One Giant Global Labor Pool?

Below the boiling political rhetoric, a real threat America's workers face is the potential for U.S. wages to sink to overseas levels

Americans have become increasingly worried over the past year about the lack of job growth in an otherwise strong economy, amid fears that the "offshoring" of white-collar work is a key culprit. This has helped make jobs -- those sent overseas and those not created at home -- one of the hottest issues in the 2004 Presidential campaign (see BW Cover Story, 3/22/04, "Where Are the Jobs?").

A number of economists are worried, too -- but, unlike the politicians, not about how many jobs the U.S. will create between now and November. They're concentrating instead on an aspect of international job competition that hasn't yet gotten much notice: The conceivably widespread impact, at some point, on U.S. incomes and living standards.


  It may sound premature to be concerned about that. For instance, no one has even been able to pinpoint precisely how many white-collar positions have moved overseas of late -- and many economists doubt that the number is high enough to make it a primary cause of sluggish employment gains. Even if a few hundred thousand jobs have departed for low-wage countries such as China and India in recent years, that number pales beside the routine job flux in the U.S., points out Harvard University trade economist Robert Z. Lawrence. In 2002, the latest year for which full data is available, 32.1 million jobs in the U.S. disappeared, while 31.7 million were created, according to the Bureau of Labor Statistics.

Even so, the recent transfer to other countries of so-called knowledge work -- jobs requiring lots of education and creative skills -- could be a signal of what lies ahead. For a precedent, look at what globalization has done to the pay of less-skilled U.S. factory workers over the past three decades or so. As low-wage countries developed the ability to produce things such as apparel, electronics, and textiles, Americans in those industries found themselves competing with people who'll work for a tenth of their pay. This has exerted downward pressure on U.S. factory wages that continues today.

True, the domestic economy usually plays a larger role in wage-setting than does foreign competition. That became clear during the boom of the late 1990s, when red-hot demand for employees who were in short supply more than offset the globalization effect and lifted pay of even the lowest-skilled Americans. Still, in non-boom times the downward tug from abroad is powerful. It's probably one reason average inflation-adjusted wages in the U.S. have slumped by 0.1% in the past year. Without the countervailing force of full employment in America, foreign competition rules.


  That's why the spread of global labor competition to the top of the skill ladder could be so significant. The ability of U.S. companies to find architects, engineers, programmers, and financial analysts in places like India for a fraction of what they cost at home almost certainly will create a dampening effect, sooner or later, on the pay of the 80% of U.S. employees who until now have been unaffected by such global job competition. "White-collar offshoring will make the wage outlook worse for high-skilled Americans, no question," says Brookings Institution economist William T. Dickens.

Indeed, trade theory suggests that the impact ultimately could be larger for high-skilled workers than it has been for the lesser-educated. As the world increasingly begins to look like one big labor pool, market forces should tend to move wages everywhere toward the same level for similar work, all else being equal. After all, employers won't pay more for labor in one country if they can easily get the same work done elsewhere for less. They wouldn't remain competitive for long if they did.

Problem is, all else isn't necessarily equal: Wages tend to move toward equilibrium only after productivity is factored into the equation. If American apparel workers earn $10 for making 10 shirts, their pay starts to come under pressure only when a Mexican worker can churn out the same quality shirts for less than $1 each. That has happened with apparel, so the U.S. has lost many clothes-making jobs. But U.S. skill and technology have made many factories at home more productive than their foreign counterparts -- one reason that all American factory jobs haven't shifted abroad.


  The question that white collar offshoring raises is whether American professionals are more productive than their Chinese or Indian rivals. If the answer is no, the result could be sobering. Many of the highest-skilled jobs that are fleeing offshore seem to depend more on brainpower than on capital or technology -- the last lines of defense in manufacturing. After all, a software programmer with sufficient smarts and education needs only an office, a computer, and plenty of caffeine to do a good job. So if an Indian programmer can produce as much high-quality code as an American one, wage equalization for programmers may occur at a faster pace than it has for apparel workers.

One lesson of today's new variety of offshoring is that "U.S. [white-collar] workers are being put in direct competition with similarly skilled workers around world," says economist Gary Burtless, a colleague of Dickens' at Brookings.

This should be the real worry for Americans who are anxious about the departure of white-collar jobs. At the moment, even with unemployment in the U.S. running at 6% or so, most well-educated Americans still can find a job if they want one. Even taking into account discouraged workers who have dropped out of the labor market would add only another percentage point or two to the official jobless rate.


  Yet even a reasonably modest loss of white-collar jobs to other countries could disrupt the income and living standards of many more Americans than the tens or hundreds of thousands who end up out of work. Wages are largely set by supply and demand across entire labor markets. As those become more global, two things could happen: First could come displacement -- a U.S. job goes elsewhere. Then could come the secondary effect of a U.S. labor surplus in a variety of highly skilled professions. For example, if enough programmers lose their jobs, it will swell the pool of those looking for such work in the U.S. -- driving down pay throughout the industry.

How can the U.S. avoid that? It can't entirely because globalization has a life of its own. But striving to keep American workers ahead of the pack would help. To achieve that, federal and state governments as well as Corporate America must put a much stronger focus on education and training. The U.S. has been struggling to improve its kindergarten through 12th-grade schooling for years, with only middling success so far. Plenty more needs to be done, especially for smart kids from lower-income families who still often don't get the educational and social support they need to succeed in school.

The U.S. needs to invest more in higher education, too. As the echo baby-boom generation moves through its college years, its numbers are straining the capacity of universities. Yet most states, which provide the education for 80% of all American college students, are cutting back on college spending because of fiscal crises. Unless a way is found to make college more affordable to those who are getting left behind, the U.S. could find itself on the sidelines in the increasingly intense global competition to turn out the best brains.


  The full effects of white-collar outsourcing could take a number of years to develop -- and the impact in America could be muted if overseas professionals demand compensation that starts to approach that in the U.S. And given the enduring demand for college-educated employees in the U.S., they're still likely to fare better than less-skilled workers once the economy starts to create more jobs.

Even so, an important lesson of 2004 is this: The immunity from global competition that U.S. white-collar employees have enjoyed for so long has started to vanish.

By Aaron Bernstein, a BusinessWeek senior writer who has covered labor issues for more than 20 years

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