|
|
"Outsourcing"
the U.S. Economic Recovery
by Alan Levenson
T. Rowe Price Chief Economist
The "outsourcing" of service sector jobs has emerged as a controversial issue in the current political season, in large measure because it is occurring in an environment of slow U.S. job growth.
In fact, however, outsourcing has not played a key role in the relatively delayed and moderate labor market response to two years of solid recovery in GDP (gross domestic product) growth. A strong productivity trend at home has been much more influential. Nonetheless, despite the rhetoric, the pace of productivity growth is moderating and labor's share of output is on the rise.
In current usage, outsourcing refers to U.S. businesses' use of foreign workers or firms to produce services - such as call-center customer support and computer programming - that had heretofore been the domain of domestic workers.
To be sure, the improvement and dissemination of computing and communications technologies has increased the mobility of such jobs, just as increased transportation capabilities have spread manufacturing capacity around the globe. Yet, there is a counterpart trend in an open economy: the U.S. economy and its workers benefit from "in-sourcing," through which foreign firms purchase services from U.S. entities.
Indeed, the net flow of business services exported by the U.S. to foreign customers (in-sourcing) relative to those imported from foreign producers (outsourcing) is positive and reached a record $50 billion last year. More to the point of the current debate, it is notable that employment by U.S. firms providing professional and technical services - composing just 5% of all nonfarm employment but including many of the outsourcing "poster children" - has risen by 79,000 over the past six months. This accounts for 20% of the net job growth since employment growth resumed last September.
Were it not for the overall weakness of the U.S. job market, outsourcing would not be such a hot news topic. The irony is that outsourcing does not explain the weakness in overall job growth relative to the strength of the economy as measured by GDP.
When demand is outsourced by U.S. purchasers - whether it is a retailer opening a call center in India, a manufacturer building a plant in Asia close to a target market, or consumers here buying Italian wine - imports are boosted at the expense of domestic production. Since imports are a drag on GDP, outsourcing should be associated with weaker economic activity than would otherwise be the case. Thus, outsourcing cannot explain the coincidence of strong output and weak job growth in the U.S.
I believe that strong productivity has caused the delay in domestic hiring and imposes a tighter constraint on U.S. employment prospects than does increased access to foreign labor and facilities. In agriculture, for example, imports rose to 80% of the value of U.S. output last year from 50% in 1994, and one might blame increased foreign penetration for the 20% drop in employment that occurred over the same period. But that's only part of the story.
Because farm sector productivity expanded at a 7% annual rate over that interval, employment would have fallen by 14% even if imports' share of domestic demand had remained unchanged.
Similarly, apparel manufacturing provides evidence that competitive pressures are predominantly home grown. Over the past four years, domestic producers' productivity gains outstripped U.S. consumer demand for clothing, indicating that industry employment would have fallen even without any imports.
In this vein, telephone customer service representatives in the U.S. have less to fear from their counterparts in Bangalore than from their employers' efforts to develop touch-tone and Web-based customer service technologies.
Overall, productivity has expanded at a 4.8% annual rate since the fourth quarter 2001 recession trough. I do not believe this pace can be sustained. In part, it is a typical pro-cyclical surge when demand recovers after a downturn. It may also reflect the intense and persistent desire of business to extract efficiencies and restore profit margins in an environment in which it's difficult to raise prices.
Rather than extol the long-term virtues of productivity growth, I'll just note that this impetus for rising output is not inexhaustible. Productivity growth has moderated in recent quarters, and against a backdrop of sturdy demand, labor's contribution to meeting production needs is reviving as productivity's role recedes.
Nonfarm payrolls have grown for six straight months, and longer weekly hours herald a better pace of job growth to come. Sectors relatively resistant to foreign competition are leading the way. Health care, education, construction, and many retailing sectors have been adding jobs. Even manufacturing activity is moving closer to a resumption of job growth.
Durable goods employment is off its lows for the cycle, not only because of a global recovery in demand for capital goods and sustained domestic interest in housing-related goods, but also because recent productivity gains and ongoing product improvements bolster these firms' competitive positions in global markets.
From a business cycle perspective, the emphasis on productivity by business was a rational response to rising demand in a hyper-competitive sales environment. Yet no matter where the (presumably elevated) productivity growth trend settles, an accommodative Federal Reserve policy can, by its nature, engineer growth in demand that exceeds the economy's underlying production capacity (productivity growth plus labor force growth. This should reduce unemployment.
Moreover, this positive trend is bolstered by home and asset price appreciation that outstrips personal income, enabling consumers to purchase more than they can produce (assuming that incomes reflect the value of production).
Over the longer term, outsourcing and in-sourcing will be enduring features if an increasingly global economy. Yet the loss of jobs and output in affected sectors is likely to be small compared with the shifts driven by innovation and productivity gains at home. Productivity has underpinned growth in the value of agricultural and manufacturing sector output even though employment has declined, sustaining inflation-adjusted income growth (a rising standard of living) for employees in those industries.
Meanwhile, employment prospects in construction, health care, education, finance, insurance, and real estate, professional and business services, wholesale distribution, and transportation offer opportunities at higher average wage rates than are available in manufacturing.
To be sure, a more rapid pace of innovation and subsequent commoditization of production may increase the speed with which industries, and the employment opportunities they provide, rise and fall. For employers and policymakers, commitments to training, retraining, flexibility, and continuing education will bolster prospects for employee tenure and higher rates of employment.
America is not predestined to watch economic activity migrate abroad or wages fall to the prevailing global level. Both can be offset by the development of new products and increased productivity of existing production. These trends will continue to garner support from our relatively advanced public and private sector infrastructure, rising levels of educational attainment, deep and innovative capital markets, and innovative culture.
Finally, keep in mind that if a consumer class develops in China (to choose only the most prominent example), then the global source of production that currently has us quaking in our boots will evolve into global source of consumption that has us licking our chops.
Editor's Note: Alan Levenson is Chief Economist for T. Rowe Price, www.troweprice.com.
|
|
