Another outsourcing debate...with a twist. Europe

[XT]

Was reading this article today on the rise of China/India as true competitors with the US and Europe in the global market place. For the most part the article paints a fairly grim picture for the US, though they concede that the US should continue to be an innovator and that to some extent outsourcing has both its pro’s and con’s for the US…i.e. we may lose jobs (or our wages may drop), but that this can be compensated by new industries opening up and new markets (theoretically…China is blocking the US from its markets the way Japan used too) for US companies.

But intense global competition could erode incomes and, hence, standards of living. Wages are not now tracking productivity gains. Since 2001 U.S. productivity has risen by about 4 percent annually, but wage growth has averaged only 1.5 percent. Jagdish Bhagwati, an economics professor at Columbia University, says that globalization is not a zero-sum game: the hiring of an insurance-claims technician in Manila does not necessarily mean that a technician in Pittsburgh or Berlin is losing his or her job. “But some workers do lose out. In America, this loss comes in the form of wages. If the Federal Reserve does its job, and unemployment stays at around 5 percent, then if you’re fired by Boeing, there will be other jobs available. The problem is that the new job may pay less than the previous one; and if this happens to enough people, wage rates will go down. There will be fewer good jobs and thus greater competition for the good ones.”

So, a mixed picture for the US. However, what I want to debate (since we’ve talked about outsourcing in the US before) is…what effect will outsourcing have on the new workers paradise in Europe? Here is what the article had to say about Europe:

Europe is less vulnerable to off shoring than America. Rigid labor laws insulate its workers from pay cuts and layoffs. Still, Deutsche Bank predicts that 2 percent of all service jobs in Germany could move overseas within four or five years. Ian Marriott, head of global-off shoring research for the Gartner Group, says that Nordic companies have been slow to catch on to off shoring and will soon be “at a financial disadvantage to global competitors who come into their markets.”

Europe faces an arguably more serious dilemma. If its companies start off shoring more, unemployment could rise—and with it the impulse to enact self-defeating protectionist laws. If it doesn’t offshore more aggressively, the Continent will lose global competitiveness and become something of a long-term loser itself. Many economists argue that the EU needs labor-market flexibility and U.S.-style job churn to spark innovation. “Unions have such control over wages there,” says Bhagwati, “that unemployment results and people live off the welfare state,” stifling productivity and growth. According to McKinsey, just over half of Americans who are laid off and find new jobs take a pay cut of at least 15 percent, and one quarter will see their salaries fall by 30 percent. In Europe, confirming Bhagwati’s point, McKinsey says that most who lose their jobs are still unemployed after several months. That illustrates a lack of the dynamism from which comes new businesses, new skill development, and the creation of new jobs.

It seems Europe might be in a bit of a dilemma. If they don’t outsource they may become less competitive and lose jobs. If they do outsource and unemployment rises they may shoot themselves in the…foot. Either way, it seems that perhaps Europe is more threatened by all this than America is…at least that’s the impression I get. I’d like to debate the possible consequences of outsourcing on Europe. Will it affect them? If so, how? Will the Europeans be able to maintain their heavy socialist oriented programs, or will they eventually have to scale back in the face of more intense competition from China, India, etc? What can and should the Europeans do to combat this (assuming its going to happen to them)?

Feel free to drag the US into this all you like, but I’d really like to see the discussion oriented around the European perspective.

-XT

[John_Mace]

It might make a terrific economic test case: anti-outsourcing laws in Europe vs outsourcing-neurtal laws in the US. Who comes out ahead?

[XT]

Oops…forgot to give the link to the article. Its here.

@John Mace

It might make a terrific economic test case: anti-outsourcing laws in Europe vs outsourcing-neurtal laws in the US. Who comes out ahead?

Should be an interesting test case…if the Europeans go the protectionist/anti-outsourcing route (which seems likely to me, if for no other reason than simple inertia of their system forcing them down that road). I’ll let other answer your question though…I’m sure you already know what my answer is on this.

-XT

[GorillaMan]

From what I see, the article is talking about the EU (and equating it to Europe) as a homogenous group. There’s immense differences between established economies in western Europe and the new members of the EU. Manufacturing and agriculture in particular are moving eastwards within the EU.

And comments such as:

Unions have such control over wages there," says Bhagwati, “that unemployment results and people live off the welfare state,” stifling productivity and growth.

…are riddled with factual errors. Somer European countries have big problems with unemployment (eg Germany), while others such as the UK have their lowest-ever ratings. Productivity isn’t a problem, anybody who bothered to look at the statistics could tell you that. That guy has an axe to grind, and is doing so with half-baked early-1980s philosophies.

[Quartz]

@GorillaMan

Somer European countries have big problems with unemployment (eg Germany), while others such as the UK have their lowest-ever ratings.

How many are employed by the State in each case? Correct me if I’m wrong - my Google skills are lacking - but I recall reading that here in the U.K., approx 25% of the 2 million new jobs are state-funded.

[GorillaMan]

@Quartz

How many are employed by the State in each case? Correct me if I’m wrong - my Google skills are lacking - but I recall reading that here in the U.K., approx 25% of the 2 million new jobs are state-funded.

Although I’d like to see a cite, I wouldn’t find it that surprising - it’d include the increased recruitment to the NHS, teaching, the police,…

[Kimstu]

xt: Should be an interesting test case…if the Europeans go the protectionist/anti-outsourcing route (which seems likely to me, if for no other reason than simple inertia of their system forcing them down that road).

I’m not sure I agree; over here in Europe and following their news, while I see strong support for job stability and social welfare, I also see a good deal of eagerness to take advantage of some outsourcing-related growth opportunities. And as GorillaMan has noted, there’s already a lot of outsourcing churning going on within the EU itself, and to a lesser extent elsewhere in Europe, along with China and India.

Frankly, I don’t think you’re going to get your “economic test case” between sharply different US/EU policies regarding outsourcing, because I think those policies are going to converge somewhat. The EU is going to loosen up some of its protectionism, and a number of EU countries are already downsizing some of their more generous welfare and social support benefits, particularly for immigrants.

At the same time, as outsourcing helps keep US wages sluggish and fosters “mini-depressions” in more white-collar employment sectors, while our employer-based healthcare system continues to burden our competitiveness, we’re going to come around to more “European-style” views on some social programs and workers’ rights, as well as more direct governmental job creation (which has already started under Bush).

The two economic styles are never going to be identical, IMHO, but I think we’ll see them getting closer together over the next decade or so.