Now for the next shake-up in the global labour market
Sep 24th 2011 | from the print edition
AS THE DELHI metro snakes its way out of the crowded south of the city the scene turns more rural, with the occasional water buffalo, schoolgirls playing hopscotch outside a village school and crudely built brick houses. But by the time the train draws up to the suburb of Gurgaon, the cacophony of urban India is heard once again.
Twenty years ago Gurgaon was farmland. Now it is a sea of villas, shopping malls, office blocks and apartment buildings with names like Beverly Park and Oakwood Estate. The metro hoardings advertise the best places to buy officewear or the Lovely Professional University’s record for getting people into jobs. On a busy Friday the roads are crammed with honking Tata Sumos, the local sports-utility vehicle. Many drivers are on their way home after a night working the American shift.
Gurgaon is a global centre for outsourcing back-office services. Here and in other such hubs around India, routine office work and data analysis are carried out for a variety of corporate customers, many from rich countries (so their tasks have been offshored as well as outsourced). The work can be sophisticated: crunching the profit-and-loss numbers of listed companies for Wall Street analysts, or teasing spending patterns from the data gathered by supermarket tills.
Wages in Gurgaon are a small fraction of those of a back-office clerk in Newcastle or New York. That lowers costs for consumers. But it also raises anxiety among workers about low pay and a drain of jobs to cheaper locations. The range of tasks that can be outsourced and offshored is constantly expanding.
The notion that trade kills jobs is based on the false premise that there is a fixed amount of work to do. The world’s leading economies have been ceding jobs to low-income rivals since the industrial revolution. The cotton industry in Britain was in the vanguard of that transformation but soon faced competition—first from New England, then from America’s South. The mills have largely disappeared and the spinning and weaving jobs replaced by better-paid ones. As the division of global labour becomes ever more fine-grained, small tasks rather than whole industries move abroad. Trading partners share the efficiency gains. The world is better off, even if some individuals lose out.
Many more to go
This sort of gradual restructuring is not new, and neither is the job insecurity that stems from it. But anxiety about offshoring has risen, for three reasons. First, jobs are already scarce because the hangover from recessions caused by financial crises lasts longer than that from other sorts of downturns. Second, China and India between them have around 2.5 billion people, so the potential for further offshoring from the rich world is immense. Third, advances in computing and communications allow for a wider range of jobs to be shifted across borders.
These last two factors mean that offshoring will be a hugely disruptive force, says Alan Blinder, a professor at Princeton University. A recent study carried out in America with a Princeton colleague, Alan Krueger, found that a quarter of the workers interviewed considered their work potentially “offshorable”. This figure includes all manufacturing jobs, as goods are readily traded across borders. But it also covers many occupations that used to be thought safe from foreign competition.
Any service job that can be delivered down a wire without any diminution in quality is offshorable, reasons Mr Blinder. That means high-paying jobs in accountancy, financial analysis or computer programming are at risk. Jobs that involve face-to-face contact or require the worker to be present are safer: think of taxi drivers, plumbers, police officers or janitors. Mr Blinder makes a distinction between personal and impersonal services. Only the latter are offshorable. A contract lawyer or radiologist is vulnerable to offshoring; a divorce lawyer or family doctor isn’t.
Yet not all the jobs that can be offshored will be. Even in manufacturing the savings on labour from offshoring are often outweighed by other cost considerations. Low-value bulky goods, such as bricks or bottles, tend to be made close to where they are consumed because transporting them is expensive. Cars are also mostly made in the countries where they are sold.
High-tech manufacturing relies on a skilled labour force working closely with design teams. There is little cost advantage to offshoring for small batches of goods or where fast delivery to local customers is important. Economies of scale mean industries are “sticky”: Britain’s cotton industry, for instance, did not go into serious decline until the 1960s even though wages were high.
The alarm over the threat to jobs from India and China echoes the anxiety about Japan’s rise in the 1970s and 1980s. America’s economy has survived the shake-up of its steel, electronics and car industries, as have other rich countries. The scale of the challenge is large but may not be so much larger than in the past. A quarter of American jobs in 1970 were in manufacturing and hence potentially offshorable. Many did move offshore but were replaced by jobs in service industries.
A lot also depends on what happens in emerging markets. If China can successfully switch from export-led growth to domestic sources of demand it will create more opportunities for American exports. As China and India become better off the wage gap with the rich world will narrow and the pace of offshoring will slow. And as technology opens up more sorts of work to cross-border trade it will create openings for rich-world economies whose comparative advantage is in services.
If services become more tradable that will be good for America’s workers. But it might also exacerbate the growing wage divide within its own labour market. Economic theory suggests that trade with emerging markets creates a wage premium for the skilled workers in rich countries. The world’s division of labour is determined by the relative abundance of skilled and unskilled workers. Rich countries have more of the former, so specialise in traded goods with a high skill content. Poor countries have more of the latter, so concentrate on low-skilled work. Skilled workers in rich countries benefit from trade, but the wages of the less skilled suffer from foreign competition.
Most studies so far have found that trade explains only a small part of the increase in income inequality in America since the 1980s. The decline of trade-union power and below-inflation increases in the minimum wage also played a role. But most of the growing inequality is probably due to technological change which makes a college education more valuable—in much the same way that trade does, in fact. It is possible that the effect of trade on wages is more significant than those studies have found. Much of the stuff that China makes is no longer produced in the rich world, so it is difficult to establish a direct link.
That may also be because the data are not detailed enough to capture the effects on relative wages within industries, says Josh Bivens of the Economic Policy Institute, a think-tank in Washington, DC. Only those with a four-year college degree (perhaps a quarter of America’s workforce) are clear winners from growing trade, reckons Mr Bivens.
The most striking feature of rising wage dispersion is not the wider gap between the skilled and unskilled but the bigger slice that goes to a tiny elite. The share of income claimed by the top 0.1% of earners increased from 2% in 1970 to 8% by 2007, according to research by Emmanuel Saez of the University of California, Berkeley, and Thomas Piketty of the Paris School of Economics. Much of this trend, says Harvard University’s Richard Freeman, is explained by stock options, which are counted as part of pay. “This goes back to something we have thought of as old-fashioned: capital versus labour,” says Mr Freeman.
Waiting for intelligent robots
There are dangers in extrapolation. The recent rapid growth rates in emerging markets are unlikely to be sustained. And perhaps the wage premium paid to workers with a college degree will shrink again, for reasons unrelated to trade. Scarce and expensive skilled labour is often a spur to invention. Before the industrial revolution the hand-spinning of raw cotton into thread was the main bottleneck in the production of cloth. It took six spinsters to feed each handloom used to weave thread into cloth. The introduction of mechanised spinning (of the sort carried out at Quarry Bank Mill) changed that, creating a dearth of hand-weavers. Then power looms destroyed the wage premium for hand-weaving, so the Luddites destroyed some of the looms in response. It is conceivable that advances in artificial intelligence might spell the end of the wage premium for skilled workers, too.
But for the immediate future skilled workers in the rich world still seem to have the best prospects. College-educated workers are more likely to be able to switch jobs in response to outsourcing than those with little education. And the rewards for those with jobs that compete in the global market for tradable services are likely to be higher than for those in low-skill personal services—though the risks of losing their jobs are also greater.
The anxiety about offshoring has obscured another change in the economic landscape that will bring jobs to rich countries: the rise of the emerging-market multinational.