The migration of jobs to foreign destinations, China included, has become a hotly debated topic in the United States and in other nations, mostly—but not only—in the industrialized world. Job migration has been blamed for a “jobless recovery” in America, with new job creation lagging behind economic recovery further than at any time since the aftermath of World War II, as well as for stalled employment growth in Mexico and in other developing economies. In fairness, job migration is not the only or even primary factor behind job losses: Productivity gains induced by technology (for example, automation), capital investment, process improvements, and enhanced skills; cyclical and nontrade related structural shifts; alternate employment in the service sector; and regulatory and tax burden are among the factors that influence the employment picture. Still, job migration in its various forms accounts for a significant portion of job losses in the U.S., as well as in other economies, and its impact will continue to loom large in the years to come.
Based on Trade Adjustment Assistance (TAA) data, 6.4 million American jobs were lost to foreign competition between 1979 and 1990—or, approximately one-third of the 17 million manufacturing jobs lost during that period, according to Lori Kletzer, a University of California–Santa Cruz economist.[1] Analyzing Department of Labor data, Bardhan and Kroll found that between 2001 and 2003, the U.S. manufacturing sector suffered a 12.8 percent decline in employment (versus a 1.4 percent addition in the service sector), but industries at risk of outsourcing experienced a steeper decline, with computer and electronic products and semiconductor and electronic components (sectors in which Chinese imports are prominent) falling at 24 and 22.9 percent below their prior staffing levels, respectively.[2] Goldman Sachs and Company estimates that 20 percent of U.S. manufacturing employment, representing one-half a million jobs and including those involving sophisticated design and technology, have moved overseas.[3]
China is not solely responsible for jobs lost to foreign competition, and—in the service sector—it is not even the primary culprit. If you are an information technology or call center worker, India would place higher than China. If you are an insurance claim processor, Irish workers may have already replaced you, only to face their own competition in the form of Polish recruits. If you are an aircraft designer, Russian replacements may be more of a concern. China is not yet a major player in services although it is already a destination for embedded software and for financial firm back-office business processes and application development, and a competitor in call centers for Japanese and Korean firms.[4] Figures compiled by McKinsey Global Institute show China to be a destination for only $1.1 billion in services versus $7.7 billion destined for India and $8.3 billion destined for Ireland (though the Chinese figures are still higher than those for Australia and Russia, among others).[5]
If you are in manufacturing, however, or are in one of the many sectors that support it directly (such as product design) and indirectly (such as engineering and consulting services), a 750 million strong Chinese workforce is not something you would want to discount in a global economy where production factors are ever more mobile. Historically more susceptible to employment shifts (for example, productivity in industry has risen much faster than in services), manufacturing has shed close to three million jobs in the U.S. in a mere three-year period. Many of those losses have little to do with foreign competition or are in sectors where employment has been declining for years. Nevertheless, job losses attributed to developing economies in general, and to China in particular, have stirred political backlash in the U.S., the European Union (EU), and Japan. China has also been blamed for job losses in developing economies like Mexico, which holds China responsible for fleeing foreign investors and for the country's shrinking share in lucrative export markets.
The vocabulary surrounding job migration can get confusing. Briefly, outsourcing is the farming out of portions of a company's value chain (such as an appliance motor) to other companies, divisions, or affiliates. Foreign outsourcing, or off-shoring (a term that may not only acquire virtual connotation but also involve the physical movement of value chain elements), is similar to outsourcing except that the work is farmed out overseas. Trade displacement is job loss due to foreign imports driving domestic producers out of the market. Trade displacement is defined and measured in terms of import competition in a focal market, but domestic workers also lose when the foreign markets to which they export shrink; additionally, they miss out on future demand at home and abroad. Outward foreign investment, another source of job loss, is when domestic manufacturers shift production to an overseas location or when a new plant is placed abroad and home country employees are not hired as a result.
There are no overarching statistics for job migration. The numbers that appear in the media typically refer only to one type of migration, (such as off-shoring or trade displacement, a usage which tends to discount the overall impact of job migration). For example, foreign outsourcing proponents point out that the phenomenon represents a very small portion of overall job loss, but rarely mention that it is only one aspect of foreign competition for jobs. In addition, some of the oft-cited estimates entail a clear downward bias. For instance, TAA statistics are based on the U.S. government program by that name, which, as Jon Honeck of Policy Matters Ohio notes, greatly undercounts job losses—to be counted, you must apply, but many workers are unaware of the program's existence and TAA does not cover service providers (even when related to manufacturing), (upstream or downstream) suppliers, or (until recently) jobs relocated to any country other than Mexico or Canada.[6] As to outward foreign investment, because its impact is difficult to gauge, it is almost never included in job loss estimates; in contrast, inward investment often is, which amplifies the under counting. The confusion surrounding the numbers makes them ripe for political hijacking by proponents, opponents, and other job migration constituencies.
What it clear is that the production flows underlying the various forms of job migration are on the rise. For instance, from 1987 to 1997, the share of foreign inputs in American manufacturing (an outsourcing measure) rose from 10.5 to 16.2 percent and in American high tech rose from 26 to 38 percent.[7] There is a general consensus that the U.S. is the leader in off-shoring with more than two-thirds of the global market, and that the flow will only grow; a recent survey of financial officers of U.S. firms found that 27 percent planned foreign outsourcing while 61 percent of those already engaged in the activity planned to expand outsourcing activities. In 2004, 86 percent of the companies DiamondCluster International polled expected to increase foreign technology outsourcing, compared to 32 percent just two years earlier.
Given the above trends, the job impact cannot be far behind; Forrester Research projects that by 2015, off-shoring will have generated a loss of 3.3 million U.S. jobs, especially in the service sector, representing more than $130 billion in wages (keep in mind that most of the impact is projected to occur in later years and that the yearly loss seems minute in a work force of 150 million). McKinsey Global Institute sees a loss of about 200,000 jobs a year through off-shoring, while Economy.com projects that the 300,000 jobs currently lost every year will double by the end of the decade.[8] By 2010, 277,000 jobs in computer science, 162,000 in business operations, and 83,000 in architecture will have moved from the U.S. to low wage countries like India and China.[9] Trade displacement—somewhat forgotten in the uproar surrounding off-shoring—continues to be a significant contributor to employment losses, averaging 270,000 jobs annually between 1989 and 2000 according to the Department of Labor Statistics.[10] A study by Policy Matters Ohio calculated that U.S. trade deficits between 1994 and 2000 removed 135,000 actual and potential jobs in Ohio alone, 100,000 of which where in the manufacturing sector. Finally, the U.S. has the largest outstanding stock of foreign direct investment, and its foreign affiliates—like those of other nations—compete with domestic jobs twice: first, by shifting company employment that would have taken place domestically; second, by exporting back to the U.S. market thereby displacing American workers employed by their domestic competitors.[11]
To put things in context, economies shed and create numerous jobs regardless of trade; this is especially true of the American economy that is more flexible than most others. Every year, millions of Americans separate from their workplace—voluntarily or otherwise—and millions of jobs are lost (many, like those of typists, never return) while millions of new jobs are created in a so-called “creative destruction” process. Job migration itself is not a one-way street; one country's outsourcing is another country's insourcing. The U.S. runs a huge deficit in merchandise trade, which destroys jobs via trade displacement but enjoys a considerable surplus in commercial services—a form of insourcing for the American economy—such as consulting or engineering services. The Institute for International Investment claims that, over the last fifteen years, insourced jobs have grown by an annual rate of 7.8 percent while outsourced jobs have grown at a rate of 3.8 percent. In 2001, according to Department of Commerce figures, U.S. companies exported $280 billion worth of services directly and $432 billion more through their affiliates; at the same time, foreign companies sold to the U.S. services in the amounts of $202 and $367 billion, respectively. U.S. exports of private services such as consulting, banking, and engineering exceeded $130 billion in 2003 while imports were lower at about $78 billion.[12]
Although outsourcing eliminates many jobs, it also creates employment. It does so directly by creating demand for employment in sectors associated with the mobility of production inputs and finished goods (such as logistics, shipping and retail) and indirectly by enhancing the competitiveness of the focal firm. Outsourcing permits a company to focus on what it does best (for example, designing and developing new products) and allows for the deployment of resources into areas of comparative advantage that, at least in developed economies, produce more value added and better paying jobs. President Bush's chief economic advisor was alluding to those benefits when he suggested that outsourcing was good for the U.S. economy, though he neglected to consider its downside potential or show sympathy for the workers displaced. In addition, workers in outsourcing destinations are often more motivated to do jobs viewed by those in an industrialized nation as less attractive.[13] Global Insight, a consultancy, argues that off-shoring lowers inflation and interest rates and raises productivity. According to Global Insight, off-shoring added a net of 90,000 jobs by the end of 2003 and will yield more than 300,000 jobs by the end of 2008 by making U.S. producers better competitors and exporters.
Imports need not result in job losses if the foreign producer decides to manufacture in the host market. While the U.S. has the largest foreign investment stock, it is also the primary destination for inward investment and was the second ranked recipient (following China) in 2003. Close to 6.5 million Americans are employed by the affiliates of foreign companies in the U.S. and, as the Organization for International Investment notes, foreign firms tend to pay more—on average—than their U.S. counterparts. Also, without imports, there would be no exports, which typically provide better than average compensation. Still, exports tend to create jobs while imports tend to destroy them, and the problem for the U.S. is that it runs an enormous trade deficit; in other words, the downside employment potential of imports outweighs the upside employment potential of exports.
Economic models such as that of the Economic Policy Institute (EPI), which capture the employment impact of both imports and exports, show a loss of three million U.S. jobs and job opportunities between 1994 and 2000—the difference between 2.77 million jobs created through exports and 5.8 million lost via imports.[14] Additionally, the jobs gained are not necessarily better than the jobs lost. Past wisdom was that the U.S. exported simple, low-paying jobs and imported high-skilled jobs. No more. Knowledge intensive jobs are now on the line. Finally, the people who lose jobs and those who gain jobs as a result of job migration are not the same people, do not work in the same industries, and do not live in the same regions. Thus, even if job migration were beneficial at the macro level, there remains the problem of those who pay the price for the supposedly common good.
The McKinsey Global Institute argues that off-shoring creates net additional value for the exporting economy. According to the McKinsey analysis (using off-shoring to India as an example), for every dollar off-shored, the U.S. economy accrues between $1.12 and $1.14 while the receiving country captures just 33 cents. The U.S. benefit comes from a combination of reduced costs (58 cents), purchases from U.S. providers (5 cents), and repatriated earnings (4 cents) for a current and directly retained benefit of 67 cents; an additional 45 to 47 cents is supposed to come from the redeployment of labor into higher value-added (and better-paying) jobs.
Since the McKinsey report does not provide the actual analysis on which the final numbers are based (McKinsey states that they are based on a conservative interpretation of historical patterns), it is impossible to pass judgment on their validity. Nonetheless, the report seems to make a number of optimistic assumptions that may not materialize. For instance, the profit repatriation component in the formula is suspect not only because foreign investment contracts in developing economies often limit profit repatriation but also because companies increasingly choose to retain earnings in higher growth markets such as China and India in order to fund further expansion. The McKinsey analysis also fails to capture the value of the capabilities that the receiving countries obtain as a result of outsourcing and that will eventually enhance their ability to compete with the origin-country producers. This benefit to the receiving country (which will eventually show up as trade displacement) challenges the largest benefit for the origin country, namely savings accrued to U.S. investors and/or consumers. McKinsey's calculation does not take into account the losses associated with loss of purchasing power by laid off workers (including loss of tax revenues), possibly because the assumption is that the gap will be more than made up by higher-paying jobs. It is not clear that this compensation will happen. And, if foreign producers end up in an oligopoly position (quite possible, given China's dominance in some product lines and ongoing consolidation of its industry), the savings to consumers may disappear. Finally, if indeed most benefits are accrued to investors and customers while most costs are born by employees, there might be a substantial social cost that is not factored into the McKinsey formula.
If—like the chairman of the Federal Reserve—you have an unfailing faith in the vibrancy of the U.S. economy, you are still left wondering about the prospects for your industry, firm, and job. The redeployment of resources that may be beneficial in the long run to the public at large presents immediate challenges to certain industries and job categories and—as a result—to individuals, families, and communities. Those affected will find little comfort in a common benefit that will not be shared by all or in the fact that (according to demographers' predictions) the U.S. will eventually be facing a shortage of employees as its population, like that of other industrialized countries, ages. Those adversely affected will also find little solace in the thought that the U.S. is not the only country to be affected or in the belief that all of this has happened before.
From the perspective of individual employees, redeployment is easier said than done. As Ron Hira of the Institute of Electrical and Electronic Engineers (IEEE) asks, how realistic is it to expect a twenty-year engineering veteran to find employment as a nurse? And how many of the 32,000 workers displaced by U.S. furniture makers over the last two and one-half years—some with highly specialized skills—are likely to find employment, and where? It is true that exports create jobs, but the U.S. happens to run an enormous merchandise trade deficit. Some say this deficit does not matter but others, including this author, disagree. Furthermore, as numerous studies have shown, the jobs created by exports seldom go to those workers displaced by imports; close to one-third of the manufacturing employees displaced by foreign competition were unable to find a job. Two-thirds of those able to find work made less than in their old jobs, and while the average earnings loss was 13 percent, one-quarter suffered earning losses in excess of 30 percent. Those who found employment in the service sector, where average wages are barely more than half the manufacturing wages and where newcomers lack know-how and seniority, suffered an especially steep drop.[15]
States like Ohio, with a high concentration of manufacturing, are especially vulnerable to job loss. Policy Matters Ohio, a nonprofit and nonpartisan research institute, input data from the TAA and the former North American Free Trade Agreement (NAFTA) TAA program into an EPI economic model that takes into account exports as well as imports. The institute's study identified more than 45,000 jobs that were lost to trade competition between January 1995 and October 2003. More than three-quarters of the losses occurred in the 1999 to 2003 period, with the manufacturing wage bill in the second quarter of 2003 down $1.21 billion from three years earlier. While China's (like any other country except Canada and Mexico) generated trade displacement was not included in the study, the Federal Reserve Bank of Chicago notes that the key sectors in the Midwest economy (such as automotive) have recently become exposed to Chinese competition, with companies like Nippert (see Chapter 6, “The Business Challenge”) hard hit. Job losses vary widely within the state; they were especially high in urban counties such as Cuyahoga (5,460 job losses) and almost nonexistent in Geauga and Seneca (10 job losses each). Still, only three of Ohio's congressional districts experienced less than 1,000 job losses. While those numbers should be counted against trade and investment related job gains, the comparison is not necessarily comforting: Bureau of Economic Analysis data cited by the Organization for International Investment suggests that 242,000 Ohioans are employed by foreign subsidiaries, but this number should be evaluated against outward foreign investment by Ohio companies for which domestic displacement numbers are unavailable. Global Insight sees Ohio gaining almost 4,000 jobs through outsourcing in 2003 and more than 13,000 by 2008, but this is a drop in the bucket given the overall job losses in the state.
Job migration is driven primarily (but by no means only) by the prospect of lowering input cost, which helps firms remain competitive, increase margins, and tap additional revenues and opportunities that would not have been pursued otherwise.[16] Cost is not comprised only of wages (in a certain product category, labor represents less than 10 percent of product cost), nor is cost the only decision criterion when it comes to investment location; tax and regulatory environment, proximity to customers, and the availability of expertise are also important when considering investment location. In essence, companies are considering three sets of factors: the conditions at the destination (such as investment incentives, tax regime); the conditions at the departure point (such as unit costs); and the costs involved in shutting down production at the origin point (such as severance) and shifting it to destination, including the expenditure involved in coordinating design, production, distribution, and sales flows. For instance, compared to other countries, shutting down a plant is relatively easy in the U.S. The U.S. employment protection legislation is the least strict of the industrialized nations, ranking a mere 0.2 on the 1999 OECD index before New Zealand (0.4), the United Kingdom (0.5), Canada (0.6), and Ireland (0.9). Most EU countries scored high: Germany scored 2.5, France scored 3.0, and Italy scored 3.3. Spain and Portugal—two countries that are in direct competition with China for some labor intensive goods (such as shoes)—had the high scores of 3.1 and 3.7, respectively. Japan and Korea scored 2.4 and 2.6, respectively.[17] Thus, shifting production from those countries is much more expensive and cumbersome than it is in the U.S., reducing the incentive to move manufacturing away (keep in mind, however, that most EU countries have much higher unemployment rates than the U.S., partially as a result of this same inflexibility).
Exhibit 7-1 shows average hourly pay in manufacturing for selected countries in 2001 (employer cost, including bonuses and all direct pay and mandated insurance). At 30(!) times the China figure, the Chinese option looks very attractive to American producers—especially those in labor-intensive industries. In fact, moving production to China can be so attractive as to nullify the advantage of automation or of higher productivity. The gap is also sufficiently attractive vis-à-vis the labor costs in other developing markets (such as Brazil), even those that benefit from proximity to the American market (such as Mexico). But, is this gap enough to make a difference in industries where labor is not the key cost factor? For instance, according to the International Trade Commission (ITC), direct labor constitutes a mere $22 of the $469 total cost of manufacturing a TV set in the U.S., with raw materials (also much cheaper in China) constituting the main expense at $392. However, when you add a factory overhead cost of $55 (which also has a labor cost component) to direct labor, the combined dollar amount represents more than 15 percent of the final product cost (not including distribution and sales expense). Given the huge pay differential between China and the U.S., this cost impact is significant though less so when you compare China and Mexico—which, combined with transportation costs, explains why some makers of large appliances remain in Mexico while increasingly using Chinese components.
Source: Bureau of Labor Statistics; China Statistical Yearbook.
Figure 7-1. Hourly Pay in Manufacturing 2002 (a)
The magnitude of the wage gaps suggests that currency alignment—even at the high-end estimates of 40 percent—will hardly change the equation for labor-intensive industries in the industrialized world, though it might make a difference in technology-intensive sectors and developing economies. While U.S. manufacturing productivity is five-times higher than productivity in China, the difference is not enough to compensate for a thirty-times higher wage differential. Also, the productivity gap is likely to narrow as more foreign multinationals open up shop in China and as Chinese firms invest in capital equipment and upgrade employee skills (generally speaking, productivity improvements on the low end are easier because they involve existing machinery and proven techniques).
China's labor cost advantage extends to technology-related jobs. In 2002, the average salary for a Chinese engineer was only $8,135—a 16 percent increase from 2001, but still eight-times cheaper than average U.S. levels. The Wall Street Journal cited internal IBM documents showing a total hourly cost (inclusive of benefits) of $12.50 for a Chinese low level programmer versus $56 for a comparable U.S. employee, or $24 versus $81 for a project manager (the figures reflect internal company accounting rather than market prices but are indicative of the company's perceived gap, which normally would take into account differences in productivity and transaction costs).[18] While wages for skilled engineers in China have been rising as a result of intense competition for talent, they are kept in check by the increasing supply of newly minted engineering graduates (almost half a million annually) and a continuous influx of technical talent from rural cities. Chinese competition may have already been exerting downward pressure on salaries across the region; average salaries for engineers across Asia were down $200 between 2001 and 2002. In the U.S., the IEEE blames foreign competition for the unprecedented seven-percent unemployment rate registered among electrical and electronic engineers in the first quarter of 2003.
Most economists view job migration as a part of a natural progression involving redeployment of resources, assets, and capabilities and consider this progression beneficial to all economies. Over centuries, nations competed on efficiencies generated by advances in machinery and production techniques on the one hand and cheaper labor (often a function of immigration waves) on the other. “The loss of manufacturing jobs is just another chapter of technological progress in our economy,” said Christopher Meyer, the former director of the Center for Business Innovation, to the conference board.[19] The U.S. (in this view) is simply ahead of the curve, experiencing structural transformation from an industrial to a service economy, akin to the transformation from agriculture to manufacturing a century earlier (see Exhibit 7-2). According to the Bureau of Labor Statistics, the number of Americans employed in the manufacturing sector today is about the same as it was more than half a century ago—except that manufacturing employment now represents barely 11 percent, versus more than one-third of nonfarm employment back then. At the same time, though its share in the economy continues to go down, the real value of manufacturing has increased.
Source: Historical Statistics of the United States: Colonial Times to 1970. Susan Carter, Scott Gartner, Michael R. Haines, Alan Olmstead, Richard Sutch, Gavin Wright, eds. Cambridge University Press (2001).
Figure 7-2. Changes in U.S. Employment by Sector (1800-2001).
In an oft-cited study, Joseph Carson of Alliance Capital Management suggests that the loss of two million manufacturing jobs in the U.S. between 1995 and 2002 is part of a general trend and that other nations suffered a greater loss. China, for one, has lost 15 percent of its manufacturing employment during the same time period.[20] The numbers are accurate, but do not tell the whole story. First, as noted by the National Association of Manufacturers (NAM), China has actually added 2.5 million manufacturing jobs in the more recent 2000-2003 period. Second, as later acknowledged by Alliance Capital, the China statistics mask two divergent trends: manufacturing job losses in the inefficient and noncompetitive state sector, which has been going through a precipitous decline (from a 34 percent share of manufacturing employment in 1995 to a little over 20 percent in 1999, according to Chinese data), and job gains in the more efficient private and foreign invested enterprises that are much more competitive in world markets. The OECD notes that China, as a whole, has a much higher proportion of people employed in industry than nations at a similar level of development.
Erica Groshen and Simon Potter of the Federal Reserve Bank of New York observed that “the failure of employment to rebound during the 2001 recovery reflects an unusually high concentration of structural changes resulting in permanent shifts in the distribution of workers throughout the economy.” Reasons for the structural changes include prior overexpansion, monetary and fiscal policy that has reduced cyclical change, and new management strategies focused on leaner staffing models. Trade was not included as a variable in the study, though Groshen believes that it was responsible for only a modest portion of the structural change.[21] Groshen views the U.S. as an innovating country, which explains why it sells more in developed countries than in developing markets like China and agrees that having a manufacturing base is important for retaining innovative capacity (she believes that the U.S. has lost very little of this base). While Groshen holds that we have seen significant structural change, some economists go much further. For instance, both Sung Won Sohn (chief economist of Wells Fargo) and Stephen Roach (chief economist of Morgan Stanley) see globalization as bringing about a “paradigm shift,” a structural change that is unprecedented and believe that its impact is still difficult to grasp.
America, then a young colony with a labor cost advantage, got textile jobs at the expense of then-costly England. Japan did the same in the later nineteenth and early twentieth century only to be followed by—in their turn—Korea, Taiwan, Singapore, and Hong Kong. On their heels came Malaysia, Indonesia, and the Philippines. The countries that lost textile jobs typically moved to bigger and better things, with some—like the U.S.—moving to the top of the table and parlaying their early economic gains into capability building in other, more advanced areas. While there were exceptions (for example, textile machinery gave England an edge over cheaper India in the nineteenth century), this was by and large the historical pattern. Is there anything new about China? The answer is unequivocally “Yes.” China's enormous labor reserve, with pay scales radically lower in the hinterland than on the coast and in urban areas (the average income on the farm, where more than half of the Chinese population lives, is less than $25 per month), creates the equivalent of a country within a country; so, instead of Vietnam or Bangladesh replacing China as a labor intensive haven, Hunan will replace Guangdong. In the meantime, there are 150 million or so rural migrants in temporary employment and at least 30 million underemployed state-enterprises workers which cap wage increases. Given its population growth (China is now relaxing its one child policy), China needs to create almost 15 million new jobs annually just to stay level and stave off an increase in the unemployment rate. Despite the demand for talent, half of 2003 college graduates in China are still looking for work. Finally, China—which comes to the global stage at a time when communication and logistic advances as well as global market liberalization facilitate the integration of production networks and supply chains globally—has no intention of playing the role of the low cost, low value-added role that the American economists have assigned to it for long. This means that it will soon be competing for the higher value-added jobs that were once considered the birthright of the industrialized world.
Calculating China's impact on the job market in the U.S. and other countries is a difficult exercise. In addition to the undercounting involved in the TAA numbers and (until recently) the lack of country specification (other than Canada and Mexico), establishing a correlation between trade and job loss or gain is tenuous because it is impossible to control all other contributing factors. Estimates regarding China's impact on U.S. manufacturing employment consequently vary. For instance, Lont Yongtu, a former vice-minister in China's Ministry of Foreign Trade and Economic Cooperation, suggested that only 10 percent of U.S. unemployment was attributable to foreign trade.[22] Jonathan Andersen, chief Asia economist at investment house UBS argues that low wage competition from Asia accounts for no more than one-twentieth of manufacturing losses in the U.S. and Japan.[23] In contrast, a Minnesota-state backed economic development group estimates that China was responsible for a significant portion of the more than 38,000 manufacturing jobs lost in the state since 2000.[24]
An interpretation of Lori Kletzer's results (published by the conservative Institute for International Economics) in light of China's exports to the U.S., suggests a potentially pronounced impact. Kletzer estimates bigger displacement impact in manufacturing—where Chinese exports are concentrated—than in services, especially when accompanied by lower import prices (a hallmark of Chinese imports). Manufacturing employees displaced from import competing industries where Chinese imports are rising fast (such as apparel, textiles, and electrical machinery) are less likely to find employment than employees displaced from other manufacturing lines. Kletzer also reports that earning losses are greater for displaced employees who fail to secure reemployment in their own industry, a more likely scenario for those competing in areas where Chinese imports are quickly cornering the market (such as clothing and electronics). Finally, the employees in the industries already involved in head-to-head competition with China (such as textiles, apparel, and leather products)—older, female, and with little education—also happen to be the most vulnerable in terms of reemployment and earning losses.
An especially somber assessment of China's job impact comes from Robert Scott of the Economic Policy Institute (EPI), a liberal think tank. Scott calculated the overall impact of China trade on U.S. employment based on the forecast of 80 percent growth in the U.S. trade deficit with China between 1999 and 2010 (a conservative assumption in light of recent trade figures), assuming full Chinese compliance with the Permanent Normal Trade Relations Agreement (an optimistic assumption). The analysis shows a net loss of almost 700,000 jobs in the 1992 to 1999 period and a projected loss of almost 900,000 jobs in the 1999 to 2010 period; total job losses fall at close to 740,000 and 1,150,000, respectively (see Exhibit 7-3).
Source: Scott, Robert. China and the States. Briefing Paper, the Economic Policy Institute (2003).
Figure 7-3. Total Job Losses from Growing U.S. Trade Deficits with China, 1992-2010 (Millions of Constant 1987 Dollars in Units of 1,000).
Not surprisingly, Scott projects that manufacturing will bear the brunt of China-generated job losses with over 740,000 net job losses, 85 percent of the estimated total. No sector is forecasted to gain jobs, though selected players will. For instance, though agriculture as a whole will lose jobs, Scott notes that agribusiness concerns will benefit because they earn from both exports and imports of agricultural products. The labor-intensive sector, already in decline, will see a dramatic acceleration in job losses. Labor Department figures show that textile mill employment in the U.S. declined from 477,700 in January 1993 to 284,000 in December 2002. Business Week reported a loss of nearly 50,000 U.S.-based garment and textile jobs in 2003, but the carnage is expected to get much worse. The Union of Needletrades, Industrial, and Textile Employees (UNITE) forecasts a loss of half a million textile and apparel jobs once the multifiber agreement expires in 2004; the Textile Manufacturers Institute puts the number at 630,000 between 2004 and 2006 alone. The Institute projects that, assuming a 65 percent market penetration of Chinese products, roughly two-thirds of U.S. workers employed in the textile trade and its supporting industries may lose their jobs.
Source: Scott, Robert. China and the States. Economic Policy Institute (2003).
Figure 7-4. Job Losses by Industry under the China-World Trade Organization Proposal 1999-2010.
Because of their industry correlates, job losses will also vary by state. As shown in Exhibit 7-5, future losses will be dramatically higher in states that rely on manufacturing (such as Ohio), versus those that are more dependent on agriculture (such as Iowa) or that are in other sectors of the economy (such as Louisiana). Hawaii, which relies heavily on tourism and federal spending, may actually benefit from China's rise if an influx of Chinese tourists materializes and if it picks up military expenditure should China stir up trouble in the Taiwan Strait.
Source: Scott, Robert. China and the States. Working Paper, Economic Policy Institute (2003).
Figure 7-5. Job Losses by State under the China-WTO Proposal (1999-2010).
States with a significant number of apparel-related jobs will be hit especially hard. The Textile Manufacturers Institute estimated job losses ranging from 85,000 in North Carolina to 25,000 in Georgia, for a total of 630,000 U.S. jobs. Particularly grim are the prospects of apparel employees in states like North and South Carolina, where overall manufacturing unemployment already exceeds 15 percent. Those workers face dim reemployment prospects not only in their own industry but also in the manufacturing sector as a whole and, hence, face grim prospects for employment and—should they find a job—for earning retention.
As bad as the impact will be in the developed world, it will be much worse in developing nations, especially those that rely on the apparel industry for much of their foreign earnings. As noted in Business Week, a Chinese clothing worker makes, on average, $73 per month versus $300 in Honduras. Wages in Indonesia ($75 a month) and the Dominican Republican ($102, but discounted by a distance advantage) are more comparable, yet those countries are still projected to suffer enormous job losses; for instance, the Dominican Republic is forecasted to lose one-third of its 119,000 garment workers.[25] This is because the Chinese now employ advanced production techniques and can extract the benefits of agglomeration with end product and supporting industries networked in the same locale. While the impact will be mitigated by recent U.S. trade initiatives, it is doubtful that Central American and Caribbean nations will remain competitive in the apparel sector for long.
As a kid, your parents may have prodded you to finish your meal because there was a hungry child in China or India who would love to have it. In the coming years, you may hear from your boss that a Chinese or Indian employee is hungry for your job. So, how vulnerable are you? Let's start with a broad brush: If you are in manufacturing, there is a better than 50/50 chance that your job is at risk. The manufacturing sector has been shedding jobs for years, and now offers fewer jobs than it did more a generation ago despite a sizable increase in the population base. The trends that kept a lid on employment in this sector—productivity, technological improvements, and foreign competition—are all accelerating. As a result, U.S. manufacturing has lost 13 percent of its workforce over the last three years alone. In labor-intensive and noncomplex assembly jobs, the writing is already on the wall. The Federal Reserve Bank of New York's Erica Groshen and Simon Potter found a significant job decline in industries where China is a major exporter to the U.S.: apparel (–9.14% in the most recent recession), electronics and electrical equipment (–12.04%), leather and leather products (–12.5%), and furniture (–8.16%). All indications are that job losses in those segments will pick up speed in the years ahead. For example, if you are a textile mill worker in North Carolina, your prospects for retaining employment beyond 2008 (when special World Trade Organization (WTO) provisions allowing remedy against import surge expire) are not at all promising.
The impact of China implies not only a deepening but also a broadening of job losses. Kletzer reports that the share of white collar employees among those displaced in the U.S. manufacturing sector has been on the increase, from 29.9 percent in the 1979 to 1989 period to 35.3 percent in the 1990 to 1999 period. The proportion is likely to increase as China, India, and other developing nations offer skilled staff at a fraction of domestic cost and as technological developments and logistic advances facilitate off-shoring. Off-shoring proponents like to point out that the phenomenon currently accounts for a minute portion of job displacement but they rarely note that it joins other forms of job migration, such as trade displacement, which together account for a significant portion of overall job losses in the economy. These proponents of off-shoring also fail to note that these channels (off-shoring, trade displacement, and so on), too, see growing white-collar losses. It is the flight of skilled, white-collar jobs—especially those that are knowledge intensive, such as research and development—that is shaking the belief in the overall benefit of job migration.
At this junction, it is outsourcing rather than the much more significant trade displacement that is the focus of the political debate surrounding the loss of jobs to foreign competition. Just how charged this issue has become was illustrated when President Bush's chief economic advisor belatedly expressed understanding with those losing jobs to outsourcing and when the president's nominee for manufacturing czar was forced to withdraw when it was found that his own company has outsourced to China. The vast majority of interviewees in a DiamondCluster survey were concerned with political backlash regarding outsourcing, but employers are apparently not concerned with the reaction of their workers: 80 percent of the respondents in a Gartner survey said that their off-shoring plans will not be affected by potential opposition from workers.
Policy initiatives devised to tackle job migration range from the punitive (such as limiting U.S. government agencies' help to off-shoring firms or levying a higher tax rate on off-shoring companies) to the supportive (such as providing funds for retraining, broadening the definition of jobs under TAA) and the administrative (such as reducing the number of visas issued to foreign workers with special skills). Most of those initiatives are likely to face stiff opposition on the part of business groups that have become dependent on foreign production and outsourcing. Another set of ideas is designed to protect those adversely affected: This includes proposals by Kletzer and Robert Litan (of the Brookings Institute) to require earning loss insurance and by Glenn Hubbard (the former chairman of the Council of Economic Advisors under Bush), to establish “reemployment accounts.”[26] Policy initiative notwithstanding, employees will do best by understanding the nature of the coming changes and their impact.
Should you steer clear of the labor-intensive sectors of the economy? Not necessarily. According to Bardhan and Kroll, the jobs that are likely to withstand outsourcing are those that require either face-to-face contact with a customer or social networking requirements, do not involve pay that would be much lower in an alternate location, have high setup barriers, and/or cannot be easily communicated via technology. Some of those jobs have already proven their resilience, such as personal services (0.00% in the Groshen and Potter data) and legal services (+2.24%). Jobs such as being a waiter or firefighter require workers to be present and are, therefore, relatively safe. In contrast, some personal-service jobs seem safe from outsourcing but can be staffed by imported workers. Even construction, one of the last strongholds of unionized America, is on the line: new construction techniques (such as modular assembly) mean that a portion of the job can be done overseas. While the healthcare sector is growing (+2.09% in the Groshen and Potter data), the market for nurses is rapidly becoming global. Medical services such as record transcription are being outsourced and patient mobility is growing despite regulatory and insurance hurdles. The same is true for airline pilots: Preparing for a strike standoff, Hong Kong-based Cathay Pacific has lined up mainland Chinese crews and planes to fill in at a much lower cost structure. While certification and union agreements prevent that from occurring in most other countries, such a scenario is not farfetched once the aviation market liberalizes further.
In contrast, supply chain jobs such as those in shipping, logistic services, and distribution will benefit from increased movement of goods and services across borders. Education jobs, such as trainers and professors, will be needed to train Chinese employees (including the most dreaded job of training Chinese or Indian workers to take your place) and to keep the innovation edge. Tourism is also likely to greatly benefit from an influx of Chinese tourists. Finally, there will be opportunities in the Chinese labor market: Shanghai's Liberation Daily recently reported that 1,200 Japanese managers and engineers applied for work in the city.[27]
In its 2004-2005 Occupational Outlook, forecasting job growth between 2002 and 2012, the U.S. Department of Labor lists thirty occupations as offering the brightest prospects. Of those, five are in healthcare (such as nurses, home health aides) and four are in education (such as teacher assistants). Next, however, are three food service categories (such as waiters). Jobs as security guards, janitors and repairmen, and sales clerks and truck drivers subsequently follow—not exactly the twenty-first century jobs that you may have had in mind. Only three of the jobs are managerial (including managerial analysts) and only two are technologically intensive (including computer service engineers).
Indeed, perhaps the most dramatic employment challenge of the Chinese century is that education is no longer the insurance policy against trade displacement and other forms of job migration it once was. As the IEEE's Ron Hira noted in his testimony before the House Small Business Committee, in the thirty years in which the Department of Labor has collected such statistics, the unemployment rate for electrical and electronic engineers has never exceeded that of the general unemployment rate. That is, until now. Much of the U.S. technological edge rests on an influx of talent from abroad that in the future may seek other venues and, despite great efforts, the U.S. educational system is not exactly a model of readiness for the new technology frontiers: According to the National Center for Educational Statistics, the math test scores of 13-year-olds in the U.S. rank 31 out of 35 participating nations and provinces—ahead only of the French population of Ontario, Jordan, two Brazilian provinces, and Mozambique. China ranks first, Taiwan third. Truly, the U.S. has some great universities, but it would be a dangerous mistake to take the current innovation lead for granted. The arrogant comment of MIT's career services director that “the jobs that are being outsourced aren't the jobs that (its) students are seeking”[28] may come back to haunt us all.
Take, for example, electronic chips. Interviewed in Fortune magazine, Lin Stiles of the executive search firm Linford Stiles and Associates, declared that for high tech firms, “…product design and marketing really have to stay in the U.S. [and]…aren't getting outsourced.”[29] She should not be so sure. Israeli scientists already do groundbreaking chip development for Intel and may do so for others in the future. China, in the meantime, is offering significant tax rebates for companies to locate chip design on its soil. Hewlett-Packard already designs computer servers in Singapore and in Taiwan, and there is no reason to believe it will not eventually do so on the mainland. And, as far as marketing is concerned, why is it preordained to stay in the U.S. when many markets abroad (such as China) are growing faster? In an age of global supply chains, the organizational “brain” will be staffed with people who understand other cultures and environments. American diversity helps greatly in this respect, but business education that is increasingly devoid of any country specific information does not.
The increasing complexity of the global labor environment suggests that we do not take old assumptions for granted. In the words of Wachovia Securities chief economist John Silvia, “…because of the globalization of the labor market, the relationship between economic growth and employment is different this time than it has been in the past…in other words, the models are permanently broken.”[30] China will play a central role in how the new models turn out, and we'd better be prepared.