"Global Labor Arbitrage" Dismantling America
July 28, 2004, 05:00 AM
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In the current economic recovery, low pay, low skill jobs account for twice the normal amount of job growth reports Stephen Roach, chief economist for Morgan Stanley (More Jobs, Worse Work New York Times, July 22).

Mr. Roach attributes the low quality of new US jobs to globalization:

"Under unrelenting pressure to cut costs, American companies are now replacing high-wage workers here with like quality, low-wage workers abroad. With new information technologies allowing products and now knowledge-based services to flow more easily cross borders, global labor arbitrage is likely to be an enduring feature of the economy."

"What are we going to do about it?" he asks.

As long as most economists and elected officials remain in total denial, we are unlikely to do anything about it.

Desirous of demonstrating that globalization is creating more US jobs than it is destroying, normally sound economists are making fundamental analytical and empirical errors.

For example, Matthew J. Slaughter, a professor at Dartmouth, recently concluded that during 1991-2001 "for every one job that US multinationals created abroad in their foreign affiliates they created nearly two US jobs in their parent operations."[Globalization and Employment by U.S. Multinationals: A Framework and Facts," Daily Report for Executives, Bureau of National Affairs, [Subscription] March 26, 2004]

This would be good news, if true. Unfortunately, in measuring the growth of US multinational employment Mr. Slaughter failed to take into account the two biggest forces driving multinational employment during that period.

Multinational employment grew because multinationals acquired many existing smaller firms and because many firms became multinational by establishing foreign operations for the first time.

In brief, Mr. Slaughter overlooked the real reasons more people work for multinationals and mistakenly concluded that the employment growth was due to stimulus to US employment caused by outsourcing.

Matthew Spiegelman, an economist with the Conference Board, is similarly afflicted with a case of the denials as he stumbles through the data.

Mr. Spiegelman wants to show that there is not much difference between remuneration in service jobs and in manufacturing jobs. To this end he compares hourly wages and concludes that manufacturing pay is only slightly higher.

As Charles McMillion of MBG Information Services pointed out to me, Mr. Spiegelman thus overlooks substantial differences in compensation that stem from manufacturing employees working more weekly hours and from a substantially larger share of manufacturing employers providing pension and health care benefits.

Economists don't seem to understand globalization, and that's a puzzle. Referring to low foreign wages, Dartmouth's Mr. Slaughter writes:

"Low wages do not necessarily mean low production costs abroad. This is because low wages are mainly a signal of low worker productivity. In much of the world, workers are less productive than their American counterparts because they enjoy less access to the training, tools, ideas, and broad market institutions that are the foundations of high productivity."

Once upon a time this was true. That was when US employees, working with US capital, technology and business know-how, were producing products to compete in import and export markets against products made by foreign workers, who worked with less capital and inferior technology.

Those were the bygone days of international trade.

Today when a US multinational moves a factory from Ohio to China, the Chinese labor works with the same capital and technology that formerly employed Americans in Ohio.

The Chinese workers are no less productive. Yet, their wage is far lower.

Dartmouth's Mr. Slaughter is wrong to attribute low Chinese wages to low productivity. The wages are low because of the enormous excess supply of labor that overhangs the Chinese labor market.

Morgan Stanley's Stephen Roach is correct to differentiate between free trade and "global labor arbitrage." US employers are substituting cheaper foreign labor for US labor in the goods and services that they supply to markets at home and abroad.

As a result, the US labor force is being redirected to nontradable services. Charles McMillion's monthly reports (MBG Information Services) based on the Bureau of Labor Statistics payroll data show that job growth during the current recovery is concentrated in domestic services that cannot be outsourced.

A country whose work force is concentrated in nontradable domestic services is a Third World country.

Will economists stay in denial until the US reaches this destination?

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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