Five truths about offshoring

Source: Reason Online

Written by Brink Lindsey

Is globalization sending the best American jobs overseas? If you get your news from CNN's Lou Dobbs, the answer is "of course" and the only real issue is how many trade restrictions should be applied to stem the bleeding.

But the recent scare about "offshoring" is just the latest twist on an inaccurate, decades-old complaint that global trade is stealing jobs and causing a "race to the bottom" in which corporations relentlessly scour the world for the lowest wages and most squalid working conditions. China and India have replaced 1980s Japan and 1990s Mexico as the most feared foreign threats to U.S. employment, and the old fallacy of job scarcity has once again reared its distracting head.

The truth is cheerier. Trade is only one element in a much bigger picture of incessant turnover in the American labor market. Furthermore, the overall trend is toward more and better jobs for American workers. While job losses are real and sometimes very painful, it is important -- indeed, for the formulation of sound public policy, it is vital -- to distinguish between the painful aspects of progress and outright decline.

Toward that end, and to counter protectionist "analysis" masquerading as fact, here are 10 core truths about global trade and American jobs.

1. The Number of Jobs Grows With the Population

As Figure 1 shows vividly, the total number of jobs in the American economy is first and foremost a function of the size of the labor force. As the population grows, the number of people in the work force grows; then market forces absorb that supply and deploy labor to different sectors of the economy.

Consider all the major events that have increased the supply of labor during the last half-century: the baby boom, the surge in work force participation by women, and rising rates of immigration after decades of restrictionist policies. Consider as well the key developments that have slashed demand for certain kinds of labor: the growing competitiveness of foreign producers and falling U.S. barriers to imports; the shift by American companies toward globally integrated production and the consequent relocation of many operations overseas; the deregulation of the transportation, energy, and telecommunications industries and the wrenching restructuring that followed; and, most important, the many waves of labor-saving technological innovations, from the containerization that replaced longshoremen to the dial phones that replaced switchboard operators to the factory-floor robots that replaced assembly-line workers to the automatic teller machines that replaced bank tellers.

Yet in the face of all this flux, no chronic shortage of jobs has ever materialized. Over those tumultuous five decades, a growing economy and functioning labor markets were all that was needed to accommodate huge shifts in labor supply and demand. Now and in the future, sound macroeconomic policies and continued flexibility in labor markets will suffice to generate increasing employment, notwithstanding the rise of China and India and the march of digitization.

2. Jobs Churn Constantly

The steady increase in total employment masks the frenetic dynamism of the U.S. labor market. Gross changes -- total new positions added, total existing positions eliminated -- are much greater in magnitude. Large numbers of jobs are being shed constantly, even in good times. Total employment continues to increase only because even larger numbers of jobs are being created.

According to economist Brad DeLong, a weekly figure of 360,000 new unemployment insurance claims is actually consistent with a stable unemployment rate. In other words, when the unemployment rate holds steady -- that is, total employment grows fast enough to absorb the ongoing increase in the labor force -- some 18.7 million people will lose their jobs and file unemployment insurance claims during the course of a single year. Meanwhile, even more people will get new jobs.

More detailed and dramatic evidence of job turnover can be found in Table 1. According to data compiled by the Department of Labor's Bureau of Labor Statistics, total private-sector employment rose by 17.8 million between 1993 and 2002. To produce that healthy net increase, a breathtaking total of 327.7 million jobs were added, while 309.9 million jobs were lost. In other words, for every one net new private-sector job created during that period, 18.4 gross job additions had to offset 17.4 gross job losses.

In light of those facts, it is impossible to give credence to claims that job losses in this or that sector constitute a looming catastrophe for the enormous and dynamic U.S. economy as a whole. It is as inevitable that some companies and industries will shrink as it is that others will expand. Localized challenges and problems should not be confused with national crises.

3. Challenging, High-Paying Jobs Are Becoming More Plentiful, Not Less

The ongoing growth in total employment is frequently dismissed on the ground that most of the new positions being created are low-paying, dead-end "McJobs." The facts show otherwise.

Managerial and specialized professional jobs have grown rapidly, nearly doubling between 1983 and 2002, from 23.6 million to 42.5 million. These challenging, high-paying positions have jumped from 23.4 percent of total employment to 31.1 percent.

And these high-quality jobs will continue growing in the years to come. According to projections for 2002-12 prepared by the Bureau of Labor Statistics, management, business, financial, and professional positions will grow from 43.2 million to 52 million, increasing from 30 percent of total employment to 31.5 percent.

4. "Deindustrialization" Is a Myth

Opponents of open markets frequently claim that unshielded exposure to foreign competition is destroying the U.S. manufacturing base. That charge is flatly untrue. Figure 2 sets the record straight: Between 1980 and 2003, American manufacturing output climbed a dizzying 93 percent. Yes, production fell during the recent recession, but it is now recovering: the industrial production index for manufacturing rose 2.2 percent in 2003.

It is true that manufacturing's share of gross domestic product has been declining gradually over time -- from 27 percent in 1960 to 13.9 percent in 2002. The percentage of workers employed in manufacturing likewise has been falling, from 28.4 percent to 11.7 percent during the same period. But the primary cause of these trends is the superior productivity of American manufacturers. As shown in Figure 3, output per hour in the overall nonfarm business sector rose 50 percent between 1980 and 2002; by contrast, manufacturing output per hour shot up 103 percent. In other words, goods are getting cheaper and cheaper relative to services. Since this faster productivity growth has not been matched by a corresponding increase in demand for manufactured goods, the result is that Americans are spending relatively less on manufactures. Accordingly, manufacturing's shrinking share of the overall economy is actually a sign of American manufacturing prowess.

Exactly the same phenomenon has played out over a longer period in agriculture. In 1870, 47.6 percent of total employment was in farming. By 2002 the figure had fallen to 1.7 percent. In the future, manufacturing will in all likelihood continue down the trail blazed by agriculture. People who bemoan this prospect don't recognize economic progress when they see it.

International trade has had only a modest effect on manufacturing's declining share of the economy. It is true that imports displace some domestic production. On the other hand, exports boost sales for American manufacturers. The U.S. has been running a manufacturing trade deficit in recent years, but even if trade had been in balance between 1960 and 2002 the manufacturing share of GDP still would have fallen sharply, down to an estimated 16 percent (as opposed to the actual 13.9 percent). Innovation creates a steady, relentless drop in manufacturing's share of economic activity.

5. Imports Have Not Been a Major Cause of Recent Manufacturing Job Losses

Employment in the manufacturing sector has taken a beating in recent years. Between 1965 and 1990, the total number of manufacturing jobs fluctuated in a stable band between 16 million and 20 million; during the 1990s, the upper limit dropped to around 18 million; but between July 2000 and October 2003 jobs plummeted 16 percent, from 17.32 million to 14.56 million.

Although the losses have been severe, the charge that those jobs were eliminated by foreign competition simply doesn't square with the facts. As shown in Table 2, manufacturing imports rose only 0.6 percent between 2000 and 2003. By contrast, manufacturing exports fell by 9.6 percent. In other words, during this period the drop in exports accounted for 91 percent of the growth in the manufacturing trade deficit.

Accordingly, imports played at best a trivial role in the recent sharp decline in manufacturing employment. The main culprit was the worsening domestic market for manufactures during the recent recession -- in particular, a big drop in business investment. Between the fourth quarter of 2000 and the third quarter of 2002, total fixed nonresidential investment fell by 14 percent. Looking abroad, it was softening overseas markets, much more than stiffening import pressure, that added further downward pressure on domestic manufacturing jobs. Consequently, anti-trade activists who cite manufacturing job losses as a reason to turn away from trade liberalization couldn't be more wrong. Expanding overseas markets and commercial opportunities for American exporters would be a shot in the arm for manufacturing employment.