Thursday, March 11, 2004
The jobs conundrum
Part of the reason outsourcing has hogged so much media attention in the United States is an outsized fear of losing jobs and an even more outsized dependance on data thrown up by firms like Forrester (whose 3.3 million in 10 years is the most oft-quoted number by opponents of outsourcing). One needs to remind oneself of some of the predictions made these very same firms during the height of the dot-com boom. I certainly think some of these fears are exaggerated (and some are not) and the Democrats in particular are simply adding fuel to the fire in an election year. I have to wonder how John Kerry (who I support, just for the record) will wriggle out of some of his own statements if he were to become president. Surely, he doesn't believe he can actually stop companies from cutting costs? In this context, KAW had an interesting analysis on what may be happening vis-a-vis this jobless recovery. It also touches on the the long-term structural change that I have posted about in the past (the first time structural change or the fear of it *may* be affecting white-collar workers etc).
The phenomenon known as ‘offshoring’ accounts for a far smaller percentage than some politicians and pundits claim. “The fears are far greater than the facts,” says Ravi Aron, Wharton professor of operations and information management, who has studied the phenomenon for five years. “You hear all these fantastic projections, but the real numbers are puny compared with the normal churn in the economy.” A key driver of that normal churn is worker productivity. As the economy emerges from a recession, companies push employees harder – leaning on them to work more efficiently and longer – and that manifests itself as more output per worker. Greater productivity lets employers postpone hiring until they are confident that consumers will buy what the additional workers produce.
Offshoring can only take U.S. companies so far. Aron says his research shows that it has risks and thus limits. And that means U.S. employers can’t just keep moving operations abroad. Eventually, they will have to start hiring, assuming the economy continues to grow. “If American Express outsources 3,000 jobs, you might think, ‘Where will it stop?’ But AmEx can’t outsource 300,000 jobs because of the risks.”According to Aron, “There is operational risk – the likelihood that a process will break down when you move it abroad. There is strategic risk – when you transfer a process to a third party, it can behave in ways that are opportunistic. It might cut costs at your expense, for example. And then there is what I call composite risk – if you outsource too many jobs, you erode the capabilities within your firm.” For these reasons, Aron has found that companies typically will limit their outsourcing to about 8% to 10% of their total positions.
Even so, Wharton management professor Steffanie Wilk wonders about the long-term implications of the trend. Initially, low-skill jobs were the ones sent to foreign firms. “But now we are seeing better jobs, even high-tech jobs, going overseas.” That creates an obstacle for less-skilled American workers. Before, they could take call-center jobs, for example, prove themselves, acquire more skills and advance to better-paying positions. But with call-center jobs leaving the country, “there’s not the ladder that you can climb up,” she says. “We lose the chain of jobs that allowed less-skilled workers to get better skills.”
In other words, the U.S. economy may be undergoing some sort of deeper change – the tectonic plates of the economy may be shifting, permanently altering the employment landscape. These sorts of shifts, often hastened by technology, happen in economies, and when they do, they can cause dislocation. “Maybe what we are seeing is fundamental transformation, but so what?” asks Paul Tiffany, a business historian and Wharton adjunct professor. “In the late 19th century, we saw the same kind of change when the U.S. textile industry migrated from the Northeast to the South. Southern workers got lower wages and were non-union and that was perceived as more conducive to business.” Former textile centers such as Lowell, Mass., were hollowed out, as textile makers moved their operations to places such as Greensboro and Burlington, N.C. Over time, though, other industries developed in the Northeast to fill the void.
The difference today is that the job shifts are across national, rather than state borders, Tiffany says. But the underlying process of capital finding the lowest costs is the same and in the long run, he suggests, benefits everyone.
Didn't Keynes say something about the long-run? :))
The phenomenon known as ‘offshoring’ accounts for a far smaller percentage than some politicians and pundits claim. “The fears are far greater than the facts,” says Ravi Aron, Wharton professor of operations and information management, who has studied the phenomenon for five years. “You hear all these fantastic projections, but the real numbers are puny compared with the normal churn in the economy.” A key driver of that normal churn is worker productivity. As the economy emerges from a recession, companies push employees harder – leaning on them to work more efficiently and longer – and that manifests itself as more output per worker. Greater productivity lets employers postpone hiring until they are confident that consumers will buy what the additional workers produce.
Offshoring can only take U.S. companies so far. Aron says his research shows that it has risks and thus limits. And that means U.S. employers can’t just keep moving operations abroad. Eventually, they will have to start hiring, assuming the economy continues to grow. “If American Express outsources 3,000 jobs, you might think, ‘Where will it stop?’ But AmEx can’t outsource 300,000 jobs because of the risks.”According to Aron, “There is operational risk – the likelihood that a process will break down when you move it abroad. There is strategic risk – when you transfer a process to a third party, it can behave in ways that are opportunistic. It might cut costs at your expense, for example. And then there is what I call composite risk – if you outsource too many jobs, you erode the capabilities within your firm.” For these reasons, Aron has found that companies typically will limit their outsourcing to about 8% to 10% of their total positions.
Even so, Wharton management professor Steffanie Wilk wonders about the long-term implications of the trend. Initially, low-skill jobs were the ones sent to foreign firms. “But now we are seeing better jobs, even high-tech jobs, going overseas.” That creates an obstacle for less-skilled American workers. Before, they could take call-center jobs, for example, prove themselves, acquire more skills and advance to better-paying positions. But with call-center jobs leaving the country, “there’s not the ladder that you can climb up,” she says. “We lose the chain of jobs that allowed less-skilled workers to get better skills.”
In other words, the U.S. economy may be undergoing some sort of deeper change – the tectonic plates of the economy may be shifting, permanently altering the employment landscape. These sorts of shifts, often hastened by technology, happen in economies, and when they do, they can cause dislocation. “Maybe what we are seeing is fundamental transformation, but so what?” asks Paul Tiffany, a business historian and Wharton adjunct professor. “In the late 19th century, we saw the same kind of change when the U.S. textile industry migrated from the Northeast to the South. Southern workers got lower wages and were non-union and that was perceived as more conducive to business.” Former textile centers such as Lowell, Mass., were hollowed out, as textile makers moved their operations to places such as Greensboro and Burlington, N.C. Over time, though, other industries developed in the Northeast to fill the void.
The difference today is that the job shifts are across national, rather than state borders, Tiffany says. But the underlying process of capital finding the lowest costs is the same and in the long run, he suggests, benefits everyone.
Didn't Keynes say something about the long-run? :))
