risk Occupations (2002)
MSA
Stamford-Norwalk, CT PMSA
Sioux Falls, SD MSA
Washington, DC-MD-VA-WV PMSA
Austin-San Marcos, TX MSA
San Jose, CA PMSA
Hartford, CT MSA
Des Moines, IA MSA
Tallahassee, FL MSA
Trenton, NJ PMSA
Seattle-Bellevue-Everett, WA PMSA
Boulder-Longmont, CO PMSA
Dallas, TX PMSA
Denver, CO PMSA
Boston, MA-NH PMSA
San Francisco, CA PMSA
©2004, D Jaffee, Page 25
% At-Risk
17.6%
17.1%
16.5%
15.8%
15.8%
15.7%
15.6%
15.2%
15.1%
15.1%
14.9%
14.7%
14.6%
14.4%
14.4%
The Impact of Outsourcing on Firm
Location Within the US
► The increasing success of business services
outsourcing may change firm location choice,
especially for high-tech:
 Access to labor supply has been one key factor
traditional affecting firm location choice.
 Foreign outsourcing has reduced the need to
locate close to a pool of manufacturing workers,
and now is reducing need to locate near service
job workers (such as call center employees).
 On the other side, firm value added is
increasingly determined by its intellectual
property, related to R&D investments.
 Locations such as Silicon Valley are likely to
benefit on net, given their key role in R&D.
©2004, D Jaffee, Page 26
A View from the Other Side:
Why India?
► High favorable wage differentials;
► Human capital: large population of English
speaking and technically sound graduates;
► Institutional and cultural compatibility: legal,
accounting system, media, advertising.
► Time zones allow continuous processing;
► Diaspora effect creates vast networks;
► Entrepreneurial spirit and emerging financial
dynamism.
©2004, D Jaffee, Page 27
India Has Its Own Backlash Factors
► Creation of wide range of income, both within an
area and between regions creates tension.
► Long work hours in an office are not part of the
culture.
► Family life also must change to match new work
hours.
► Wage rates are rising, limiting the advantage.
► More advanced service jobs (banking back office for
example) require costly infrastructure), raising
costs significantly.
► Competition from other countries (China,
Philippines, etc) is squeezing profits.
©2004, D Jaffee, Page 28
Outsourcing and Real Estate in India
► India’s real estate is booming in all sectors. Rapidly rising
professional management industry.
► Business Process Outsourcing (BPO) accounts for 2/3rd of
absorption in India’s Suburban Office Market; CBD
outperformed;
► Demand for 100 million feet2 in BPO sector alone by 2008;
Space Requirement in BPO estimated as 100-150 sq.ft. per
person.
► REITS planned soon and growing interest and activity shown
by foreign investors.
► Development of residential mortgage market.
Source: FCREUE from various sources
©2004, D Jaffee, Page 29
Indian Metros and Outsourcing
► Bombay: Financial, accounting, tax preparation, data mining,
insurance and banking back office transactions, legal “table
work”.
► Bangalore: Software development, IT value-added services,
turnkey projects, database management.
► New Delhi: Call centers, customer service, general “contact
centers”, credit cards, payroll services.
► Chennai: Real estate transaction support, Financial data
crunching, records management, billing and accounting.
©2004, D Jaffee, Page 30
Office Rents: Selected Asian Cities
$/Sq.Ft.
120
100
80
60
40
20
0
Source: FCREUE from Various Sources
©2004, D Jaffee, Page 31
Manila
Bangkok
Bangalore
Singapore
New Delhi
Hong Kong
Bombay
Tokyo
©2004, D Jaffee, Page 32
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©2004, D Jaffee, Page 35