Every 15 years or so, we’re told that America’s economy faces a grave danger because of the loss of jobs to foreign companies.
Forty-five years ago, low-wage workers in European countries were the threat.
Thirty years ago, Americans feared the loss of jobs to cheap competition from Japan.
Thirteen years ago, Ross Perot howled about the “giant sucking sound” as U.S. manufacturing jobs supposedly disappeared across the Rio Grande to Mexico.
Today, pundits are anxious about white-collar knowledge jobs being off-shored to countries like India.
But in each of the past instances, America responded with ingenuity, higher productivity, innovative business practices, and technological advances. And inevitably, something happened in each of these countries that was supposed to beat the U.S. because of its low wages: Wages went up.
Consider what happened in the aftermath of NAFTA. During the 1992 presidential campaign, Ross Perot warned that U.S. jobs would head south of the border if the trade agreement passed. But more than a decade later, it’s clear that the passage of NAFTA didn’t hurt American workers.
At the same time, it didn’t help Mexican laborers either, as The Atlantic Monthly reported. Today, real wages in Mexico are lower than they were in 1994. NAFTA did create jobs in Mexico’s export-manufacturing sector, but it destroyed an equal number of jobs in other sectors, like agriculture, where U.S. exports of crops like corn have wiped out 1.3 million Mexican jobs.
If NAFTA had succeeded in moving American jobs to Mexico, we would expect the tide of northward immigration to have slowed. After all, if the jobs were going to Mexico, America would no longer be the land of plenty. But, of course, that hasn’t happened ? not even close. In fact, migration from rural Mexico to the United States grew by 183 percent from 1994 to 2002. As they arrive to find jobs in the U.S. Mexicans are supporting families who are living in far less prosperous conditions south of the border. Mexicans working in the U.S. sent $14.5 billion to relatives in their homeland in 2003, according to a report by the Pew Hispanic Center. As the Atlantic notes, this sum far exceeds all the foreign aid that the U.S. sent to Mexico, and it’s nearly as much money as Mexico gained from selling its oil.
Moreover, even though Mexico’s real wages are lower than they were pre-NAFTA ? they fell from 23 percent of the average U.S. wage in 1975 to 11 percent in 2001 ? they have risen enough so that they no longer look attractive to American corporations looking to off-shore their production. In fact, according to The Nation, the average manufacturing wage in Mexico, at $1.50 an hour, is six times the average Chinese wage of 25 cents an hour (based on 2001 data).
Mexico’s experience makes perfect sense because of a fundamental pattern that always plays out in a global economy:
At first, a region enjoys a competitive advantage based on cheap labor. That was the case in Europe in the 1950s, in Japan in the early 1970s, in Mexico in the 1990s, and in India today.
Then, the cheap labor attracts foreign demand. When that happens, the competition for the labor pool intensifies. Wages go up. And the region loses its cost advantages.
We can see this happening in India today. India’s computer programmers are relatively cheap. They earn an average of $20,000 a year, compared with $80,000 for American programmers. But India’s knowledge workers are also scarce, so their wages are rising rapidly.
With a population of 1 billion, India appears to have an abundance of workers. But only relatively few of its people have the skills and education needed to fill outsourced jobs, as Milton Ezrati, senior economic strategist for Lord, Abbett, & Company, points out in a recent commentary. In fact, India already has a shortage of nearly a quarter-million workers, according to a report by the National Association of Software and Services Companies, an Indian trade organization.
Predictably, whenever the demand for workers is greater than the supply, the cost of labor climbs. Wages of India’s IT workers are already going up by roughly 15 percent annually, according to Hewitt Associates. That makes off-shoring work to that country less of a bargain every year.
Looking ahead, we foresee four developments arising from the off-shoring trend:
First, India will cease to be a low-cost provider of IT work for many companies by the end of this decade. Ezrati writes that the wage gap between workers at home and abroad must be 300 to 400 percent to make off-shoring a cost-effective strategy. Currently, the gap is at 400 percent. With Indian wages rising by 15 percent each year, expect India’s cost advantage to vanish within a few years.
Second, some companies will continue to use increasingly expensive off-shore IT services to fill the holes in their domestic workforce. Off-shoring will remain a way for companies to compensate for the growing shortage of skilled IT workers in the U.S., but it will no longer be used primarily as a way to save money.
Third, American companies will resist the temptation to off-shore key functions, regardless of whether cost savings exist. Finance, risk management, budgeting, forecasting, and cash management are simply too crucial to a company’s competitiveness to be delegated to foreign providers, according to two recent surveys of executives by the consulting firms Accenture and Bain & Company.
Fourth, by 2010 off-shoring of services will no longer be considered a threat to American jobs. Just as in every previous point in history when the U.S. was confronted with cheap foreign labor, the threat will pass as wages go up overseas. Then, inevitably, a new region will emerge to offer lower costs, until the pattern repeats.
References List : 1. The Atlantic Monthly, March 2004, “That Giant Sucking Sound.” ⓒ Copyright 2004 by The Atlantic Monthly Group. All rights reserved.2. The Nation, December 31, 2001, “A New Giant Sucking Sound,” by William Greider. ⓒ Copyright 2001 by The Nation. All rights reserved.3. To access Milton Ezratis commentary “A Few Additional Points on Offshoring/Outsourcing,” visit the Lord Abbett website at:www.lordabbett.com/usa/home.jsp
