I have said all along that there is no doubt that individual workers and some specific industries will be permanently hit. I don’t know why you keep asserting that I’m a ‘free market fundamentalist’ who claims that everything will be rosy for everyone. Telephone operators lost their jobs permanently because of the automation of telephone switching. Those jobs never came back, nor anything like them. Most of those operators had little education other than that required for their very specific job. I’m sure those people were devastated. This is not an argument for an ‘anti-telephone switching act’.
As I said, workers in industries that have had their wages propped up through artificial barriers will obviously see their wages drop when those barriers are removed. They will have to learn to be competitive.
What I dispute is that there’s something special about globalization which will cause the average American worker to lose ground. That’s what anti-globalization activists are saying. Not that specific industries won’t be able to compete, or that specific workers might lose salary, but that ‘The American Worker’ will be punished by it, that ‘America will lose its manufacturing jobs’, that ‘all high tech will move overseas’. Sweeping statements about the entire economy. That’s what I’m addressing. And since this kind of permanent reduction in the standard of living of all Americans has never happened when other innovations caused radical dislocations of the work force, the burden of proof is on them to show how. That’s going to be tough to do when the U.S. has an unemployment rate of 4.7%. Most of the studies I’ve seen that claim that worker incomes are stagnant or declining either cherry-pick the data by starting at the beginning of a recession (like that flood of news stories a while ago headlined, “American family income dropping” - which used the starting point of 2000, the income height of the last economic bubble, and an ending point of 2004 - the income trough of the recession). Or, they neglect to include other worker benefits such as flex hours, health care coverage, bonuses, stock purchase plans, and other ways in which worker compensation is changing.
Likewise, the claim that ‘all tech jobs are moving overseas’ is buttressed by data showing a loss of tech jobs - after a tech bubble burst. Duh. Now that the IT industry is recovering and tech jobs are being created quickly, that argument is going to be harder to sustain.
And sorry I can’t offer specifics about how things will be in 5 years or 10. No one can. The market is somewhat chaotic that way. As I said, if we could predict the future of the economy that well, we could be filthy rich.
Probably for the same reason that you keep calling me a “protectionist” who advocates hiding behind closed borders: namely, broad-brushing induced by shortness of temper.
Getting this off the usual dime, it would be good to look at the whole picture, since the title asked for effects on the economy, even if the OP just posed the usual question. The whole picture is actually very interesting.
What we have with outsourcing is the making of a global labor market in many fields. The net effect is as if you had a sudden increase in the number of workers available.
What happened the last time this occurred? We finished going through a period of absorbing baby boomers into the economy a while back, which was the last time we had such a sudden increase. See the following table:
Net entries into the workforce:
Year: 1960 1970 1980 1990 2000 2003
18-24 year olds: 16089 23999 30022 26961 27143 28900
55-64 year olds: 15573 18590 21703 21116 24274 27900
Net entries: 516 5409 8319 5845 2869 1000
(from the Statistical Abstract of the US, tables 11 and 12. You have to dig through previous censuses for the earlier numbers.) Notice that the net number of people entering the labor force increased more than ten-fold between 1960 and 1970. The subsequent result was stagflation and drooping productivity. Notice that the declining number of net entries once the boomers were absorbed coincided with declining inflation and, recently, as the numbers have acheived a balance not seen since 1960, a nice increase in productivity - it started running consistently, in year-over-year terms, at better than 2% starting in the second half of 1997, and since 2000 the year-over-year increases have averaged better than 3%, which is pretty high (source: St Louis Fed: Output per hour non-farm sector. You have to figure out the year-over-year increase on a spreadsheet, of course).
So, does outsourcing change this by introducing so many new workers that the effect begins to resemble the effect the boomers had? On the evidence from the productivity numbers, quite simply, no.
But we do have galloping commodity prices now (cite: your local gas station), like we did in the seventies. I saw a neat one in Barron’s today, where this was labelled The Repricing of the Earth. Globally, with more workers doing more work, the demand for commodities is going to just keep on increasing.
So, maybe not stagflation, but it looks like we’ve got inflation in our future. But think about it: if we have more jobs chasing a stagnant labor force, outsourcing is a logical reaction. And if it leads to a worldwide development boom, which it looks like it is, what you have for the developed world, that would be us over here, is a recipe for prosperity: lots of work with not enough people to do it all, rapidly increasing productivity, and, as well, rapidly increasing prices.
In short, a boom. It’s already started, but we really haven’t felt it fully in the developed world yet, and so we get complaints about the effect of outsourcing.
It is having an effect, especially in engineering: see the MIT salary survey summary, which if you click on the links for the preceding years shows that the 2004 average for Masters of Engineering number was lower than the 2003 average, while the 2005 average only slightly exceeds 2003. Give it a couple more years though, because every year more boomers are going to be leaving the labor force in greater numbers, with an inadequate number of new workers to take their place. This is true not just here in the US, but everywhere in the developed world. The job market will improve, as will salaries, because they will have to.
It’s true that salaries will likely increase as people leave the workforce, but that does not translate into a ‘boom’. Ultimately, if you have fewer workers, you have lower productivity. The prodiuctivity per worker may increase, or it may not, but ultimately the aggregate wealth of a country is a measure of how much stuff it makes, and how much it has improved its infrastructure.
If fewer workers was a recipe for a boom, Japan would be in great shape. Instead, Japan could be facing a productivity meltdown. Since it’s an insular society with relatively low levels of immigration and a low natural birthrate, Japan is facing a population crash.
And it’s not clear whether this would lead to inflation, or deflation, or neither. It may lead to salary inflation in some industries, but on the other hand it could lead to a crash in the real-estate market as a housing infrastructure finds itself with 70 million fewer people demanding homes.
But even salary inflation isn’t guaranteed. If the new economic situation leads to a drop in worker productivity (maybe because industry can’t find enough workers to operate efficiently), then salaries could actually drop.
As for the ‘baby boom effect’ above, it seems to me that there’s another major factor during the years above - the entry of women in the workforce. In 1950, something like only 40% of women held jobs. Today it’s over 70%, and among the younger generations it’s higher. That’s a lot of new workers that came into the job market. But now that the number is stabilizing, we’re not seeing an increase of new women entering the job market as we did in the 60’s, 70’s, and 80’s.
In short, trying to determine a large economic trend like, “Will salaries increase in the future” based on a single table like that above is not really warranted. There are far too many other factors to consider.
Plus, if the monetarists are right (and they certainly have won the argument over the Keynesians to date), then inflation isn’t a factor, because the rate of inflation is set by monetary policy.
kimstu: well, both at the same time, of course. Globally, we have a very large surplus of new workers. In the developed world, however, there’s a shortage. What we’re seeing with outsourcing is that the developed world is looking at this shortage and deciding to go overseas to get more workers. This has triggered a boom in India and China, which of course raises the global price of commodities, which we in the US see as an increase in the price of gas, most visibly. Sam Stone: eh, the monetarists only look like they’ve won the argument. In the 60’s, everyone thought you could fine tune the business cycle, a la Keynes. Today, the world’s central bankers think they can fine tune inflation, a la Friedman. The central bankers of the 60s wound up looking like fools in the 70s. I have a funny feeling the same fate will befall today’s omniscient central bankers. But that’s a subject for another thread.
As for Japan…hmm. Japan is a subject all by itself. Once again, you could devote a whole thread to the subject. My opinion on Japan is that it’s really a single-party socialist state, which is why the demographic baby bust has had the awful effect it appears to have had on them; once they finished catching up to the West, it was all over for their economy anyway. The fact that there’s no huge pressure for immigration, and that, according to some sources I’ve read, young people are actually leaving Japan to look for better prospects elsewhere, tells me that we’re dealing with a failed economy, one that failed for reasons other than demographics, and one that won’t adapt to a new demographic regime because it is simply incapable of doing so. In the US, we have a functioning labor market that responds to supply/demand pressures: increase the supply of workers, and productivity falls because it becomes more often cheaper to hire another worker to get the job done than it is to invest in new equipment. My contention is that the increase in productivity we’ve seen since 1997 is a standard market response to the developing dearth of new workers, since now the economics are tilting more towards investing in new equipment - or improving your processes to make them more productive - than hiring new workers, overall. But this is only true if you have a market economy in the first place, which as far as I’m concerned is more not true than true in Japan.
Some foreign workers can work for a quarter an hour and survive. I’m not entirely sure the reason is for this - their capital is weak compared to the US dollar, the people they buy food from also make similar money and therefore prices are low, what else?
Someone working for a quarter an hour in the US has no chance to survive, so they could not possibly compete with a worker on equal terms who could.
So the US worker has to be, say, 50 times more efficient to make $12.50 an hour for the same cost to productivity ratio. How could a worker possibly be 50 times more efficient than another? It’s not a matter of being willing to work hard, or educate, or retrain - there’s just no possible way they can compete. So it’s not a fair market job competition - the playing field is severely askew by economic factors I admit I don’t really understand.
How quickly could that poor person making 50 cents an hour make a car, if you gave him pile of raw materials and some hand tools? What do you think the quality of the car would be like?
Workers are worth a lot in countries where their labor is magnified by significant capital investment. An auto worker makes a good wage because his labor controls millions of dollars of equipment, and his labor is made more valuable by the quality of the design of the product he’s making, which means he’s gaining leverage from the work of designers. And the output of his labor is made more valuable by a sales team, a marketing team, efficient delivery systems, etc.
A peasant farmer in Vietnam makes $400/yr because all he can make is what he can dig out of the ground with his bare hands, or perhaps a few simple implements. A farmer in the U.S. makes significantly more because he uses modern farming techniques, drives heavy equipment, has automated systems feeding the livestock, etc.
My uncle ran a chicken farm that had several hundred thousand chickens on it at a time. He ran that farm with two helpers. All the rest was automated. Three people in Vietnam would be lucky if they could manage a few hundred chickens.
And, don’t forget…American taxpayers support a huge government bureaucracy-Washinton is packed with government hacks that do nothing but produce paper. The crushing taxes we pay to support this keeps our cost of livig high-if only we could “outsource” Washington to India!
Gotcha. That inherently makes US workers more efficient in fields where automation, transportation, etc. play a big role, right? And we’re losing that, with India and China becoming more efficient in those departments.
Sam: Huh? Given x increase in work, if it’s cheaper to hire someone than to make the big upfront outlay to automate, let’s say, then hiring someone will slow the rate of increase in output per worker, or possibly make it fall, if the increase in work is less, percentagewise, than the increase in folks doing the work. If you buy the equipment and make the big upfront outlay and avoid hiring the extra worker, then the same increase in work is done by at least one less worker than otherwise, and output per worker rises. Simple.
Is that clear? That’s what I meant up there.
And when they do, their salaries will rise to match ours. Ours won’t fall to match theirs.
But there’s more to it than just automation. There’s the corporate infrastructure around you. There’s access to markets. There’s the fact that you live in a system where capital flows readily and moves from low-productivity to high-productivity areas, ensuring that the stuff you’re making is stuff that people want more than other things you might make. There’s the quality of the roads, the power grid, the telecom infrastructure, all kinds of things.
Then there cultural effects. Europe is less productive than we are, and has a subsequently lower standard of living, because their culture seeem to drive them towards shorter work weeks, more socialized infrastructures, a tradeoff of dynamism for security, etc.
Then there can be inherent advantages. Resource wealth, lots of space meaning relatively cheap land for factories and housing, etc. Every country has its version of these comparative advantages, and how effectively they utilize them has an effect on how wealthy the citizenry will be.
I’m not saying that it’s impossible that the U.S. standard of living will fall. It might. But if it does, it won’t be because of ‘globalization’, it will be because of bad government policy or poor choices by the people. There are some danger signs in North America. The higher education system is pretty screwed up, for example.
Are you talking about productivity per worker, or aggregate productivity? If you’re talking about productivity per worker, I agree. But if you’re talking about aggregate productivity, then assuming the decision not to automate was rational because the overall cost of maintaining people to do the work was lower, then aggregate producivity will improve with that decision. Because it will free up all that capital to go areas where it will be more productive.
Well, yes, we’d have to assume it was a rational decision re capital, and yes, I’ve been referring, I thought clearly, to output per worker; the series I cited to in the St Louis Fed was labelled precisely that (well, actually, Nonfarm Business Sector: Output per hour of all persons, if you want to get really really anal. The Social Security Administration’s assumed productivity for the economy, for instance, is more comprehensive as a measure of output per worker since it includes government as well as business, and it’s always going to be lower as a result, but I don’t think that one is published as a historical series by anyone. For that matter, I don’t think aggregate productivity (= total factor productivity???) is published as a historical series by anyone either, although I might be mistaken on that one.)
Middle class workers’ salaries in the US have been held stagnant for years now, while corporate profits go up, with a resulting lowring of the standard of living. SOMETHING’S doing it. Ya don’t think it would have anything to do with the flight of US capital and jobs to other markets, do ya? Or is that just something that would never happen in a capitalist system?
Yeah, because vacations and family time are EEE-VULLLLL.
If people in other countries can produce stuff for much cheaper than US workers, won’t that have some sort of effect on US workers’ standard of living? I mean, even if their average wages go up from 25cents and hour to a colossal $4 an hour, they’re still a lot cheaper than us, right?
In 1980, U.S. GDP was 2.789 trillion dollars. Corporate profit (pre tax) was 118.9 billion dollars, or 4.26% of GDP.
In 1990, U.S. GDP was 5.803 trillion. Corporate profit that year was 311.5 billion, or 5.36% of GDP.
In 2000, U.S. GDP was 9.817 trilliion. Corporate profit that year was 551.8 billion, or 5.62% of GDP.
In 2004, the last year for which I have data here, U.S. GDP was 11.734 trillion. Corporate profit was 889.4 billion, or 7.58% of GDP.
Of course, that last number reflects higher profits as a result of an ending recession. Companies have higher profits then because in a recession they scale back costs, and when the economy comes back they have temporarily higher profits, which are then used to re-invest in inventory and capital.
There is significant variance around these numbers, due to economic conditions in any given year, as you can see on this chart . For example, corporate profit overall dropped from 1997, when it was 629 billion, until 2002 when it finally climbed back above that number. Five years of stagnant corporate profits. During that same period, GDP grew from 8.304 trillion to 10.5 trillion, meaning corporate profits as a percentage of GDP fell almost 20%. Then they began to recover.
So it’s simply a myth that corporations are making more profit while the poor starve. This myth is reinforced by people with an axe to grind always using total profit, which has indeed climbed dramatically, as a measuring stick. But of course, this is bogus. If your economy grows to 10 times the size, you would expect the total dollar of corporate profit to also grow about 10 times. So you have to compare profits against GDP. And if you do that, you’ll find that the long-term trend is almost flat. There may be a tiny increase in there in the last few years, but it’s hard to know right now because there is so much variation in the data.
At the same time, wages eat up almost 50% of GDP. So if profits fluctuate around 5-7% of GDP, then any gains or losses in profit for corporations are going to have comparatively little effect on real wages.
So why have wages dropped or stayed stagnant over the past few years? That would be the recession. This is what happens in recessions. Worker productivity drops, unemployment increases, salaries fall. Then in a recovery, corporate profits lead, then investment leading to more employment, then higher wages as worker productivity recovers.
Have a look at this Excel Spreadsheet (or if you can’t, here’s a PDF). From the chart:
Notice the declines in 1975, 1982, 1991, and 2002. See the trend? Falling wages in a recession, big gains during the recovery, then gains leveling out and slowly declining into the next recession. That’s the way the business cycle works. Since the chart above, real wages have grown about 3%. That’s slightly below the average for a recovery so far, but this has been an odd recovery because of the terrorism issue and the effects of 9/11.
No one said they were evil, but there’s a clear tradeoff between leisure time and productivity. A country that has an average of 5 weeks of vacation a year for its employees can not hope to compete economically with one that only average 3, all else being equal.
That’s exactly what I meant by a cultural difference. Some cultures have chosen to be less productive in exchange for more leisure. Fine. That’s their choice. But when their .5% GDP growth difference between a harder-working country is compounded over a few decades, you start to see real differences in their relative standards of living. This should not be a shock to anyone.
A few things: First, if they make cheaper things that we buy, then we as consumers benefit. And since workers are also consumers, their wages go farther and they see an improvement in their standard of living.
Second, if they can make stuff that cheap, delivered to our door, then there will be lots of demand for them to make more things. That will drive up the price of labor in those countries to match their productivity, until their wages accurately effect the marginal difference of doing business there.
Again, in a fully functioning market, wages are already set based on the productivity of the worker. It doesn’t matter if more workers enter the market or not - if you are productive enough to earn $30/hr, then that’s what someone will pay you.
It’s only in a situation of labor scarcity that new entries into the market can drive down the price of labor. So protected industries like unions or industries that benefit today from tariffs or other artificial boundaries may in fact find that they have to lower salaries to compete. That’s what happened in the auto industry.
But note what globalization got us in the auto industry - cars that are much cheaper and much higher quality than they used to be. That benefits everyone who owns a car, and since cars are a major expenditure and a major consumer of our wages, the improvement in auto quality and value has been a major boon to the American worker. Just as cheap Asian electronics are (or would you rather have protected the RCA Victor TV company with trade tariffs to protect those jobs? Did you ever own an older RCA TV?)
Bzzzt. The average effect over all workers’ salaries doesn’t tell us what the average effect has been specifically on ordinary, i.e., non-elite, workers. We all know that salaries in many elite occupations such as lawyer, engineer, high-level executive, etc., have been growing. But we don’t know how much salary growth in high-wage occupations is masking stagnation or decline for the ordinary worker.
(I tried to look at your spreadsheet to see if it broke down these effects by income category, but your links don’t work for me.)
Except that I was specifically addressing Evil Captor’s claim that corporate profits were skyrocketing at the expense of salaried workers. I was not arguing about specific wage changes in specific industries. That’s a different discussion.
The problem with the “equilibrium” theory is that there never has been, and never will be, economic equilibrium on a global scale, where the vast majority of everybody is living a nice middle-class life. There will always be the have, the have nots, and some people in-between. You need a LOT of have-nots to support the lifestyles of the haves.
There is no equilibrium, there are merely shifts. While India and China and other developing countries are beefing up their economies and increasing their quality of life, we are seeing a real downturn in ours. While it’s possible that some sort of “equilibrium” could theoretically occur, history certainly does not bear this out. It is much more likely that once the currently developing nations reach our current level of economic might and prosperity, we have been reduced to THEIR current level of a developing nation.
