April 29, 2003

Ending The Good Times - Exporting America’s High-Wage Jobs

During the first 27 months of the Bush administration, the U.S. economy has lost 2.6 million private sector jobs. Much of this loss is from the fall in profits and subsequent downsizing after the high-tech bust. Some lost jobs, however, are from a new development: America’s export of high-wage jobs to low-wage countries.

The collapse of the Soviet Union, China’s “capitalist road,” and privatizations in formerly socialist economies made it reasonably safe for U.S. firms to locate capital and technology abroad to employ foreign labor to produce for the U.S. market. The main incentive to take production offshore is the availability of labor at wages far below the U.S. rate.

Foreign labor can be hired at a fraction of U.S. cost, because the standard of living is much lower in China, India, and other Asian countries. These countries have a labor supply that is large relative to demand, making it possible to employ people at wages considerably less than the value of their contribution to output. The labor savings allow U.S. firms to be more price competitive, or the savings flow directly into profits, thereby raising stock prices and managerial bonuses.

When U.S. firms move production for U.S. markets offshore, not only is American labor displaced by foreign labor, but also U.S. GDP is reduced by the production that is shifted abroad, while the foreign country’s GDP increases. What was formerly U.S. domestic production becomes imports. Imports have to be paid for with export earnings or by giving up ownership of U.S. assets, such as real estate, equity in U.S. companies, or government debt.

Persistent large trade deficits, such as ours, can put pressure on a country’s currency. Fortunately for us, the U.S. dollar is the world’s reserve currency. This means that the U.S. can run large trade deficits for a long time before the deficits force dollar devaluation. If alternatives to the dollar develop, such as the European Euro or, perhaps, the Chinese currency at a future date, the devaluation in the dollar could be sharp.

As long as the dollar is strong, the U.S. cannot close the trade deficit by exporting more and importing less. The problem is exacerbated by the growth in offshore production. Every time a company closes a plant in the U.S. and moves the production to China or India, our domestic production goes down and our imports go up.

Thus, the very process that helps U.S. firms become more profitable and price competitive worsens the U.S. trade deficit, lowers U.S. employment and GDP growth and puts pressure on the value of the dollar.

The growing ability of U.S. employers to substitute cheaper foreign labor for U.S. labor is putting pressure on U.S. wages and salaries. On April 26 the New York Times reported that the real earnings of those in the top ten percent fell 1.4% over the last year. The real weekly pay for the median worker fell 1.5 percent.

Another indication of the pressure on U.S. employment is the growing number of discouraged jobseekers who have dropped out of the labor force. The 5.8 percent unemployment rate does not include those too discouraged to seek jobs.

According to U.S. Labor Department figures reported in the New York Times on April 27, four million Americans have dropped out of the labor force since March 2001. Some of these dropouts are 30-year olds formerly making $150,000 per year.

Pay cuts and a growing number of discouraged jobseekers are the inevitable consequences of U.S. firms substituting lower-cost foreign labor for American employees.

In the past American workers were protected from cheap foreign labor by American capital, technology, business know-how and education, which made Americans more productive than foreign labor.

Today, capital, technology, and business know-how are internationally mobile. These factors of production move to where labor is cheap. High wage Americans have to compete with low wage Chinese and Indians, who have the same capital and technology.

This competitive pressure will force U.S. wages and salaries down and unemployment up. America’s high standard of living makes it difficult for U.S. pay to adjust downward quickly. Consequently, many Americans are losing occupations and careers.

Manufacturing workers were the first to be hard hit. Now engineers, designers, IT workers, architects, accountants, stock analysts and radiologists are experiencing disappearing jobs. Economists, who gave assurances not to worry about the loss of manufacturing jobs because we are becoming a service economy, overlooked the ability of U.S. firms to hire foreign professional services via the Internet and to import foreign workers on H-1B, L-1 and other work visas.

As long as cheaper and equally productive foreign labor can be hired, a growing number of Americans will find their hopes and expectations frustrated. Considering the enormous over-supply of Asian labor on the global labor market, this process will continue.

A dollar collapse would shorten the adjustment period by raising the cost of both foreign labor and imported goods and services, thereby reducing the cost advantage of offshore production.

But there appears to be no way to avoid the pressure on American real incomes from the competition of foreign labor as both our currency and our labor become less valuable.

Paul Craig Roberts is the author with Lawrence M. Stratton of The Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the Constitution in the Name of Justice. Click here for Peter Brimelow’s Forbes Magazine interview with Roberts about the recent epidemic of prosecutorial misconduct.