Re: Into thin Air, Fast Company, April 2004
America’ Middle Class has traditionally been composed of higher paying manufacturing (blue Collar) workers, white collar (service) workers, and professionals. Manufacturing is rapidly exiting the Country and as the article so explicitly describes, so are service jobs and eventually many professional jobs as well. Those who have lost their jobs are finding their future downwardly mobile as they find positions paying half or less their previous employment; record bankruptcies and foreclosures tell their story of survival on a day-to-day basis. Those who still have their jobs find unrelenting downward pressures on both wages and benefits. The net result in the not-so-distant future is the disappearance of the American Middle Class. The extinction of this class that has been the glue of the American social fabric for over two centuries does not bode well for this country. The effect of globalization and multinationals with no country loyalty (IBM can no longer be considered an American firm but a global one who seeks global advantages no matter what cost to any nation state) is the lowering of global wages to the least common denominator (As India will soon learn to its amazement when ‘higher-paying’ Indian jobs start moving to Filipinos and Indonesians who will work for half to third). As for globalization, beware of what you asked for, you just might get it, and we did!
Paul Herbig
Angola, Indiana
Re: Into thin Air, Fast Company, April 2004
I wept as I read the personal stories of those who have lost their jobs to offshoring. What a waste of human resources. We tell our youth “Get a college Education in a good field and you will get a great job”. They do and the result is throw-away workers, discarded and forgotten. No safety net exists for them and as they exhaust their savings and retirement funds, they scurry around looking for work, any work. Economists and global trade proponents say they need to be retrained and educated further. But these disposable workers said, almost to the person and correctly so, “In What? What should I train for that will still be here when I graduate?” And we do not have an answer for them.. What should they do? Be a retail clerk at Walmart without benefits? An health care nursing assistant making minimum wage? So goes the Baby Boomers, the most educated generation in the world, little good it did them.
Paul Herbig
Angola, Indiana
Re: Into thin Air, Fast Company, April 2004
The Information Technology (IT) industry in the U.S. has begun an inevitable death spiral. Offshoring and high unemployment in the field has caused wages to drop dramatically. They will continue until an equilibrium with overseas counterparts has been reached (probably in low 40s). The best and brightest of our youth will see this tumble and correctly calculate the industry holds no future for them and they will go elsewhere (The number of Computer Science majors have fallen annually over the last 3 years and will continue to drop). One day the multinationals will look around and comment with delayed justification, “See. We can’t find enough good IT workers. Not enough American students are entering this field so we have no choice but to bring in foreign workers and offshore these jobs.”. And so the vicious circle has claimed yet another American industry.
Thursday, July 26, 2007
Big Boxes
One more time: Walmart:
Does not create vast amounts of new jobs, they merely replace well paying small business jobs with low paying no benefit retail jobs.
Big Boxes does nothing to preserve or add to the image or flavor of a small town, in fact it destroys retail centers, downtowns, and any resemblence of ambivance.
Productivity is a result of paying its people low wages and forcing suppliers to provide ever lower cost goods by offshoring all production. Any low prices are paid for by American jobs and thousands of impoverished vendors
Is not a good community resource, avoiding any civic responsibility it can, and leaving in its wake additional crime activity and insecurity
Does not create vast amounts of new jobs, they merely replace well paying small business jobs with low paying no benefit retail jobs.
Big Boxes does nothing to preserve or add to the image or flavor of a small town, in fact it destroys retail centers, downtowns, and any resemblence of ambivance.
Productivity is a result of paying its people low wages and forcing suppliers to provide ever lower cost goods by offshoring all production. Any low prices are paid for by American jobs and thousands of impoverished vendors
Is not a good community resource, avoiding any civic responsibility it can, and leaving in its wake additional crime activity and insecurity
The Walmartization of America
Walmartiztion of America Part II
By Paul Herbig
.
Robert Reich’s editorial column on the future of work in America in the Friday, December 26, 2003 Wall Street Journal indicated the economic trends were evolving to a two class system: professionals and “personal service workers.” I would rename with two classes: the Haves and the Have-littles. Conspicuously absent is the Middle Class. Traditionally, the middle class contained higher paying union or skilled blue collar jobs (going to China), professionals (accountants, administrative, information technology—going to India), or small business owners (being squeezed out by Walmart and other retail conglomerates). The events Reich describes (and which indeed are occurring even as I write this) and the economic trends that appear to be in process, predict the end of the American Middle Class as we know it.
The Have-littles, those in the personal services (e.g.,retail, hotel/restaurant, other personal services), earning little more than minimum wage (as more and more fall into this category, the over-supply of workers will reduce wages for all) can not possibly hope to ever escape poverty status; even with two full-time breadwinners, they will still not eek out an acceptable living. If this sounds uncomfortably like the economic curve in lesser developed countries (a small upper class with most of the resources, a vast lower class with little of the resources, and a small, almost nonexistent middle class), that is indeed the end result.
As one reader replied, confirming this bleak future is already upon us: “My wife has worked at our local Wal-Mart for a few years and doesn't see much future for those who are working there. The associates who work the floor are paid a tad over minimum wage, have no benefits unless they purchase them, have one paid holiday per year, work an average of 34 to 36 hours per week. Not exactly the kind of job to raise a family on, or supplement one's retirement.” And the future will only have more such workers and families.
A Forrester Research study estimated that over the next 15 years some 3.3 million U.S. service sector jobs would be sent abroad. Economists at U.C. Berkeley say as many as 14 million programming, accounting, paralegal and other service jobs are at risk of being offshored. (Goldman Sachs & Co. says an estimated 200,000 IT-related service jobs have left the United States in the last three years.). Perot, in 1992, may have been right about the his famous job loss statement, just a decade premature and turning to the right (India, China) instead of straight South.
I believe this tremendous growth of offshoring is the result of convergence of several factors:
1) A labor market (high unemployment) that provides companies with upper hand in almost any personnel related activity. How else can you account for the passiveness in which employees knowingly and willingly train Indians as their replacement. If this were 1999 or before, those same employees in this same scenario would have given their employers the Bronx cheer on their way out the door and not humiliated themselves. The ultimate end to all this is wages for developed countries to converge with those from the developing countries: i.e., it will stop when our programmers are paid the same as those from India. A generally considerable lessening of the quality of life will be the inevitable result for all developing countries, but particularly noticeable for the U.S. .
2) Wal-mart’s rise to dominance, its obsession on costs, and its controlling behavior upon is suppliers, is forcing those suppliers to offshore to meet the prices Walmart allows them to charge. The automotive companies are also beginning to exhibit this behavior. A total focus on costs to the exclusion of relationships or any other long term conditions can only brew bad (I never have trusted beancounters to have long term interests in mind).. Those jobs that the employees at Wal-Mart did and the pay of the employees once provided middle class wages but with Wal-Mart in town the pay of these people drops to near poverty level in wages. And this isn’t just within the Wal-Mart store it also happens in Wal-Mart’s competitors that have to compete with Wal-Mart. We are spiraling towards the lowest common denominator. Wal-Mart, makes no apologies for its role in the spiralling down of employee wages and benefits. Wal-Mart, obviously, has de-emphasized the popular "Made in America" campaign that founder Sam Walton launched in the 1980s (and it was not coincidental that only after Sam’s death that the global corporate philosophy now seen presented itself—Sam would be turning in his grave if he saw what was being done now by the company that bears his name.)
This obsession on costs has spread to other American corporations. Electronic Data Systems Corp., founded by Ross Perot but no longer run by that noisy patriot, now recruits $1.25-an-hour tech workers in India and sheds their $10-an-hour counterparts in EDS's home state of Texas. Wall Street brokerages including Morgan Stanley and J. P. Morgan Chase & Co. are shifting from New York to India the ground-floor stock-research. Both India and China are already well-known to recruiters from Intel Corp. and Microsoft Corp. Carrier Corp. will relocate production to Asia from Syracuse, N.Y. No inducement or threat could now save Syracuse's 1,200 Carrier jobs, a company spokesperson said, "unless they are going to pick up New York State and move it."
3) Global marketplace and trading allows total international competition. Now with the internet, you can compare suppliers from all around the globe instantaneously. Now the Indians and Chinese can be given equal attention and low-cost takes on an international dimension. One major concern here is national security. As we lose our manufacturing to China and technology skills to India, our dependence on these nations become ever more critical. What happens in a time of national crisis or war? Will we still have enough manufacturing capability and professional skills nationally to fall back on? Is it only me or do others see an analogy of our giving India software expertise to that of selling scrap iron to Japan during the 30s?
The Wal-Mart economy knows the price of everything and the value of nothing - certainly not of a well cared-for workforce, or of a full-employment economy, or of competitive marketplaces that have not yet succumbed to the predations of a single omnipotent enterprise. And who's to blame for that? The consumer: you and I. At Wal-Mart, the customer is king, everyone else be damned: competitors, employers and even the domestic manufacturing base..
One suggested solution to the Walmartization of America dilemma is wage insurance as a possible prescription for those displaced by globalization. This takes care of providing a living wage but it does nothing to provide jobs or the self-respect that goes with them. Andy Grove, the corporate conscience and former CEO of Intel, has taken up the cause, warning that something drastic must be done to prevent the bulk of new information technology jobs from being shipped overseas. But Grove's remedies, including bigger university R&D budgets, tax cuts and tort reform, would do nothing to curb domestic job loss, only strengthen the balance sheet of domestic enterprises still in the hunt for expedient cost-saving devices.
My own solution is more to the point towards saving jobs.
1) All governmental entities (local, state, federal) to require any business doing business with them to provide made in American goods, to certify the goods and services were produced in America by workers eligible to work in the U.S. This should require enough work to counter some of the effects as well as provide the cushion for national security the next time it is needed. .
2) I would think a company would use "Made in America" as a marketing strategy and be strong enough to make it work. Walmart before Sam’s death did that and prospered. Why wouldn’t another company or many such corporations? If consumers were to purchase because of that factor, others would follow.
3) .Not a consumer boycott of foreign made goods but more positively, a consumer procott movement that buys only American made goods or encourages the purchase of such goods, perhaps even as far as having the vendors of each product specify what percentage was American produced. This could result in a boycott of retailers (one comes to mind) that do not sell American-made goods.
4) Establish a “Made in America” Political Party. The Democrats are missing a sure opportunity this year by not addressing this issue. Only John Kerry has raised it. By making this issue the fundamental difference between himself and the other Democrats, let alone Bush and the Republicans, a national debate on the issue could be established.
Everything Wal-Mart does - particularly its low prices - is done in the name of slavish devotion to consumer demand. And every day, millions of Americans ratify Wal-Mart's strategy by shopping there. As long as the consumer does not care, the end result is obvious. Only when the consumer rebels and decides that a strong country, a strong economy, jobs for himself and his neighbors, and a positive future is more important than saving a buck, will the trend turn-around. Until then, the consumers have bought into a devil’s bargain for low prices.
By Paul Herbig
.
Robert Reich’s editorial column on the future of work in America in the Friday, December 26, 2003 Wall Street Journal indicated the economic trends were evolving to a two class system: professionals and “personal service workers.” I would rename with two classes: the Haves and the Have-littles. Conspicuously absent is the Middle Class. Traditionally, the middle class contained higher paying union or skilled blue collar jobs (going to China), professionals (accountants, administrative, information technology—going to India), or small business owners (being squeezed out by Walmart and other retail conglomerates). The events Reich describes (and which indeed are occurring even as I write this) and the economic trends that appear to be in process, predict the end of the American Middle Class as we know it.
The Have-littles, those in the personal services (e.g.,retail, hotel/restaurant, other personal services), earning little more than minimum wage (as more and more fall into this category, the over-supply of workers will reduce wages for all) can not possibly hope to ever escape poverty status; even with two full-time breadwinners, they will still not eek out an acceptable living. If this sounds uncomfortably like the economic curve in lesser developed countries (a small upper class with most of the resources, a vast lower class with little of the resources, and a small, almost nonexistent middle class), that is indeed the end result.
As one reader replied, confirming this bleak future is already upon us: “My wife has worked at our local Wal-Mart for a few years and doesn't see much future for those who are working there. The associates who work the floor are paid a tad over minimum wage, have no benefits unless they purchase them, have one paid holiday per year, work an average of 34 to 36 hours per week. Not exactly the kind of job to raise a family on, or supplement one's retirement.” And the future will only have more such workers and families.
A Forrester Research study estimated that over the next 15 years some 3.3 million U.S. service sector jobs would be sent abroad. Economists at U.C. Berkeley say as many as 14 million programming, accounting, paralegal and other service jobs are at risk of being offshored. (Goldman Sachs & Co. says an estimated 200,000 IT-related service jobs have left the United States in the last three years.). Perot, in 1992, may have been right about the his famous job loss statement, just a decade premature and turning to the right (India, China) instead of straight South.
I believe this tremendous growth of offshoring is the result of convergence of several factors:
1) A labor market (high unemployment) that provides companies with upper hand in almost any personnel related activity. How else can you account for the passiveness in which employees knowingly and willingly train Indians as their replacement. If this were 1999 or before, those same employees in this same scenario would have given their employers the Bronx cheer on their way out the door and not humiliated themselves. The ultimate end to all this is wages for developed countries to converge with those from the developing countries: i.e., it will stop when our programmers are paid the same as those from India. A generally considerable lessening of the quality of life will be the inevitable result for all developing countries, but particularly noticeable for the U.S. .
2) Wal-mart’s rise to dominance, its obsession on costs, and its controlling behavior upon is suppliers, is forcing those suppliers to offshore to meet the prices Walmart allows them to charge. The automotive companies are also beginning to exhibit this behavior. A total focus on costs to the exclusion of relationships or any other long term conditions can only brew bad (I never have trusted beancounters to have long term interests in mind).. Those jobs that the employees at Wal-Mart did and the pay of the employees once provided middle class wages but with Wal-Mart in town the pay of these people drops to near poverty level in wages. And this isn’t just within the Wal-Mart store it also happens in Wal-Mart’s competitors that have to compete with Wal-Mart. We are spiraling towards the lowest common denominator. Wal-Mart, makes no apologies for its role in the spiralling down of employee wages and benefits. Wal-Mart, obviously, has de-emphasized the popular "Made in America" campaign that founder Sam Walton launched in the 1980s (and it was not coincidental that only after Sam’s death that the global corporate philosophy now seen presented itself—Sam would be turning in his grave if he saw what was being done now by the company that bears his name.)
This obsession on costs has spread to other American corporations. Electronic Data Systems Corp., founded by Ross Perot but no longer run by that noisy patriot, now recruits $1.25-an-hour tech workers in India and sheds their $10-an-hour counterparts in EDS's home state of Texas. Wall Street brokerages including Morgan Stanley and J. P. Morgan Chase & Co. are shifting from New York to India the ground-floor stock-research. Both India and China are already well-known to recruiters from Intel Corp. and Microsoft Corp. Carrier Corp. will relocate production to Asia from Syracuse, N.Y. No inducement or threat could now save Syracuse's 1,200 Carrier jobs, a company spokesperson said, "unless they are going to pick up New York State and move it."
3) Global marketplace and trading allows total international competition. Now with the internet, you can compare suppliers from all around the globe instantaneously. Now the Indians and Chinese can be given equal attention and low-cost takes on an international dimension. One major concern here is national security. As we lose our manufacturing to China and technology skills to India, our dependence on these nations become ever more critical. What happens in a time of national crisis or war? Will we still have enough manufacturing capability and professional skills nationally to fall back on? Is it only me or do others see an analogy of our giving India software expertise to that of selling scrap iron to Japan during the 30s?
The Wal-Mart economy knows the price of everything and the value of nothing - certainly not of a well cared-for workforce, or of a full-employment economy, or of competitive marketplaces that have not yet succumbed to the predations of a single omnipotent enterprise. And who's to blame for that? The consumer: you and I. At Wal-Mart, the customer is king, everyone else be damned: competitors, employers and even the domestic manufacturing base..
One suggested solution to the Walmartization of America dilemma is wage insurance as a possible prescription for those displaced by globalization. This takes care of providing a living wage but it does nothing to provide jobs or the self-respect that goes with them. Andy Grove, the corporate conscience and former CEO of Intel, has taken up the cause, warning that something drastic must be done to prevent the bulk of new information technology jobs from being shipped overseas. But Grove's remedies, including bigger university R&D budgets, tax cuts and tort reform, would do nothing to curb domestic job loss, only strengthen the balance sheet of domestic enterprises still in the hunt for expedient cost-saving devices.
My own solution is more to the point towards saving jobs.
1) All governmental entities (local, state, federal) to require any business doing business with them to provide made in American goods, to certify the goods and services were produced in America by workers eligible to work in the U.S. This should require enough work to counter some of the effects as well as provide the cushion for national security the next time it is needed. .
2) I would think a company would use "Made in America" as a marketing strategy and be strong enough to make it work. Walmart before Sam’s death did that and prospered. Why wouldn’t another company or many such corporations? If consumers were to purchase because of that factor, others would follow.
3) .Not a consumer boycott of foreign made goods but more positively, a consumer procott movement that buys only American made goods or encourages the purchase of such goods, perhaps even as far as having the vendors of each product specify what percentage was American produced. This could result in a boycott of retailers (one comes to mind) that do not sell American-made goods.
4) Establish a “Made in America” Political Party. The Democrats are missing a sure opportunity this year by not addressing this issue. Only John Kerry has raised it. By making this issue the fundamental difference between himself and the other Democrats, let alone Bush and the Republicans, a national debate on the issue could be established.
Everything Wal-Mart does - particularly its low prices - is done in the name of slavish devotion to consumer demand. And every day, millions of Americans ratify Wal-Mart's strategy by shopping there. As long as the consumer does not care, the end result is obvious. Only when the consumer rebels and decides that a strong country, a strong economy, jobs for himself and his neighbors, and a positive future is more important than saving a buck, will the trend turn-around. Until then, the consumers have bought into a devil’s bargain for low prices.
The Walmartization effect
The Walmartization of America
Walmart. You either love it (consumers) or hate it (suppliers and competitors). But all agree it has changed America. It is the world’s largest company with $ 237B in sales (2002) and with 1.45 millions of employees. It is the proverbial 800 pound gorilla that wrecks everything in its path. Its obsession with low prices (Everyday Low Prices) appears to have taken it on a path similar to an analertizic teenager: less and less without regard to the final ominous outcome.
Walmart imported $ 10B of goods from China in 2002, making it the largest single importer. But that is only half of the story. Its relationship with suppliers is legendary: if you want to do business with us, you do it on our terms and we will tell you the price you are going to charge. Take it or leave it. Most take it because the company is their single largest customer (amounting in some cases to one-third or more of their business) and not to would be giving the market to one’s competitor. But there is a dark side of prosperity: Walmart is so insistent on perpetual cost decreases, companies may have record revenues and little to none or negative profits: what you make lose per unit you make up in volume. If you can’t meet the cost requirements of the Gorilla, they will take their business elsewhere. So you do what you must do: outsource to China to meet their cost requirements. If Walmart imported $B of goods, you can be certain its suppliers at least matched that number if not far exceeded it.
Which brings us to the question of the day: What good is Everyday Low prices if no one has any jobs to provide the income to pay for the cheap goods? Henry Ford’s breakthrough of paying his workers $5/day was a shrewd way of providing a ready market for his cars: now his workers could afford to buy one. Walmart seems to have taken the other tact: emphasize costs above all else and let the chips fall where they may!
For the past two years we’ve seen a jobless recovery with growth, record productivity, profits but no jobs. What is happening with Walmart, the Walmartization of America, is happening nationally. Record productivity is great for the economy and the company but not for those workers whose jobs have forever been lost. Outsourcing jobs to China and India saves money, creates profits, and executive bonuses but is little consolation for those workers who wave goodbye to their living. In the years to come I fully expect to see this phenomena to continue (the recent announcements from the Automotive world regarding severe cost cutting measures being imposed upon their suppliers only confirms the notion).
I do not envy today’s youth. “Go to College” we tell them. “You must have a college education to succeed.” So today’s youth graduate with five figure student loans and with few job prospects. Only a decade ago, IT (Information Technology) jobs were in such high demand, one could name his/her own price and markets were begging people to enter the field. Now those that followed their advice find job pickings thin (the irony of the situation is not lost upon the laid-off manufacturing worker who lost his job to Mexico who retrained himself as an IT person only to lose his job to outsourcing to India). Many of these IT jobs (as well as several millions of traditional white collar and professional careers such as support, accountants, engineers) have found their way to India and other “cheaper” countries. Global economists may praise this shift as raising the standard of living of those in developing countries and providing productivity increases, more profits, and less expensive goods for the American consumer. The American consumer, however, must have cash, usually obtained from a job, to purchase these cheaper goods. If their jobs have disappeared, where will they obtain the cash? To paraphrase the Wal-Mart example; what benefit are cheaper goods if there is no one to buy them? My gut belief is the 00 decade will be one where the standard of living actually decreases. As much as I wish it were not so, this generation of youth graduating from college will probably be the first generation to have a decrease in quality of life compared to their parents.
The United States as a result of this Walmartization of America, is rapidly moving towards the ‘hollow corporation’ where the manufacturing has been outsourced overseas (China), the white collar (IT, support, accounting, marketing, engineering) subcontracted abroad to the cheapest source (India), and what’s left is top management. This has the audiacious beginnings of the double hump income curve often seen in lesser development countries: a huge under class, a tiny upper class with most of the income, and a small middle class. America’s middle class has traditionally come from well paying manufacturing jobs (soon to be gone), the white collar (going quickly) or the professionals (your time will come). What will be left will be plenty of minimum wage retail, fast food, and other service positions but not sufficient to provide the same quality of life as we once had.
What jobs are likely to remain in the US? Those positions that require direct contact. Primary medical physicians (doctors, dentists, optometrists, etc.), surgeons, nurses (however, radiologists whose job are to read X-rays are already being outsourced to India so too will similar back-office positions). Judges and lawyers (although those in the law profession not required face to face could well find themselves outsourced as well!). Bankers and Brokers and financial advisers who have required face-time with their clients. And on the other extreme, plumbers, carpenters, painters, electricians, gardeners and other craftsman. Perhaps we should be telling our kids to go for broke (doctors) or not go to college at all and take up a craft.
What can companies do to avoid being caught in this Walmartization of America effect? One is not to place all your eggs in one basket: diversify customers. The temptation is to have a big Daddy client who is consistent and large. But Big daddy rarely remains benigh and will inevitably begin dictating terms and conditions to you, even the price you are allowed to charge. At that point you are no longer an independent company but merely a colony. Two: keep innovating and differentiating your products. If you are the only game in town, you and only you have that product, you have the power, not the retailers. If they want your product, you can maintain your independence, perhaps just a bit longer. Three: search out alternative markets. For example, on-line through the internet or direct marketing through network marketing. Once again, you hopefully will retain the power and not the Gorilla retailers.
Ten years from now, what remains of the middle class will look back at the nineties as the Good Ole Days. They will wonder what happened and how to recover from the storm that wrecked their lives. We are unlikely to see such prosperity again. Globalization has mixed blessings. I too would like to see a wealthier India and China but not at my expense.
Walmart. You either love it (consumers) or hate it (suppliers and competitors). But all agree it has changed America. It is the world’s largest company with $ 237B in sales (2002) and with 1.45 millions of employees. It is the proverbial 800 pound gorilla that wrecks everything in its path. Its obsession with low prices (Everyday Low Prices) appears to have taken it on a path similar to an analertizic teenager: less and less without regard to the final ominous outcome.
Walmart imported $ 10B of goods from China in 2002, making it the largest single importer. But that is only half of the story. Its relationship with suppliers is legendary: if you want to do business with us, you do it on our terms and we will tell you the price you are going to charge. Take it or leave it. Most take it because the company is their single largest customer (amounting in some cases to one-third or more of their business) and not to would be giving the market to one’s competitor. But there is a dark side of prosperity: Walmart is so insistent on perpetual cost decreases, companies may have record revenues and little to none or negative profits: what you make lose per unit you make up in volume. If you can’t meet the cost requirements of the Gorilla, they will take their business elsewhere. So you do what you must do: outsource to China to meet their cost requirements. If Walmart imported $B of goods, you can be certain its suppliers at least matched that number if not far exceeded it.
Which brings us to the question of the day: What good is Everyday Low prices if no one has any jobs to provide the income to pay for the cheap goods? Henry Ford’s breakthrough of paying his workers $5/day was a shrewd way of providing a ready market for his cars: now his workers could afford to buy one. Walmart seems to have taken the other tact: emphasize costs above all else and let the chips fall where they may!
For the past two years we’ve seen a jobless recovery with growth, record productivity, profits but no jobs. What is happening with Walmart, the Walmartization of America, is happening nationally. Record productivity is great for the economy and the company but not for those workers whose jobs have forever been lost. Outsourcing jobs to China and India saves money, creates profits, and executive bonuses but is little consolation for those workers who wave goodbye to their living. In the years to come I fully expect to see this phenomena to continue (the recent announcements from the Automotive world regarding severe cost cutting measures being imposed upon their suppliers only confirms the notion).
I do not envy today’s youth. “Go to College” we tell them. “You must have a college education to succeed.” So today’s youth graduate with five figure student loans and with few job prospects. Only a decade ago, IT (Information Technology) jobs were in such high demand, one could name his/her own price and markets were begging people to enter the field. Now those that followed their advice find job pickings thin (the irony of the situation is not lost upon the laid-off manufacturing worker who lost his job to Mexico who retrained himself as an IT person only to lose his job to outsourcing to India). Many of these IT jobs (as well as several millions of traditional white collar and professional careers such as support, accountants, engineers) have found their way to India and other “cheaper” countries. Global economists may praise this shift as raising the standard of living of those in developing countries and providing productivity increases, more profits, and less expensive goods for the American consumer. The American consumer, however, must have cash, usually obtained from a job, to purchase these cheaper goods. If their jobs have disappeared, where will they obtain the cash? To paraphrase the Wal-Mart example; what benefit are cheaper goods if there is no one to buy them? My gut belief is the 00 decade will be one where the standard of living actually decreases. As much as I wish it were not so, this generation of youth graduating from college will probably be the first generation to have a decrease in quality of life compared to their parents.
The United States as a result of this Walmartization of America, is rapidly moving towards the ‘hollow corporation’ where the manufacturing has been outsourced overseas (China), the white collar (IT, support, accounting, marketing, engineering) subcontracted abroad to the cheapest source (India), and what’s left is top management. This has the audiacious beginnings of the double hump income curve often seen in lesser development countries: a huge under class, a tiny upper class with most of the income, and a small middle class. America’s middle class has traditionally come from well paying manufacturing jobs (soon to be gone), the white collar (going quickly) or the professionals (your time will come). What will be left will be plenty of minimum wage retail, fast food, and other service positions but not sufficient to provide the same quality of life as we once had.
What jobs are likely to remain in the US? Those positions that require direct contact. Primary medical physicians (doctors, dentists, optometrists, etc.), surgeons, nurses (however, radiologists whose job are to read X-rays are already being outsourced to India so too will similar back-office positions). Judges and lawyers (although those in the law profession not required face to face could well find themselves outsourced as well!). Bankers and Brokers and financial advisers who have required face-time with their clients. And on the other extreme, plumbers, carpenters, painters, electricians, gardeners and other craftsman. Perhaps we should be telling our kids to go for broke (doctors) or not go to college at all and take up a craft.
What can companies do to avoid being caught in this Walmartization of America effect? One is not to place all your eggs in one basket: diversify customers. The temptation is to have a big Daddy client who is consistent and large. But Big daddy rarely remains benigh and will inevitably begin dictating terms and conditions to you, even the price you are allowed to charge. At that point you are no longer an independent company but merely a colony. Two: keep innovating and differentiating your products. If you are the only game in town, you and only you have that product, you have the power, not the retailers. If they want your product, you can maintain your independence, perhaps just a bit longer. Three: search out alternative markets. For example, on-line through the internet or direct marketing through network marketing. Once again, you hopefully will retain the power and not the Gorilla retailers.
Ten years from now, what remains of the middle class will look back at the nineties as the Good Ole Days. They will wonder what happened and how to recover from the storm that wrecked their lives. We are unlikely to see such prosperity again. Globalization has mixed blessings. I too would like to see a wealthier India and China but not at my expense.
Indian assault
Indian Assault
The story on India’s assault on U.S. services and the impact on U.S. companies has several major flaws. One: It believes ‘that harnessing Indian brainpower will greatly boost American tech and services leadership by filling a big projected shortfall in skilled labor as baby boomers retire.” If the boomers find their jobs transferred overseas and must rely on considerably lower-paying jobs (if they can find them at all), how will they be able to retire? I project many boomers will be working well into their seventies because they cannot afford to retire. Two: “Throughout U.S. History, workers have been pushed off farms, textile mills, steel plants . . . managed to move up to better-paying, higher-quality jobs.” Like what? Agriculture migrated to manufacturing which yielded to Services which now has passed the baton to Information Technology. Manufacturing jobs have vanished or will soon go to China. Services and IT jobs will go to India (“Kearney predicts 500,000 financial services jobs offshore by 2008”) With 234,000 IT professionals unemployed in the US, jobless rates more than doubling in three years, with India having a ‘$57Billion services export industry employing 4 million people by 2008’ it will only get worse. Where do you expect them to find work . . . at the local Wal-mart or fast-food chain at near minimum wage?
Three: Paying Indian workers 1/10 what an American costs will save corporations tons of money, increase their profits immensely and will lead directly to the hollow corporation, whose executive offices are located here but whose manufacturing and services/support outsourced off-shore. Unlike Ford whose $5/day pay was specifically created to allow his workers to afford the products they built, these companies do not understand if your customers have no job, you cannot buy the product, no matter how cheap it has been made.
In conclusion, This obsession with costs will only result with millions of formerly skilled workers contending with much lower-paying jobs, probably retail, if they can find work at all (the alternative is for the skilled workers to accept positions at comparable salary ranges to the Indians and Chinese—perhaps 15 to 20% of current levels—what everyone would consider poverty level wages). Even dual income families will be hard pressed to pay the increasingly higher insurance, health costs, taxes, tuition, and eek out a modest living. The route to the middle class has traditionally been higher paying manufacturing (soon to be in China) or services or professionals (as your article so well described it, flowing like a river to India). The end result, I fear, is the death of the middle class. Already, many formerly middle class families have been forced down the economic chain as a result of these outsourcing will little hope to regain their once vibrant lifestyles. The U.S., I fear, is rapidly moving into the standard third world economic double dip curve with a small immensely rich upper class having most of the income, a very large underclass and a small, meaningless middle class. Is this the future we want for our children and for us in our old age?
The decade of 00s will be long remembered as when the standard of living began falling for the average American. Today's youth and college graduates could well be the first generation NOT to economically exceed their parents. Perhaps “India will drive down costs in services” but that is small consolation for the laid-off manufacturing worker who retrained in IT only to see his second job go to India. Perhaps his third career should be in plumbing, painting, or gardening, those jobs should not be outsourced anytime soon (sic).
I am all for helping the Indians and Chinese improve their economies but not at my expense, my children’s future, and the creation of a wasteland that was once a thriving heartland.
The story on India’s assault on U.S. services and the impact on U.S. companies has several major flaws. One: It believes ‘that harnessing Indian brainpower will greatly boost American tech and services leadership by filling a big projected shortfall in skilled labor as baby boomers retire.” If the boomers find their jobs transferred overseas and must rely on considerably lower-paying jobs (if they can find them at all), how will they be able to retire? I project many boomers will be working well into their seventies because they cannot afford to retire. Two: “Throughout U.S. History, workers have been pushed off farms, textile mills, steel plants . . . managed to move up to better-paying, higher-quality jobs.” Like what? Agriculture migrated to manufacturing which yielded to Services which now has passed the baton to Information Technology. Manufacturing jobs have vanished or will soon go to China. Services and IT jobs will go to India (“Kearney predicts 500,000 financial services jobs offshore by 2008”) With 234,000 IT professionals unemployed in the US, jobless rates more than doubling in three years, with India having a ‘$57Billion services export industry employing 4 million people by 2008’ it will only get worse. Where do you expect them to find work . . . at the local Wal-mart or fast-food chain at near minimum wage?
Three: Paying Indian workers 1/10 what an American costs will save corporations tons of money, increase their profits immensely and will lead directly to the hollow corporation, whose executive offices are located here but whose manufacturing and services/support outsourced off-shore. Unlike Ford whose $5/day pay was specifically created to allow his workers to afford the products they built, these companies do not understand if your customers have no job, you cannot buy the product, no matter how cheap it has been made.
In conclusion, This obsession with costs will only result with millions of formerly skilled workers contending with much lower-paying jobs, probably retail, if they can find work at all (the alternative is for the skilled workers to accept positions at comparable salary ranges to the Indians and Chinese—perhaps 15 to 20% of current levels—what everyone would consider poverty level wages). Even dual income families will be hard pressed to pay the increasingly higher insurance, health costs, taxes, tuition, and eek out a modest living. The route to the middle class has traditionally been higher paying manufacturing (soon to be in China) or services or professionals (as your article so well described it, flowing like a river to India). The end result, I fear, is the death of the middle class. Already, many formerly middle class families have been forced down the economic chain as a result of these outsourcing will little hope to regain their once vibrant lifestyles. The U.S., I fear, is rapidly moving into the standard third world economic double dip curve with a small immensely rich upper class having most of the income, a very large underclass and a small, meaningless middle class. Is this the future we want for our children and for us in our old age?
The decade of 00s will be long remembered as when the standard of living began falling for the average American. Today's youth and college graduates could well be the first generation NOT to economically exceed their parents. Perhaps “India will drive down costs in services” but that is small consolation for the laid-off manufacturing worker who retrained in IT only to see his second job go to India. Perhaps his third career should be in plumbing, painting, or gardening, those jobs should not be outsourced anytime soon (sic).
I am all for helping the Indians and Chinese improve their economies but not at my expense, my children’s future, and the creation of a wasteland that was once a thriving heartland.
If things are so good why do we feel so bad?
re: If Things are so good why do we feel so bad.
The Walmartization of America is derived from an anorexic obsession with cutting costs, continuous productivity, moving production to China, and outsourcing white-collar and professional jobs to India. Unlike Ford whose $5/day pay was specifically created to allow his workers to afford the products they built, these companies do not understand if you have no job, you cannot buy the product, no matter how cheap it has been made. In the not-so-distant world of 'hollow corporations', the only jobs left here will be top management. Formerly skilled workers will have to contend with low-paying retail positions if they can find work at all. Even dual income families will be hard pressed to pay the increasingly higher insurance, health costs, taxes, tuition, and eek out a modest living. The end result, I fear, is the death of the middle class. The decade of 00s will be long remembered as when the standard of living fell for the average American. Today's youth and college graduates could well be the first generation NOT to economically exceed their parents. Why get a college degree in Computer Science, Engineering, Accounting, or management if your careerfield is being outsourced off-shore (Pity the two time loser: the plant worker whose plant moved aboard who went to the effort to learn the computer field only to see his new job gone likewise). My advice to my sons: Don't go to college. Learn a craft. At least plumbers, painters, and electricians will always be needed and probably never outsourced. No doubt we will look back at the 90s as the "Good Old Days."
The Walmartization of America is derived from an anorexic obsession with cutting costs, continuous productivity, moving production to China, and outsourcing white-collar and professional jobs to India. Unlike Ford whose $5/day pay was specifically created to allow his workers to afford the products they built, these companies do not understand if you have no job, you cannot buy the product, no matter how cheap it has been made. In the not-so-distant world of 'hollow corporations', the only jobs left here will be top management. Formerly skilled workers will have to contend with low-paying retail positions if they can find work at all. Even dual income families will be hard pressed to pay the increasingly higher insurance, health costs, taxes, tuition, and eek out a modest living. The end result, I fear, is the death of the middle class. The decade of 00s will be long remembered as when the standard of living fell for the average American. Today's youth and college graduates could well be the first generation NOT to economically exceed their parents. Why get a college degree in Computer Science, Engineering, Accounting, or management if your careerfield is being outsourced off-shore (Pity the two time loser: the plant worker whose plant moved aboard who went to the effort to learn the computer field only to see his new job gone likewise). My advice to my sons: Don't go to college. Learn a craft. At least plumbers, painters, and electricians will always be needed and probably never outsourced. No doubt we will look back at the 90s as the "Good Old Days."
Myths and truths of Off shoring
Myths of Off-sourcing
By Paul A. Herbig
Foreign Direct Investment is the expensing of funds towards building facilities or making investments in a country different from one’s own. American foreign investment consists of American firms making investments in another country. But not all investment is the same. If the investment is oriented towards establishing a foothold in a country, for purposes of creating goods or services to be marketed in that country, as has been the vast majority of investments overseas, then it is a vital part of globalization, of expanding markets, of creating foreign trade. However, if the investment is for the sheer purpose of avoiding higher priced labor in the homeland and all the goods or services are meant to be shipped right back to the homeland and no marketing building operations in the foreign country are expected, this I call offshoring. And it is this particular brand of foreign direct investment that has, and rightfully so, many concerned.
Offshoring is certainly not a new phenomenon. For decades, numerous manufacturing industries have been creating facilities in other countries for labor cutting reasons: mostly Mexico as a result of Maquiladoras and NAFTA treaties. Since most of the manufacturing was in basic industries and was of the labor intensive assembly type, little concern was given to the losses (which although in the tens of thousands were quickly absorbed by the booming US economy). But today we see in offshoring a far more frightful behavior. Not just labor intensive jobs but highly skilled manufacturing, service jobs, and highly educated information technology and professional jobs have been offshored and continue to be in increasingly immense numbers (hundreds of thousands if not millions).
Starting decades ago with low-skilled manufacturing jobs in basic industries, followed by textiles, cars, semiconductors, and now, services, the nimbleness of the world's economy has allowed us to reduce costs by moving production to wherever it's least expensive. The benefits to our economy--in increased productivity, lower prices, and greater demand for American products--are touted by corporate America as the only way to remain competitive. 40% of the Fortune 500 expected to have done so by the end of this year, according to the research firm Gartner Inc. The savings are dramatic: Companies can cut 20% to 70% of their labor costs by moving jobs to low-wage nations.
"It's happening much faster [than in manufacturing]," says Cynthia Kroll, senior regional economist at UC Berkeley's Haas School of Business. "There are fewer capital investments required in outsourcing a services job." Kroll cowrote a recent study that pegged the current number of jobs vulnerable in some way to offshoring at a stunning 14 million or 10% of the work force
In IT alone, Gartner estimates that another 500,000 positions in the U.S. may leave by the end of this year (2004); in one scenario, as many as 25% of all IT professional jobs could go overseas by 2008. If just 40% of those people never find another job in their field, that could be more than 1 million whose careers are altered forever..In essence, no job is safe nor permanent. If it can be routinized or computerized and does not require live person to person contact, it is vulnerable. The true numbers are not 10% but perhaps double or triple that.
Offshoring is not just an American phenomenon: Tata Consulting Services (TCS), Indian-based with an Edinburgh office, recently forecast 40% growth in offshoring jobs from Britain next year, with most of them going to India. About half of the jobs leaving Britain will be well above call centre level. And for all of Europe: 730,000 estimated number of financial services job that will migrate from Western Europe through 2008, and 100,000 telecom jobs as well. These jobs are going to principlly India but also eastern Europe and china. One estimate is that the volume of European deals could match that of America. These are not all basic labor jobs but also includes good jobs such as research, management.
Careerplanner.com. and others have come up with a list of jobs and their relative vulnerability.
Extreme Risk | Accountant | Industrial Engineer | Production Control Specialist | Quality Assurance Engineer | Call-Center Operator | Help-Desk Specialist | Telemarketer
High or Moderate Risk | Automotive Engineer | Computer Systems Analyst | Database Administrator | Software Developer | Customer-Service Representative | CAD Technician | Paralegal/Legal Assistant | Medical Transcriptionist | Copy Editor/Journalist | Film Editor | Insurance Agent | Lab Technician | Human Resources Specialist
Low Risk | Airplane Mechanic | Artist | Carpenter | Civil Engineer | Headhunter | Interior Designer.
Corporate executives are climbing on the offshoring bandwagon at an alarming rate, anxious to get at that cost savings and improve the bottom line without worrying about customers or marketing. Yet, offshoring must be entered into carefully but not all that is said is true. Quite a few of the reasons given are myths. In this chapter, we intend to explore those myths and provide the truths.
1. Indian (Chinese, fill-in-the-blank) workers are better educated, more productive, and provide better quality than American workers
Truth: the only advantage they have is that they are cheaper. Studies have indicated that they produce many times less quality but no overhead (especially pensions and health costs) (some estimates are Indian workers are 15% as productive as the average US worker). Given their wage rates of one-quarter to one-sixth that of an American worker and given that they do not burden their employers with silly frills like health care and pension costs, even at 15% they can provide a cost savings.
2. America will continue to “Move up the curve” . . . as it did from Agriculture to Manufacturing, from Manufacturing to Services, from Services to Information, from Information to (Next level?) . . . And we should forget about the lower levels that are being offshored and continue to seek higher valued jobs at the next level of the curve.
Truth:
To move from Agriculture to Manufacturing required no new skills (muscles and a strong back) and almost all could make the transition. To move to services required additional skills (basically people skills) but average intelligence could still do the job acceptably so most could easily make the transition. The third migration to information technology has been the hardest, requiring advanced math skills, good analytical skills, and advanced mental ability and that limited those who could make the transition thus leaving considerable workers behind (In an August 2003 report entitled "Offshoring: Is It a Win-Win Game?" McKinsey Global Institute concludes with great specificity that every dollar of offshoring results in 58 cents of savings to the American economy. But even that report acknowledges that 31% of workers who lost their jobs in earlier waves were never fully reemployed, with 80% taking pay cuts).
This next migration will be the hardest yet with superior mental and analytical skills required, thus severely limiting those who can make the cut. For the modern migrations, the higher the level, the more education and smarts required, and therefore the fewer the people that can move there. Which leaves us with the issue of human capital: What about the rest who cannot make the transition? Are they just throwaways, the victim of capitalism unbound, victims of creative destruction, to be left to survive as best they can? (As one victim said it best: "We've had throwaway clothes, throwaway cars, and now we have throwaway people.”) What are our obligations to them? Education and retraining? And if they are unable to do so then what? Should we have a permanent class of workers on the dole? What social ramifications exist if we were to totally ignore them? If their numbers grow too high could this lead to social unrest? Enough of these wannabes and will it disrupt the consumer spending needed to maintain our economy?
The second aspect of moving up the curve is the pyramid effect. Business Week in its March1 article on India and outsourcing information technology jobs to India provide the Software Pyramid. At the bottom and most susceptible to offshoring are basic programming positions, of which over a million exist in the U.S. The next levels up are business analysts and project manages, of which only 100,000 of each exist. These are regarded as relatively safe havens for programmers to migrate upwards. These positions require additional skills and training that many of the programmers may not have nor can acquire. What are those unable to make the cut suppose to do? Work at Wal-Mart? Become a nurse’s aide? Let us assume that half of these can make the cut to the two higher ranking job classes. (a liberal projection). However, how many do we need for each category? Certainly not 500,000. At most double those are needed. The inevitable effect of flooding those positions with new entrants is to drive down the salaries for all. It is, therefore, not realistic to move up the pyramid since not all can master the skills necessary, not sufficient positions exist, and by doing so one will be creating overcapacity which will just make life difficult for all concerned.
And finally, the official solution is to “move up the value chain”, training to do higher end functions while Indians do the grunt work. What few seem to have noticed is that Indians are already heading up the same chain. Why won’t they in the future be able to do the analysts and project managers work for much less? Why shouldn’t those categories go offshore as well? What functions are safe? What therefore, should workers retrain for that will be around long enough for them to recoup their investment in retraining? Part of the inertia seen now is the fear of the unknown, fear of investing in another occupation only to see it too go away. Can anyone really blame them?
Carly Fiorina, chief executive for Hewlett-Packard Co. Her famous quote: "There is no job that is America's God-given right any more. We have to compete for jobs." Has put her in the hall of shame. Having millions in salary, stock options, bonuses, golden parachutes, she does not have to worry about changing positions, unlike the millions of middle and lower class workers she appears to want to see out of work. I can only wonder what her attitude would be like if her board decided to replace her with an Indian CEO who would work for 1/10th as much, require her to train her replacement, and terminate her with little notice and few benefits.
3. Only “Low paying, low skill jobs” are being offshored . . .
Truth: IBM, radiologists, White-collar jobs, professionals, highly educated positions are increasingly being offshored A recent Wall Street Journal article describes the occupations that are currently being offshored: medical transcriptionists, architects and drafters, analysts—legal and investment research, accountants and tax professionals, technical writers, insurance claims processors, desktop publishing, animators, claims processing for insurance and medical industries, customer-service, telemarketing, ticketing and reservations. All these positions are relatively well-paying and contribute significantly to middle-class aspirations.
For doctors, they are well established in providing specialised secretarial services. They are looking to provide specialised accountancy and legal services, and not just for big multinationals but also for small partnerships who can use only a handful of niche offshore workers. One senior government figure was heard musing that Indians could soon be producing British newspapers.
India is now eyeing a massive sector of Western economies, which basically includes anyone who works on-screen. That starts with the back office, dealing with data entry, account reconciliation and transaction reporting. It is now continuing through travel and expenses departments, order processing and even human resources, then into professional services and some of the top-earning jobs. If a process is digitized or routinized, it can be done in India, and more cheaply. Pay rates can be one-tenth of those in the U.S. or Britain, and once other costs are factored in, overall savings tend to come out between 40-60%. For India, that next wave will be a much bigger bonanza than call centres. An American consultancy reckons that the value of offshored business processing will rise from last year’s $1.3 billion to $24bn in 2007, meaning growth at 79% per year.
Is it safe to assume that there is a skill level or point in the food chain at which jobs can no longer be outsourced? "No one's immune .” Intel Chief Executive Craig Barrett said the United States "now has to compete for every job going forward. That has not been on the table before. It had been assumed we had a lock on white-collar jobs and high-tech jobs. That is no longer the case."
Very few jobs are sancrosanct.
4. **Globalization is good for all countries “Rising Tide Raises all ships” Theory of economics . . .
Truth:
When the international barriers that separate the American economy from the third world`s economy disappear, the labor markets almost merge. An overwhelming amount of the demand for college-education-requiring high-value-added middle class labor originates in the United States. However, China and India have populations of about 2.3 billion relatively impoverished people combined, and millions of them have received college training, and hundreds of millions more could receive if it an economic driver made getting that education and training feasible. A merger of the two labor markets means that the demand for college-educated will remain almost the same, but the supply of college-educated and technologically-trained labor will increase dramatically. Basic economic principles tell us that when the supply increases relative to demand, the supply curve shifts out, lowering the price point where the supply of labor curve intersects with the demand of labor curve. In this case, because the increase in the supply of college-educated labor is so dramatic relative to the demand for college-educated labor, American wages must fall. This means that the American standard of living and quality of life will also decrease dramatically, averaging out with the poverty of the third world.
Downward mobility and bringing Americans down to their level. Yes we will keep jobs here if you will accept the pay of Indians (A January 2004 study by Foote Partners shows that IT compensation has fallen for four straight quarters in the areas most vulnerable to outsourcing, dropping an average of 7.6% in 2003 alone) What we are seeing is labor arbitrage with global wage rates being reduced to the lowest common denominator. This is true not just in blue-collar assembly work but in services and technology as well. If Americans must accept the pay of Indians or Chinese in order to secure jobs in America, at half to one-quarter or less of what they have been making, how can it be good for Americans to go from a middle class existence to one below the poverty line?
5. “Competition is forcing us to go off-shore” (They Made me do it school of thought) . . .
Truth: “Competition is forcing us to go off-shore” (What I call the ‘They Made me do it’ school of thought). That is since everybody else is going.offshore I have to too!
For American/Japanese/European based multinationals to make that statement reminds me of the “Keeping up with the Jones” brand of suburb building that we so often see in more exclusive neighborhoods (or for that matter anywhere, although the degree of expense might not be the same the rationale is). You find this phenomena where one neighbor builds a new swimming pool and all the others must do likewise ; to save face, to keep up with his neighbors, to be the same as all the other houses on the block. The rationale is the same for executive compensation: “I am only getting 3 million a year and my golfing buddy CEO of XYZ is getting 4 plus options. How can I hold my head up high, let alone play a decent game of golf being so underpaid. I know he is laughing at me. For my good morale and for the good of the company, I need to be paid the same as he. Our company is at least as good as his!!” (Don’t all you underpaid, underemployed, or unemployed workers out there feel sorry for the poor man. Anyone want to start a collection to help his self-esteem be regained?)
The problem with that line of thought is that it is pure bunk. No one has to do it and by saying everyone else is doing it, so must we, is giving away your own personal conduct of behavior in favor of the mob and following blindly the mob. What is curious is the lack of investigation on whether or not it is a good thing, what the future repercussions could be, or what it might cost you in the long run, just the reasoning if they are doing it, it must be good and so must I. (If it sounds like your young child trying to justify why he/she ought to go to a party, be with their friends, do wild stunts, or jump off a climb, it is because it is the same line of thinking with about the same amount of thought behind the lemming thinking.) The only good part about such justification is that it removes you from being held accountable and if no good comes from the decision, it is not your fault and can be blamed on the mob (likewise executive fads come and go).
So the question remains: is it really necessary in the first place? Who gains from offshoring? An examination of the facts indicate that prices are not fluctuating very much so where are the competitive effects if you are not being forced to meet another’s lower cost when all competitors are not lowering costs and in fact are actually raising them? If cost savings from lower labor costs are not being passed through to the employees, nor to lower cost of goods sold, then where are these cost savings going? It is obvious: to higher profits of the firms. These higher profits are being transferred to add to the wealth of the executives of the firm and to the investors in the form of higher stock prices. How can they justify competitive reasons for doing so when the only competitive aspect is to see whose stock is higher?
Remember, all is in the mind of the beholder. For an executive or a board to say we must follow the competition because they are making us do it can be interpreted: We don’t want them to make higher profits than we are so we must too offshore and cut our costs by laying off loyal employees. Never mind the effects on thousands of workers, on whole communities, on the American economy, just so long as my excessive executive compensation is paid, my overwhelming bonus is delivered, and my stock portfolio is padded, I am happy. If I am happy, so goes the CEO, so should be the world. (Of course if CEOs could also be offshored, perhaps he would not be so anxious to do so)
To all you CEO' thinking of engaging in offshore outsourcing just because your competitors are doing it consider this:In the spirit of true competitiveness here is a golden opportunity to kick the %#@&!! out of your competitors as follows:
1. Advertise the fact that they are displacing American workers and you are not.
2. Advertise the fact that they are exposing their customer's personal information overseas and you are not.
3. Advertise the fact that they are exposing their customers to the risk of international conflicts and you are not.
4. Advertise to recruit their ex-employees who were displaced by outsourcing. Just imagine all of the inside information and dirty laundry regarding your competitors' business practices that would fall right into your hands if you hire the right people!
6. Consumers only care about cost and could care less where it is produced
Corollary:. .Offshoring provides lower cost goods. .
Truth: "There is hardly anything in the world that some men cannot make a little worse and sell a little cheaper."
- John Ruskin
The last few years has seen an America obsessed with cost: ever driven to achieve lower and lower costs with nothing low enough. Walmart’s obsession with cost and being the lowest imaginable has caused not a few of their suppliers to go bankrupt: what they lost per unit they tried to make up in volume. It has forced most of its suppliers to locate overseas contributing to the offshoring debacle and the immense trade deficit. It is not the only corporation so inclined: The Automotive industry has challenged it suppliers to cut costs to meet Chinese levels or beware the consequences. Of course, America’s consumers are not short of blame: in their effort to find the cheapest items, to cut pennies off items, they have made Walmart the largest corporation in the world and in the process destroyed the business infrastructure of a thousand small towns. But what the heck, we saved a few pennies didn’t we?
Which makes me wonder (Yes I do question life and its perplexities a lot). Is there more to life than cost? Is life supposed to be all about finding the cheapest item always, no matter what the eventual cost? Let us presume it is. If true, we would all be driving Yugos, living in mobile homes, wearing hand-me-down clothes until they turned to rags, eating spam and mac ‘n cheese every day, using old crates for furniture, drinking boone’s farm, and rolling your own. Let’s take a roll call of readers: how many fall into this category? I’m still searching. Just what I suspected: none.
If there is more to life than the cost of an item then what are they? Why buy a Chevy, A Ford, a Chrysler rather than a Yugo? Perhaps it deals with reputation, quality, reliability, service, support (not to mention safety!). We are willing to pay additional for these items. Why then do we buy SUVs or MiniVans? Perhaps it is because we need to ferry more than 2 people at a time (in the case of some soccer moms or dads an entire team). Then it is worth paying more for to have the features and capabilities we seek. The boss is in the market for another vehicle and she will only consider minivans. Why? Because in one she sits up high and feels more in control than in a street hugging vehicle. Is she willing to pay more for that function: of course.
Let’s take the analogy one step further. Why would anyone want to purchase a BMW, Porsche, or Mercedes Benz when they can get the same transportation capabilities for a lot less? Because they want more, the prestige, the status, the eye-turning vehicle, than just a mere engine and four wheels. And then, if given the choice, would you buy from your reliable dealer Jim, a trusted family friend for over 20 years, with whom you have purchased three vehicles and have had them serviced without problems for that entire length of time, or from Friendly Al, the shady new dealer just down the street who offers you the same car for $100 less. I do not know about you but I would choose Jim every time. Why? There is a lot less risk with a known tried entity than with an unknown. Does that mean I am willing to pay more for dealing with Jim. Yes. I know he will be there tomorrow if I need him; I have no such confidence with Friendly Al.
Is there more to life than mere cost? Yes. Than why are we as consumers, as industrial customers, so penny-wise and pound foolish? Why stop doing business with an American firm whom you have dealt with for fifty flawless years to buy from a new Chinese firm just to save a few pennies? Is it worth ignoring Old Joe, the bicycle shop owner, whom you have purchased three bikes from and have had serviced and repaired without failure, just to save $5 or $10 at an unnamed big box Discount store and as a consequence see Old Joe go out of business? Who then will fix your bikes? Not the big box store for sure.
Isn’t it about time we view the future and examine the consequences before running to save a few pennies? There is a lot more than just cost in life and we ought to consider those factors before our next purchase.
7. Better Education, more skills are the answer for American Workers. . . ?
We are shooting ourselves in the foot. The Information Technology (IT) industry in the U.S. has begun an inevitable death spiral. Offshoring and high unemployment in the field has caused wages to drop dramatically. They will continue until an equilibrium with overseas counterparts has been reached (probably in low 40s). The best and brightest of our youth will see this tumble and correctly calculate the industry holds no future for them and they will go elsewhere (The number of Computer Science majors have fallen annually over the last 3 years and will continue to drop). One day the multinationals will look around and comment with delayed justification, “See. We can’t find enough good IT workers. Not enough American students are entering this field so we have no choice but to bring in foreign workers and offshore these jobs.”. And so the vicious circle has claimed yet another American industry.
"The problem is not a lack of highly educated workers," said Scott Kirwin, founder of the Information Technology Professionals Association of America."The problem is a lack of highly educated workers willing to work for the minimum wage or lower in the U.S. Costs are driving outsourcing, not the quality of American schools."
8. The looming American labor shortage (when baby boomers retire) is a cause of off-shoring and will mute its effect . . .
“There are three types of lies in this world: lies, damned lies, and statistics.” Mark Twain
Truth: No such imminent shortage exists
As a marketing instructor, I continually preach to my students one of the keys to success is to catch a trend early and ride its shirttails to riches. Some of the easiest trends to spot come from an analysis of demographics. It is easy to determine how many college students there will be 10 years from now, just count the 8-12 year olds and voila you have an excellent picture of what to expect. Along the same vein, though, demographics are statistics and, as Mark Twain so eloquently phrased it, sometimes you can twist the facts to read what you want them to. Beware!
My sermon this week is on the myth of the upcoming labor shortage Recently, the U.S. Bureau of Labor Statistics estimates a shortfall of about 10 million workers within the next seven years. “Between 2000 and 2010, the number of Americans between the ages of 55 and 64 will jump 47.2 percent, while those aged 25 to 34 will increase only 2.8 percent. The number of workers aged 35 to 45 will actually drop 13.7 percent.”
The study suggests employers may well face difficult challenges in recruiting and hiring people in the future..
The demographic that is causing this panic is the retirement of the baby boomers. The Baby Boomers, those born between 1946 and 1960 have been known as the pig in the python for their tidal wave effect on the social fabric of this nation ever since their births. The Baby Bust, Generation X as sometimes referred to, were born from 1963 to 1977 and consist of only 60% of the numbers the Boomers had. By 2010, it is estimated there will be 74 Million boomers compared to only 47 Million Busters. Herein lies the worry, those first boomers will reach retirement age in 2011 with the rest to follow for the next two decades. With such huge numbers of boomers retiring and considerably fewer busters, to many Chicken Littles, it is a crisis in the making.
Fallacies with this argument are many. 1) this assumption is predicated on the unrealistic expectation that the boomers will quit work at age 65. Unlike their parents and grandparents, many boomers will continue to work past 65, even though they may change the kind of work they do. The Retirement Confidence Survey released by the Employee Benefit Research Institute in April found workers expect to stay on the job longer to make up for any savings shortfall with 54% expecting to wait until at least age 65 to retire and 68% expecting to work for pay in some capacity after they retire. As the age to receive full retirement benefits edges upwards towards 70, many boomers will continue to work even after 65. With offshoring downsizing and downward mobility hitting particularly hard the professional class, many boomers will have minimal retirement savings and must continue to work just to survive. Retire at 65. I wish.
2) Not only will the general population continue to grow, so will the labor force The Bureau of Labor Statistics estimates that the labor force will rise from 153 million in 2000 to 159 million in 2010. The assertion that the labor force will be smaller in the years ahead is wrong since the baby-bust cohort will be followed by an even larger generation, the Baby Boomlet, Generation Y, the children of the Boomers, who are now in their teens and 20s.
3) The U.S. economy today is eight times bigger than it was at the end of World War II, but the workforce is only twice as big. Put another way, employees are roughly four times as productive today as they were in the late 1940s. If there had been no improvement in productivity, the economy would need four times as many workers as it now has in order to sustain the current level of gross domestic product. Continued productivity will limit the need for new workers (current productivity numbers of 3-4 percent mean a doubling every 20-25 years: that is, by 2030 it is likely we could have an economy twice as large as today manned by the same number of workers!).
4) Immigration, foreign workers in the U.S., and offshoring of U.S. jobs to other countries will impact both the work force and the number of jobs available.
The moral of the story is not to believe everything you hear or see unless you have had the chance to check the sources. Sometimes numbers do lie. Get in early on trends just make certain they are true trends!
9. Americans make too much (are overpaid).and we should learn to live with much less. .
i.e.,computer programming is generally calculated to cost $80 per hour. In India, that figure drops to $22 per hour, and in China it falls to $15 an hour.
Truth:
If you count health care benefits and pensions. If you include tougher labor laws, environmental standards, which workers in other countries do not have, perhaps not overpaid after all Would you want to sacrifice all those gains we have made in those fields so you can go back to paying workers below minimum just to compete with foreign workers? I think not.
10. Indians and Chinese need the jobs.
Truth: Approximately 150 million jobs exist in US. There are 2.5 Billion East Asians, mostly Indians and Chinese. Therefore, the number of jobs required for East Asians are upwards of 1.5 Billion. You could transfer all the American jobs to East Asia and still provide only 10% of needed jobs. I am all in favor of being charitable towards the poor Indians and Chinese but not at the price of sacrificing my own welfare or the future of my children.
11. India and China are where it is going to be at for the 21st century.
Truth: Only as long as cheap labor is available. As wage levels increase in those countries, multinationals will be looking at the next cheaper area. Already, jobs that just five years ago went to Ireland are now done in India; as wages rise there, new, cheaper sources of well-trained workers are springing up in such places as the Philippines and, of course, China
12. Foreign Direct Investment in the US is immense and any reaction to offshoring would hinder investments here let alone additional investment.
Truth: I have been writing often about the offshoring of US jobs to lower wage countries (right now that is India or China but come next year it may be an even lower wage country—sort of like the country of the month club—sic!!). I have received many notes from those who want to point out the immense number of “insourced” jobs that exist—that is, those companies which are foreign owned who have placed plants or facilities in the United States and hired American citizens as workers They point to these insourced companies and indicate that is exactly what American companies are doing when they offsource and that we can’t forget all the insourced companies.
I am very cognizant of foreign direct investment in the United States. (on the order of hundreds of billions of dollars) I am thankful of it and appreciative of the work it provides to American workers. But comparing the performance of these companies to US companies offshoring is not the same: it is an apples to oranges comparison.
Foreign companies when they come to the US (for example Toyota, Honda or Nissan to name just a few highly visible companies), set up shop here with the main objective of serving the U.S. marketplace, of providing goods to US consumers, or providing products to companies located in the United States which then produce goods for the American consumer. This is a very basic principle of trade: moving to where your markets are. It has been the predominant aspect of Foreign Direct Investment forever. U.S. Manufacturers build plants in Europe to serve the European Marketplace. Right now there are considerable foreign investment being pursued in China with the main objective being providing goods for the red hot Chinese marketplace. I have no problems with this nor should anyone else.
Where then is my gripe? When American firms move facilities to other countries for the expressed purpose of utilizing the lower wages in that country but whose final intent or destination for those goods are the good old U.S.A. This is offshoring. Call centers are an excellent example. Their major purpose is to service the American marketplace. When they are moved, lock, stock, and barrel, to India, they are oriented not to serve the Indian marketplace but to continue to serve the American market. The same goes for Information Technology jobs, other manufacturing and service jobs which are primarily uprooted from the US and moved to another country for the sole purpose of taking advantage of lower wages and not to serve the local market. This offshoring is merely a sham on American workers.
Which brings to mind another interesting thought. The U.S. has a $500 billion trade deficit, increasing yearly. During the late 70s, we were losing auto industry share to Japanese companies. What we did then was to twist their arms and indicate forcefully that if they wanted to sell automobiles here, they need to build them here. And it worked. Today millions of cars per year are built in the U.S. by foreign auto manufacturers.
Why can’t we take a similar tact for other goods? If they want to sell it here, they must make it here? We did it before and it worked to save an entire industry. As a country with the highest standard of living in the world and the most lucrative consumer market that exists, why shouldn’t the government twist arms with other counties over other industries to build product here. If they want to sell it in the US they must produce so much of the product (or so much a percentage of the good must be American content) or else?
We are losing entire industries in a space of a few years. We must act and act now to reverse the flow. Sell it here. Build it here. That’s my motto..
13. American firms have only best American interests at hear.
Truth: Right. And you believe in Santa Claus and the Tooth Fairy too!
Newsnote: In March 2004, German Chancellor Gerhard Schroder called multinationals that transfer jobs to lower cost countries “unpatriotic.”
The Fortune 1000 and their service counterparts (Banks, Brokerages, insurance, Transportation) can no longer be considered American companies but, instead, multinational entities. This is not mere synaptics. American companies have loyalty and commitment to the United States and the communities they reside in. Not so for multinational concerns, which most all the larger corporations have become. Their entire mission is to be globally competitive (in itself not an altogether evil concept but as taken to the extreme as it has been, it has considerable negative consequences to the local communities and nation as a whole). Multinational corporations, in general, could care less where a product is manufactured nor where it is developed as long as it is available on a global basis for a competitive price. Any cost savings do not necessarily go into lower product costs nor higher innovation nor additional research and development as economists would have you believe but rather into higher profits which translates into higher bonuses and salaries for the executives and higher stock prices for the privileged few owners of the stocks. The German Chancellor is right but patriotism for most multinationals serves no purpose at a stockholder’s meeting, during a board meeting, or to the marketplace.
Just examine our own local communities. What entities belong to the Chamber of Commerce? Which ones regularly donate goods for charities or raffles or school functions? Local small businesses. The larger chains, the big boxes, the corporate owned fast food franchises, have no stakes in the community save to pluck as much cash out as possible to ship it to their headquarters, wherever that may be. What commitment do these firms (mostly divisions or branches of the Fortune 1000) have to our communities? None. And that is the way they want it to be.
A Paradox analogous to the tragedy of the commons is inevitable here. The multinationals covet the American marketplace, the hundreds of millions of (right now) well-off consumers. Yet they wish to eventually serve that market from afar with minimum or no high-priced American labor. They are counting on all the other companies to stay in America providing high wage jobs to provide income to spend on their own goods made overseas and services provided offshore. What is going to happen when most if not all companies decide to exploit labor arbitrage and seek the lowest possible costs. What companies will be left producing in the US to provide those high paying jobs to allow the other companies to continue to supply their foreign made goods to the American consumer? (the answer: as few as possible unless we the people do something and fast). What will happen when a critical mass of companies have gone overseas is analogical a volcanic crater when all the lava has been expelled: a catastrophic collapse of the economy, the currency, the social climate. A rapid descent into a second or even third world economy could well result.
And what of the major multinational corporations? With the North American market gone, very little reason exists for any headquarter or development function to remain here. It would probably be better served in a country that is ascending, not one that has descended to the depths. Multinationals are only interested in marketing to affluent markets but producing products at the lowest possible prices. What causes affluence? The availability (or inevitable lack) of high paying jobs which, by definition, the multinationals will seek to move elsewhere to the lowest possible cost source, and in so doing will destroy the very affluence they feed off. Unlike a parasite, though, once their host has been consumed, they will not necessarily die with it but move on to the next market, the next lowest cost producing country, ever seeking that absolute bottom: where workers will pay them for the privilege of working for the corporation.
Corporate Loyalty. Dream on. That concept died years ago
What are the Unabated Consequences: of offshoring that are not being told?
*
1. The eventual rise of a*Two class system: the haves and the have nots and the loss of the middle class
America’ Middle Class has traditionally been composed of higher paying manufacturing (blue Collar) workers, white collar (service) workers, and professionals. Manufacturing is rapidly exiting the Country and as the article so explicitly describes, so are service jobs and eventually many professional jobs as well. Those who have lost their jobs are finding their future downwardly mobile as they find positions paying half or less their previous employment; record bankruptcies and foreclosures tell their story of survival on a day-to-day basis. Those who still have their jobs find unrelenting downward pressures on both wages and benefits. The net result in the not-so-distant future is the disappearance of the American Middle Class. The extinction of this class that has been the glue of the American social fabric for over two centuries does not bode well for this country. The effect of globalization and multinationals with no country loyalty (IBM can no longer be considered an American firm but a global one who seeks global advantages no matter what cost to any nation state) is the lowering of global wages to the least common denominator (As India will soon learn to its amazement when ‘higher-paying’ Indian jobs start moving to Filipinos and Indonesians who will work for half to third). As for globalization, beware of what you asked for, you just might get it, and we did!
2. National Security problems
We are also giving away our technology to other countries. As jobs are eliminated in the states, the people with those skills disappear and the information gets (partially) lost in the process. We are now so dependant on Asia that we would have a hard time if they cut all ties with the US.
the rapid escalation of outsourcing worries some economists and venture capitalists. Although startups rarely employ more than a few hundred people--often working for smaller salaries than big companies pay--they act as crucial incubators and entrepreneurial farm teams for established companies. Outsourcing startup work could have disastrous long-term consequences, critics say, depriving Americans of unique business experience and minimizing the likelihood that the next Hewlett-Packard will get its start in a Palo Alto garage.
"Silicon Valley isn't dead yet, but could outsourcing become a risk to the ecosystem?" asks Allen Morgan, managing director of Menlo Park-based venture firm Mayfield Fund. "Human beings aren't good at recognizing risks to the ecosystem when they're acting in their own self-interest--that's the case with the environment, and it might be the case now with Silicon Valley
Venture firms now sponsor how-to outsourcing clinics for companies in their portfolio, and more entrepreneurs are pitching business proposals that already include detailed offshore strategies. How "offshoreable" a project is can determine whether a venture firm will endorse a company with an initial funding round
3. Future uncertainties in education
Absurdly, Americans are being urged to "retrain" or acquire "additional skills" in the face of the trend to send jobs offshore — as if the vast majority of jobs they might retrain for couldn't just as easily be sent offshore, too, no matter what "additional skills" they might acquire. Too, the exporting of any job from any sector increases pressure on all the remaining sectors, because it increases the labor supply and drives down wages for everybody. Worst of all, the offshoring trend is accelerating, and is almost certain to accelerate even faster in the future; and if this occurs it will make for tremendous economic turbulence, which will make it difficult to even guess what to retrain for
4. Compression of wages everywhere in the economy:
Real Estate example—personal services flood
5. Loss of significant portion of tax base that will have to be made up by the rest of us (i.e. our own taxes rise greatly)
6.Privacy and security issues (of data)
Outsourcing jobs to offshore destinations can sharply increase data privacy risks and the complexity of managing that risk, several experts
at the Fourth Annual Privacy and Data Security Summit here warned this week. As a result, companies need to ensure that overseas vendors are contractually tied to specific conditions regarding how data is transmitted, accessed, used,stored and shared, they said. Those challenges include regulatory compliance, data protection and access issues, as well as monitoring and auditing issues.
Security breaches at offshore locations can be harder to
detect -- and deal with -- from a regulatory compliance standpoint. Under
California law, for example, companies are required to notify customers of
any database breach that may have compromised the customers'personal data as soon as the breach is discovered. With overseas vendors, it becomes a lotharder to know whether, and exactly when, a material breach may have occurred,
Also, when data is sent overseas for processing, companies often make little attempt at categorizing it. Personal data covered by privacy laws might be combined in one database with data protected under HIPAA rules or other laws. That makes it much harder to provide adequate levels of protection for different classes of data. Several companies that ship work overseas also handle data on European Union citizens and must abide by the more stringent requirements of EU privacy laws. In such cases, companies need to understand their own legal obligations.
Ensuring adequate physical protection of data at a foreign site is more difficult than doing so at a local site. Also, it's harder to find out if
data is being improperly accessed or misused. Sometimes overseas vendors mightsubcontract work out to smaller vendors within their own countries or tothose in other countries, adding yet another layer of risk.
A country's data privacy laws and its legal system also make a difference. India, which is the biggest outsourcing destination for many companies, has no formal data privacy law. Offshore vendors aren't obligated to comply with thesame privacy regulations their customers must meet as owners of the data.
7. Downward mobility, moving down economic scale to their level
8. Who will be able to afford all those cheap goods.
9. Crime, workplace violence increases
10. Potential civil war: haves vs have nots
In the SHORT-INTERMEDIATE term (10-20 years) offshoring could trigger an economic and political crisis in this country.
As we dilute our current "wealth" with 3rd world economics (masses living in poverty) by exporting all the wealth overseas, and importing disease, unemployment and hopelessness.
There will be a massive deflationary spiral triggered initially by the collapsing labor-cost "bubble" - one that has been growing and inflating for many many decades. And then add to that volatile cauldron, the $6 trillion government debt and the many
trillions of record consumer and mortgage debt that have been building up over the decades.With no jobs no-one will be servicing their massive debt loads anymore.Banks will begin to collapse.The economy will implode with a big BANG. Only the privileged few (in this country) will be able to afford the high priced products being sold by the companies that did all the offshoring. No-one will be able to pay for the overpriced housing, overpriced medical care, high taxes, any and all good and services sold in this country that on average are way higher than the rest of the civilized world.They will have to slash prices as demand goes to zero. And finally, it will be have versus have-not battle with the wealthy in their protected, gated communities guarded by their own security force attempting to protect themselves against the unemployed mobs in a scene reminiscent of the storming of Bastille.
By Paul A. Herbig
Foreign Direct Investment is the expensing of funds towards building facilities or making investments in a country different from one’s own. American foreign investment consists of American firms making investments in another country. But not all investment is the same. If the investment is oriented towards establishing a foothold in a country, for purposes of creating goods or services to be marketed in that country, as has been the vast majority of investments overseas, then it is a vital part of globalization, of expanding markets, of creating foreign trade. However, if the investment is for the sheer purpose of avoiding higher priced labor in the homeland and all the goods or services are meant to be shipped right back to the homeland and no marketing building operations in the foreign country are expected, this I call offshoring. And it is this particular brand of foreign direct investment that has, and rightfully so, many concerned.
Offshoring is certainly not a new phenomenon. For decades, numerous manufacturing industries have been creating facilities in other countries for labor cutting reasons: mostly Mexico as a result of Maquiladoras and NAFTA treaties. Since most of the manufacturing was in basic industries and was of the labor intensive assembly type, little concern was given to the losses (which although in the tens of thousands were quickly absorbed by the booming US economy). But today we see in offshoring a far more frightful behavior. Not just labor intensive jobs but highly skilled manufacturing, service jobs, and highly educated information technology and professional jobs have been offshored and continue to be in increasingly immense numbers (hundreds of thousands if not millions).
Starting decades ago with low-skilled manufacturing jobs in basic industries, followed by textiles, cars, semiconductors, and now, services, the nimbleness of the world's economy has allowed us to reduce costs by moving production to wherever it's least expensive. The benefits to our economy--in increased productivity, lower prices, and greater demand for American products--are touted by corporate America as the only way to remain competitive. 40% of the Fortune 500 expected to have done so by the end of this year, according to the research firm Gartner Inc. The savings are dramatic: Companies can cut 20% to 70% of their labor costs by moving jobs to low-wage nations.
"It's happening much faster [than in manufacturing]," says Cynthia Kroll, senior regional economist at UC Berkeley's Haas School of Business. "There are fewer capital investments required in outsourcing a services job." Kroll cowrote a recent study that pegged the current number of jobs vulnerable in some way to offshoring at a stunning 14 million or 10% of the work force
In IT alone, Gartner estimates that another 500,000 positions in the U.S. may leave by the end of this year (2004); in one scenario, as many as 25% of all IT professional jobs could go overseas by 2008. If just 40% of those people never find another job in their field, that could be more than 1 million whose careers are altered forever..In essence, no job is safe nor permanent. If it can be routinized or computerized and does not require live person to person contact, it is vulnerable. The true numbers are not 10% but perhaps double or triple that.
Offshoring is not just an American phenomenon: Tata Consulting Services (TCS), Indian-based with an Edinburgh office, recently forecast 40% growth in offshoring jobs from Britain next year, with most of them going to India. About half of the jobs leaving Britain will be well above call centre level. And for all of Europe: 730,000 estimated number of financial services job that will migrate from Western Europe through 2008, and 100,000 telecom jobs as well. These jobs are going to principlly India but also eastern Europe and china. One estimate is that the volume of European deals could match that of America. These are not all basic labor jobs but also includes good jobs such as research, management.
Careerplanner.com. and others have come up with a list of jobs and their relative vulnerability.
Extreme Risk | Accountant | Industrial Engineer | Production Control Specialist | Quality Assurance Engineer | Call-Center Operator | Help-Desk Specialist | Telemarketer
High or Moderate Risk | Automotive Engineer | Computer Systems Analyst | Database Administrator | Software Developer | Customer-Service Representative | CAD Technician | Paralegal/Legal Assistant | Medical Transcriptionist | Copy Editor/Journalist | Film Editor | Insurance Agent | Lab Technician | Human Resources Specialist
Low Risk | Airplane Mechanic | Artist | Carpenter | Civil Engineer | Headhunter | Interior Designer.
Corporate executives are climbing on the offshoring bandwagon at an alarming rate, anxious to get at that cost savings and improve the bottom line without worrying about customers or marketing. Yet, offshoring must be entered into carefully but not all that is said is true. Quite a few of the reasons given are myths. In this chapter, we intend to explore those myths and provide the truths.
1. Indian (Chinese, fill-in-the-blank) workers are better educated, more productive, and provide better quality than American workers
Truth: the only advantage they have is that they are cheaper. Studies have indicated that they produce many times less quality but no overhead (especially pensions and health costs) (some estimates are Indian workers are 15% as productive as the average US worker). Given their wage rates of one-quarter to one-sixth that of an American worker and given that they do not burden their employers with silly frills like health care and pension costs, even at 15% they can provide a cost savings.
2. America will continue to “Move up the curve” . . . as it did from Agriculture to Manufacturing, from Manufacturing to Services, from Services to Information, from Information to (Next level?) . . . And we should forget about the lower levels that are being offshored and continue to seek higher valued jobs at the next level of the curve.
Truth:
To move from Agriculture to Manufacturing required no new skills (muscles and a strong back) and almost all could make the transition. To move to services required additional skills (basically people skills) but average intelligence could still do the job acceptably so most could easily make the transition. The third migration to information technology has been the hardest, requiring advanced math skills, good analytical skills, and advanced mental ability and that limited those who could make the transition thus leaving considerable workers behind (In an August 2003 report entitled "Offshoring: Is It a Win-Win Game?" McKinsey Global Institute concludes with great specificity that every dollar of offshoring results in 58 cents of savings to the American economy. But even that report acknowledges that 31% of workers who lost their jobs in earlier waves were never fully reemployed, with 80% taking pay cuts).
This next migration will be the hardest yet with superior mental and analytical skills required, thus severely limiting those who can make the cut. For the modern migrations, the higher the level, the more education and smarts required, and therefore the fewer the people that can move there. Which leaves us with the issue of human capital: What about the rest who cannot make the transition? Are they just throwaways, the victim of capitalism unbound, victims of creative destruction, to be left to survive as best they can? (As one victim said it best: "We've had throwaway clothes, throwaway cars, and now we have throwaway people.”) What are our obligations to them? Education and retraining? And if they are unable to do so then what? Should we have a permanent class of workers on the dole? What social ramifications exist if we were to totally ignore them? If their numbers grow too high could this lead to social unrest? Enough of these wannabes and will it disrupt the consumer spending needed to maintain our economy?
The second aspect of moving up the curve is the pyramid effect. Business Week in its March1 article on India and outsourcing information technology jobs to India provide the Software Pyramid. At the bottom and most susceptible to offshoring are basic programming positions, of which over a million exist in the U.S. The next levels up are business analysts and project manages, of which only 100,000 of each exist. These are regarded as relatively safe havens for programmers to migrate upwards. These positions require additional skills and training that many of the programmers may not have nor can acquire. What are those unable to make the cut suppose to do? Work at Wal-Mart? Become a nurse’s aide? Let us assume that half of these can make the cut to the two higher ranking job classes. (a liberal projection). However, how many do we need for each category? Certainly not 500,000. At most double those are needed. The inevitable effect of flooding those positions with new entrants is to drive down the salaries for all. It is, therefore, not realistic to move up the pyramid since not all can master the skills necessary, not sufficient positions exist, and by doing so one will be creating overcapacity which will just make life difficult for all concerned.
And finally, the official solution is to “move up the value chain”, training to do higher end functions while Indians do the grunt work. What few seem to have noticed is that Indians are already heading up the same chain. Why won’t they in the future be able to do the analysts and project managers work for much less? Why shouldn’t those categories go offshore as well? What functions are safe? What therefore, should workers retrain for that will be around long enough for them to recoup their investment in retraining? Part of the inertia seen now is the fear of the unknown, fear of investing in another occupation only to see it too go away. Can anyone really blame them?
Carly Fiorina, chief executive for Hewlett-Packard Co. Her famous quote: "There is no job that is America's God-given right any more. We have to compete for jobs." Has put her in the hall of shame. Having millions in salary, stock options, bonuses, golden parachutes, she does not have to worry about changing positions, unlike the millions of middle and lower class workers she appears to want to see out of work. I can only wonder what her attitude would be like if her board decided to replace her with an Indian CEO who would work for 1/10th as much, require her to train her replacement, and terminate her with little notice and few benefits.
3. Only “Low paying, low skill jobs” are being offshored . . .
Truth: IBM, radiologists, White-collar jobs, professionals, highly educated positions are increasingly being offshored A recent Wall Street Journal article describes the occupations that are currently being offshored: medical transcriptionists, architects and drafters, analysts—legal and investment research, accountants and tax professionals, technical writers, insurance claims processors, desktop publishing, animators, claims processing for insurance and medical industries, customer-service, telemarketing, ticketing and reservations. All these positions are relatively well-paying and contribute significantly to middle-class aspirations.
For doctors, they are well established in providing specialised secretarial services. They are looking to provide specialised accountancy and legal services, and not just for big multinationals but also for small partnerships who can use only a handful of niche offshore workers. One senior government figure was heard musing that Indians could soon be producing British newspapers.
India is now eyeing a massive sector of Western economies, which basically includes anyone who works on-screen. That starts with the back office, dealing with data entry, account reconciliation and transaction reporting. It is now continuing through travel and expenses departments, order processing and even human resources, then into professional services and some of the top-earning jobs. If a process is digitized or routinized, it can be done in India, and more cheaply. Pay rates can be one-tenth of those in the U.S. or Britain, and once other costs are factored in, overall savings tend to come out between 40-60%. For India, that next wave will be a much bigger bonanza than call centres. An American consultancy reckons that the value of offshored business processing will rise from last year’s $1.3 billion to $24bn in 2007, meaning growth at 79% per year.
Is it safe to assume that there is a skill level or point in the food chain at which jobs can no longer be outsourced? "No one's immune .” Intel Chief Executive Craig Barrett said the United States "now has to compete for every job going forward. That has not been on the table before. It had been assumed we had a lock on white-collar jobs and high-tech jobs. That is no longer the case."
Very few jobs are sancrosanct.
4. **Globalization is good for all countries “Rising Tide Raises all ships” Theory of economics . . .
Truth:
When the international barriers that separate the American economy from the third world`s economy disappear, the labor markets almost merge. An overwhelming amount of the demand for college-education-requiring high-value-added middle class labor originates in the United States. However, China and India have populations of about 2.3 billion relatively impoverished people combined, and millions of them have received college training, and hundreds of millions more could receive if it an economic driver made getting that education and training feasible. A merger of the two labor markets means that the demand for college-educated will remain almost the same, but the supply of college-educated and technologically-trained labor will increase dramatically. Basic economic principles tell us that when the supply increases relative to demand, the supply curve shifts out, lowering the price point where the supply of labor curve intersects with the demand of labor curve. In this case, because the increase in the supply of college-educated labor is so dramatic relative to the demand for college-educated labor, American wages must fall. This means that the American standard of living and quality of life will also decrease dramatically, averaging out with the poverty of the third world.
Downward mobility and bringing Americans down to their level. Yes we will keep jobs here if you will accept the pay of Indians (A January 2004 study by Foote Partners shows that IT compensation has fallen for four straight quarters in the areas most vulnerable to outsourcing, dropping an average of 7.6% in 2003 alone) What we are seeing is labor arbitrage with global wage rates being reduced to the lowest common denominator. This is true not just in blue-collar assembly work but in services and technology as well. If Americans must accept the pay of Indians or Chinese in order to secure jobs in America, at half to one-quarter or less of what they have been making, how can it be good for Americans to go from a middle class existence to one below the poverty line?
5. “Competition is forcing us to go off-shore” (They Made me do it school of thought) . . .
Truth: “Competition is forcing us to go off-shore” (What I call the ‘They Made me do it’ school of thought). That is since everybody else is going.offshore I have to too!
For American/Japanese/European based multinationals to make that statement reminds me of the “Keeping up with the Jones” brand of suburb building that we so often see in more exclusive neighborhoods (or for that matter anywhere, although the degree of expense might not be the same the rationale is). You find this phenomena where one neighbor builds a new swimming pool and all the others must do likewise ; to save face, to keep up with his neighbors, to be the same as all the other houses on the block. The rationale is the same for executive compensation: “I am only getting 3 million a year and my golfing buddy CEO of XYZ is getting 4 plus options. How can I hold my head up high, let alone play a decent game of golf being so underpaid. I know he is laughing at me. For my good morale and for the good of the company, I need to be paid the same as he. Our company is at least as good as his!!” (Don’t all you underpaid, underemployed, or unemployed workers out there feel sorry for the poor man. Anyone want to start a collection to help his self-esteem be regained?)
The problem with that line of thought is that it is pure bunk. No one has to do it and by saying everyone else is doing it, so must we, is giving away your own personal conduct of behavior in favor of the mob and following blindly the mob. What is curious is the lack of investigation on whether or not it is a good thing, what the future repercussions could be, or what it might cost you in the long run, just the reasoning if they are doing it, it must be good and so must I. (If it sounds like your young child trying to justify why he/she ought to go to a party, be with their friends, do wild stunts, or jump off a climb, it is because it is the same line of thinking with about the same amount of thought behind the lemming thinking.) The only good part about such justification is that it removes you from being held accountable and if no good comes from the decision, it is not your fault and can be blamed on the mob (likewise executive fads come and go).
So the question remains: is it really necessary in the first place? Who gains from offshoring? An examination of the facts indicate that prices are not fluctuating very much so where are the competitive effects if you are not being forced to meet another’s lower cost when all competitors are not lowering costs and in fact are actually raising them? If cost savings from lower labor costs are not being passed through to the employees, nor to lower cost of goods sold, then where are these cost savings going? It is obvious: to higher profits of the firms. These higher profits are being transferred to add to the wealth of the executives of the firm and to the investors in the form of higher stock prices. How can they justify competitive reasons for doing so when the only competitive aspect is to see whose stock is higher?
Remember, all is in the mind of the beholder. For an executive or a board to say we must follow the competition because they are making us do it can be interpreted: We don’t want them to make higher profits than we are so we must too offshore and cut our costs by laying off loyal employees. Never mind the effects on thousands of workers, on whole communities, on the American economy, just so long as my excessive executive compensation is paid, my overwhelming bonus is delivered, and my stock portfolio is padded, I am happy. If I am happy, so goes the CEO, so should be the world. (Of course if CEOs could also be offshored, perhaps he would not be so anxious to do so)
To all you CEO' thinking of engaging in offshore outsourcing just because your competitors are doing it consider this:In the spirit of true competitiveness here is a golden opportunity to kick the %#@&!! out of your competitors as follows:
1. Advertise the fact that they are displacing American workers and you are not.
2. Advertise the fact that they are exposing their customer's personal information overseas and you are not.
3. Advertise the fact that they are exposing their customers to the risk of international conflicts and you are not.
4. Advertise to recruit their ex-employees who were displaced by outsourcing. Just imagine all of the inside information and dirty laundry regarding your competitors' business practices that would fall right into your hands if you hire the right people!
6. Consumers only care about cost and could care less where it is produced
Corollary:. .Offshoring provides lower cost goods. .
Truth: "There is hardly anything in the world that some men cannot make a little worse and sell a little cheaper."
- John Ruskin
The last few years has seen an America obsessed with cost: ever driven to achieve lower and lower costs with nothing low enough. Walmart’s obsession with cost and being the lowest imaginable has caused not a few of their suppliers to go bankrupt: what they lost per unit they tried to make up in volume. It has forced most of its suppliers to locate overseas contributing to the offshoring debacle and the immense trade deficit. It is not the only corporation so inclined: The Automotive industry has challenged it suppliers to cut costs to meet Chinese levels or beware the consequences. Of course, America’s consumers are not short of blame: in their effort to find the cheapest items, to cut pennies off items, they have made Walmart the largest corporation in the world and in the process destroyed the business infrastructure of a thousand small towns. But what the heck, we saved a few pennies didn’t we?
Which makes me wonder (Yes I do question life and its perplexities a lot). Is there more to life than cost? Is life supposed to be all about finding the cheapest item always, no matter what the eventual cost? Let us presume it is. If true, we would all be driving Yugos, living in mobile homes, wearing hand-me-down clothes until they turned to rags, eating spam and mac ‘n cheese every day, using old crates for furniture, drinking boone’s farm, and rolling your own. Let’s take a roll call of readers: how many fall into this category? I’m still searching. Just what I suspected: none.
If there is more to life than the cost of an item then what are they? Why buy a Chevy, A Ford, a Chrysler rather than a Yugo? Perhaps it deals with reputation, quality, reliability, service, support (not to mention safety!). We are willing to pay additional for these items. Why then do we buy SUVs or MiniVans? Perhaps it is because we need to ferry more than 2 people at a time (in the case of some soccer moms or dads an entire team). Then it is worth paying more for to have the features and capabilities we seek. The boss is in the market for another vehicle and she will only consider minivans. Why? Because in one she sits up high and feels more in control than in a street hugging vehicle. Is she willing to pay more for that function: of course.
Let’s take the analogy one step further. Why would anyone want to purchase a BMW, Porsche, or Mercedes Benz when they can get the same transportation capabilities for a lot less? Because they want more, the prestige, the status, the eye-turning vehicle, than just a mere engine and four wheels. And then, if given the choice, would you buy from your reliable dealer Jim, a trusted family friend for over 20 years, with whom you have purchased three vehicles and have had them serviced without problems for that entire length of time, or from Friendly Al, the shady new dealer just down the street who offers you the same car for $100 less. I do not know about you but I would choose Jim every time. Why? There is a lot less risk with a known tried entity than with an unknown. Does that mean I am willing to pay more for dealing with Jim. Yes. I know he will be there tomorrow if I need him; I have no such confidence with Friendly Al.
Is there more to life than mere cost? Yes. Than why are we as consumers, as industrial customers, so penny-wise and pound foolish? Why stop doing business with an American firm whom you have dealt with for fifty flawless years to buy from a new Chinese firm just to save a few pennies? Is it worth ignoring Old Joe, the bicycle shop owner, whom you have purchased three bikes from and have had serviced and repaired without failure, just to save $5 or $10 at an unnamed big box Discount store and as a consequence see Old Joe go out of business? Who then will fix your bikes? Not the big box store for sure.
Isn’t it about time we view the future and examine the consequences before running to save a few pennies? There is a lot more than just cost in life and we ought to consider those factors before our next purchase.
7. Better Education, more skills are the answer for American Workers. . . ?
We are shooting ourselves in the foot. The Information Technology (IT) industry in the U.S. has begun an inevitable death spiral. Offshoring and high unemployment in the field has caused wages to drop dramatically. They will continue until an equilibrium with overseas counterparts has been reached (probably in low 40s). The best and brightest of our youth will see this tumble and correctly calculate the industry holds no future for them and they will go elsewhere (The number of Computer Science majors have fallen annually over the last 3 years and will continue to drop). One day the multinationals will look around and comment with delayed justification, “See. We can’t find enough good IT workers. Not enough American students are entering this field so we have no choice but to bring in foreign workers and offshore these jobs.”. And so the vicious circle has claimed yet another American industry.
"The problem is not a lack of highly educated workers," said Scott Kirwin, founder of the Information Technology Professionals Association of America."The problem is a lack of highly educated workers willing to work for the minimum wage or lower in the U.S. Costs are driving outsourcing, not the quality of American schools."
8. The looming American labor shortage (when baby boomers retire) is a cause of off-shoring and will mute its effect . . .
“There are three types of lies in this world: lies, damned lies, and statistics.” Mark Twain
Truth: No such imminent shortage exists
As a marketing instructor, I continually preach to my students one of the keys to success is to catch a trend early and ride its shirttails to riches. Some of the easiest trends to spot come from an analysis of demographics. It is easy to determine how many college students there will be 10 years from now, just count the 8-12 year olds and voila you have an excellent picture of what to expect. Along the same vein, though, demographics are statistics and, as Mark Twain so eloquently phrased it, sometimes you can twist the facts to read what you want them to. Beware!
My sermon this week is on the myth of the upcoming labor shortage Recently, the U.S. Bureau of Labor Statistics estimates a shortfall of about 10 million workers within the next seven years. “Between 2000 and 2010, the number of Americans between the ages of 55 and 64 will jump 47.2 percent, while those aged 25 to 34 will increase only 2.8 percent. The number of workers aged 35 to 45 will actually drop 13.7 percent.”
The study suggests employers may well face difficult challenges in recruiting and hiring people in the future..
The demographic that is causing this panic is the retirement of the baby boomers. The Baby Boomers, those born between 1946 and 1960 have been known as the pig in the python for their tidal wave effect on the social fabric of this nation ever since their births. The Baby Bust, Generation X as sometimes referred to, were born from 1963 to 1977 and consist of only 60% of the numbers the Boomers had. By 2010, it is estimated there will be 74 Million boomers compared to only 47 Million Busters. Herein lies the worry, those first boomers will reach retirement age in 2011 with the rest to follow for the next two decades. With such huge numbers of boomers retiring and considerably fewer busters, to many Chicken Littles, it is a crisis in the making.
Fallacies with this argument are many. 1) this assumption is predicated on the unrealistic expectation that the boomers will quit work at age 65. Unlike their parents and grandparents, many boomers will continue to work past 65, even though they may change the kind of work they do. The Retirement Confidence Survey released by the Employee Benefit Research Institute in April found workers expect to stay on the job longer to make up for any savings shortfall with 54% expecting to wait until at least age 65 to retire and 68% expecting to work for pay in some capacity after they retire. As the age to receive full retirement benefits edges upwards towards 70, many boomers will continue to work even after 65. With offshoring downsizing and downward mobility hitting particularly hard the professional class, many boomers will have minimal retirement savings and must continue to work just to survive. Retire at 65. I wish.
2) Not only will the general population continue to grow, so will the labor force The Bureau of Labor Statistics estimates that the labor force will rise from 153 million in 2000 to 159 million in 2010. The assertion that the labor force will be smaller in the years ahead is wrong since the baby-bust cohort will be followed by an even larger generation, the Baby Boomlet, Generation Y, the children of the Boomers, who are now in their teens and 20s.
3) The U.S. economy today is eight times bigger than it was at the end of World War II, but the workforce is only twice as big. Put another way, employees are roughly four times as productive today as they were in the late 1940s. If there had been no improvement in productivity, the economy would need four times as many workers as it now has in order to sustain the current level of gross domestic product. Continued productivity will limit the need for new workers (current productivity numbers of 3-4 percent mean a doubling every 20-25 years: that is, by 2030 it is likely we could have an economy twice as large as today manned by the same number of workers!).
4) Immigration, foreign workers in the U.S., and offshoring of U.S. jobs to other countries will impact both the work force and the number of jobs available.
The moral of the story is not to believe everything you hear or see unless you have had the chance to check the sources. Sometimes numbers do lie. Get in early on trends just make certain they are true trends!
9. Americans make too much (are overpaid).and we should learn to live with much less. .
i.e.,computer programming is generally calculated to cost $80 per hour. In India, that figure drops to $22 per hour, and in China it falls to $15 an hour.
Truth:
If you count health care benefits and pensions. If you include tougher labor laws, environmental standards, which workers in other countries do not have, perhaps not overpaid after all Would you want to sacrifice all those gains we have made in those fields so you can go back to paying workers below minimum just to compete with foreign workers? I think not.
10. Indians and Chinese need the jobs.
Truth: Approximately 150 million jobs exist in US. There are 2.5 Billion East Asians, mostly Indians and Chinese. Therefore, the number of jobs required for East Asians are upwards of 1.5 Billion. You could transfer all the American jobs to East Asia and still provide only 10% of needed jobs. I am all in favor of being charitable towards the poor Indians and Chinese but not at the price of sacrificing my own welfare or the future of my children.
11. India and China are where it is going to be at for the 21st century.
Truth: Only as long as cheap labor is available. As wage levels increase in those countries, multinationals will be looking at the next cheaper area. Already, jobs that just five years ago went to Ireland are now done in India; as wages rise there, new, cheaper sources of well-trained workers are springing up in such places as the Philippines and, of course, China
12. Foreign Direct Investment in the US is immense and any reaction to offshoring would hinder investments here let alone additional investment.
Truth: I have been writing often about the offshoring of US jobs to lower wage countries (right now that is India or China but come next year it may be an even lower wage country—sort of like the country of the month club—sic!!). I have received many notes from those who want to point out the immense number of “insourced” jobs that exist—that is, those companies which are foreign owned who have placed plants or facilities in the United States and hired American citizens as workers They point to these insourced companies and indicate that is exactly what American companies are doing when they offsource and that we can’t forget all the insourced companies.
I am very cognizant of foreign direct investment in the United States. (on the order of hundreds of billions of dollars) I am thankful of it and appreciative of the work it provides to American workers. But comparing the performance of these companies to US companies offshoring is not the same: it is an apples to oranges comparison.
Foreign companies when they come to the US (for example Toyota, Honda or Nissan to name just a few highly visible companies), set up shop here with the main objective of serving the U.S. marketplace, of providing goods to US consumers, or providing products to companies located in the United States which then produce goods for the American consumer. This is a very basic principle of trade: moving to where your markets are. It has been the predominant aspect of Foreign Direct Investment forever. U.S. Manufacturers build plants in Europe to serve the European Marketplace. Right now there are considerable foreign investment being pursued in China with the main objective being providing goods for the red hot Chinese marketplace. I have no problems with this nor should anyone else.
Where then is my gripe? When American firms move facilities to other countries for the expressed purpose of utilizing the lower wages in that country but whose final intent or destination for those goods are the good old U.S.A. This is offshoring. Call centers are an excellent example. Their major purpose is to service the American marketplace. When they are moved, lock, stock, and barrel, to India, they are oriented not to serve the Indian marketplace but to continue to serve the American market. The same goes for Information Technology jobs, other manufacturing and service jobs which are primarily uprooted from the US and moved to another country for the sole purpose of taking advantage of lower wages and not to serve the local market. This offshoring is merely a sham on American workers.
Which brings to mind another interesting thought. The U.S. has a $500 billion trade deficit, increasing yearly. During the late 70s, we were losing auto industry share to Japanese companies. What we did then was to twist their arms and indicate forcefully that if they wanted to sell automobiles here, they need to build them here. And it worked. Today millions of cars per year are built in the U.S. by foreign auto manufacturers.
Why can’t we take a similar tact for other goods? If they want to sell it here, they must make it here? We did it before and it worked to save an entire industry. As a country with the highest standard of living in the world and the most lucrative consumer market that exists, why shouldn’t the government twist arms with other counties over other industries to build product here. If they want to sell it in the US they must produce so much of the product (or so much a percentage of the good must be American content) or else?
We are losing entire industries in a space of a few years. We must act and act now to reverse the flow. Sell it here. Build it here. That’s my motto..
13. American firms have only best American interests at hear.
Truth: Right. And you believe in Santa Claus and the Tooth Fairy too!
Newsnote: In March 2004, German Chancellor Gerhard Schroder called multinationals that transfer jobs to lower cost countries “unpatriotic.”
The Fortune 1000 and their service counterparts (Banks, Brokerages, insurance, Transportation) can no longer be considered American companies but, instead, multinational entities. This is not mere synaptics. American companies have loyalty and commitment to the United States and the communities they reside in. Not so for multinational concerns, which most all the larger corporations have become. Their entire mission is to be globally competitive (in itself not an altogether evil concept but as taken to the extreme as it has been, it has considerable negative consequences to the local communities and nation as a whole). Multinational corporations, in general, could care less where a product is manufactured nor where it is developed as long as it is available on a global basis for a competitive price. Any cost savings do not necessarily go into lower product costs nor higher innovation nor additional research and development as economists would have you believe but rather into higher profits which translates into higher bonuses and salaries for the executives and higher stock prices for the privileged few owners of the stocks. The German Chancellor is right but patriotism for most multinationals serves no purpose at a stockholder’s meeting, during a board meeting, or to the marketplace.
Just examine our own local communities. What entities belong to the Chamber of Commerce? Which ones regularly donate goods for charities or raffles or school functions? Local small businesses. The larger chains, the big boxes, the corporate owned fast food franchises, have no stakes in the community save to pluck as much cash out as possible to ship it to their headquarters, wherever that may be. What commitment do these firms (mostly divisions or branches of the Fortune 1000) have to our communities? None. And that is the way they want it to be.
A Paradox analogous to the tragedy of the commons is inevitable here. The multinationals covet the American marketplace, the hundreds of millions of (right now) well-off consumers. Yet they wish to eventually serve that market from afar with minimum or no high-priced American labor. They are counting on all the other companies to stay in America providing high wage jobs to provide income to spend on their own goods made overseas and services provided offshore. What is going to happen when most if not all companies decide to exploit labor arbitrage and seek the lowest possible costs. What companies will be left producing in the US to provide those high paying jobs to allow the other companies to continue to supply their foreign made goods to the American consumer? (the answer: as few as possible unless we the people do something and fast). What will happen when a critical mass of companies have gone overseas is analogical a volcanic crater when all the lava has been expelled: a catastrophic collapse of the economy, the currency, the social climate. A rapid descent into a second or even third world economy could well result.
And what of the major multinational corporations? With the North American market gone, very little reason exists for any headquarter or development function to remain here. It would probably be better served in a country that is ascending, not one that has descended to the depths. Multinationals are only interested in marketing to affluent markets but producing products at the lowest possible prices. What causes affluence? The availability (or inevitable lack) of high paying jobs which, by definition, the multinationals will seek to move elsewhere to the lowest possible cost source, and in so doing will destroy the very affluence they feed off. Unlike a parasite, though, once their host has been consumed, they will not necessarily die with it but move on to the next market, the next lowest cost producing country, ever seeking that absolute bottom: where workers will pay them for the privilege of working for the corporation.
Corporate Loyalty. Dream on. That concept died years ago
What are the Unabated Consequences: of offshoring that are not being told?
*
1. The eventual rise of a*Two class system: the haves and the have nots and the loss of the middle class
America’ Middle Class has traditionally been composed of higher paying manufacturing (blue Collar) workers, white collar (service) workers, and professionals. Manufacturing is rapidly exiting the Country and as the article so explicitly describes, so are service jobs and eventually many professional jobs as well. Those who have lost their jobs are finding their future downwardly mobile as they find positions paying half or less their previous employment; record bankruptcies and foreclosures tell their story of survival on a day-to-day basis. Those who still have their jobs find unrelenting downward pressures on both wages and benefits. The net result in the not-so-distant future is the disappearance of the American Middle Class. The extinction of this class that has been the glue of the American social fabric for over two centuries does not bode well for this country. The effect of globalization and multinationals with no country loyalty (IBM can no longer be considered an American firm but a global one who seeks global advantages no matter what cost to any nation state) is the lowering of global wages to the least common denominator (As India will soon learn to its amazement when ‘higher-paying’ Indian jobs start moving to Filipinos and Indonesians who will work for half to third). As for globalization, beware of what you asked for, you just might get it, and we did!
2. National Security problems
We are also giving away our technology to other countries. As jobs are eliminated in the states, the people with those skills disappear and the information gets (partially) lost in the process. We are now so dependant on Asia that we would have a hard time if they cut all ties with the US.
the rapid escalation of outsourcing worries some economists and venture capitalists. Although startups rarely employ more than a few hundred people--often working for smaller salaries than big companies pay--they act as crucial incubators and entrepreneurial farm teams for established companies. Outsourcing startup work could have disastrous long-term consequences, critics say, depriving Americans of unique business experience and minimizing the likelihood that the next Hewlett-Packard will get its start in a Palo Alto garage.
"Silicon Valley isn't dead yet, but could outsourcing become a risk to the ecosystem?" asks Allen Morgan, managing director of Menlo Park-based venture firm Mayfield Fund. "Human beings aren't good at recognizing risks to the ecosystem when they're acting in their own self-interest--that's the case with the environment, and it might be the case now with Silicon Valley
Venture firms now sponsor how-to outsourcing clinics for companies in their portfolio, and more entrepreneurs are pitching business proposals that already include detailed offshore strategies. How "offshoreable" a project is can determine whether a venture firm will endorse a company with an initial funding round
3. Future uncertainties in education
Absurdly, Americans are being urged to "retrain" or acquire "additional skills" in the face of the trend to send jobs offshore — as if the vast majority of jobs they might retrain for couldn't just as easily be sent offshore, too, no matter what "additional skills" they might acquire. Too, the exporting of any job from any sector increases pressure on all the remaining sectors, because it increases the labor supply and drives down wages for everybody. Worst of all, the offshoring trend is accelerating, and is almost certain to accelerate even faster in the future; and if this occurs it will make for tremendous economic turbulence, which will make it difficult to even guess what to retrain for
4. Compression of wages everywhere in the economy:
Real Estate example—personal services flood
5. Loss of significant portion of tax base that will have to be made up by the rest of us (i.e. our own taxes rise greatly)
6.Privacy and security issues (of data)
Outsourcing jobs to offshore destinations can sharply increase data privacy risks and the complexity of managing that risk, several experts
at the Fourth Annual Privacy and Data Security Summit here warned this week. As a result, companies need to ensure that overseas vendors are contractually tied to specific conditions regarding how data is transmitted, accessed, used,stored and shared, they said. Those challenges include regulatory compliance, data protection and access issues, as well as monitoring and auditing issues.
Security breaches at offshore locations can be harder to
detect -- and deal with -- from a regulatory compliance standpoint. Under
California law, for example, companies are required to notify customers of
any database breach that may have compromised the customers'personal data as soon as the breach is discovered. With overseas vendors, it becomes a lotharder to know whether, and exactly when, a material breach may have occurred,
Also, when data is sent overseas for processing, companies often make little attempt at categorizing it. Personal data covered by privacy laws might be combined in one database with data protected under HIPAA rules or other laws. That makes it much harder to provide adequate levels of protection for different classes of data. Several companies that ship work overseas also handle data on European Union citizens and must abide by the more stringent requirements of EU privacy laws. In such cases, companies need to understand their own legal obligations.
Ensuring adequate physical protection of data at a foreign site is more difficult than doing so at a local site. Also, it's harder to find out if
data is being improperly accessed or misused. Sometimes overseas vendors mightsubcontract work out to smaller vendors within their own countries or tothose in other countries, adding yet another layer of risk.
A country's data privacy laws and its legal system also make a difference. India, which is the biggest outsourcing destination for many companies, has no formal data privacy law. Offshore vendors aren't obligated to comply with thesame privacy regulations their customers must meet as owners of the data.
7. Downward mobility, moving down economic scale to their level
8. Who will be able to afford all those cheap goods.
9. Crime, workplace violence increases
10. Potential civil war: haves vs have nots
In the SHORT-INTERMEDIATE term (10-20 years) offshoring could trigger an economic and political crisis in this country.
As we dilute our current "wealth" with 3rd world economics (masses living in poverty) by exporting all the wealth overseas, and importing disease, unemployment and hopelessness.
There will be a massive deflationary spiral triggered initially by the collapsing labor-cost "bubble" - one that has been growing and inflating for many many decades. And then add to that volatile cauldron, the $6 trillion government debt and the many
trillions of record consumer and mortgage debt that have been building up over the decades.With no jobs no-one will be servicing their massive debt loads anymore.Banks will begin to collapse.The economy will implode with a big BANG. Only the privileged few (in this country) will be able to afford the high priced products being sold by the companies that did all the offshoring. No-one will be able to pay for the overpriced housing, overpriced medical care, high taxes, any and all good and services sold in this country that on average are way higher than the rest of the civilized world.They will have to slash prices as demand goes to zero. And finally, it will be have versus have-not battle with the wealthy in their protected, gated communities guarded by their own security force attempting to protect themselves against the unemployed mobs in a scene reminiscent of the storming of Bastille.
Where the Jobs went and are going
Where the Jobs Went and where are they going
By Paul Herbig
What is going on here? Since the beginning of the recession, the United States has lost nearly 3 million manufacturing jobs. That alone is not unusual. However, the recession officially ended, according to Economists, nearly 2 years ago (2002), yet the typical pattern of jobs increase mirroring the economy has yet to be seen. (Job growth has averaged just over 100,000 per month since August 2003, half the pace of a normally growing economy). This “jobless recovery” has many (particularly those unemployed, under employed, or those who see the handwriting on the wall) nervous and asking why? At this point in a typical recovery, all the lost jobs should have been recovered and then some. But ‘tis not the case. Instead, lay-offs continue to be reported, unemployment rate is still uncommonly high, off-shoring has rejuvenated an usually passive electorate, and despite interest rates not seen for fifty years, jobs continue to be flat. Why?
Some clues can provide the answer:
1. Growth in productivity almost matches the rate of lost manufacturing jobs
2. Over the last few years, American workers have climbed well past the Japanese to claim the world title of average hours worked.
3. Global overcapacity in a host of industries
4. Soaring cost of employee benefits especially health care
5. Although the unemployment rate has fallen from 6.5% in June 2003 to 5.7% in March 2004, the labor force participation rate has dropped even lower to a level lower than that seen during the 90-91 recession (if it were included in the unemployment rate, the unemployment rate would have been 7.4%).
What does it all mean? The start of this jobless recovery and the ominous future it portrays for America can be traced, obviously, back to the Dotcom collapse in March 2000, the initial eventual recession, the 9/11 events and the deepening recession caused. But here the scenario differs from traditional recessions. Globalization over the last two decades has significantly increased as well as technology (internet, telecommunications, computing power) to bring the world closer together. Part of the effect of globalization has been increase in manufacturing capacity throughout the world. Growth exceeded even robust demand causing deflationary pressures throughout the system. This was great as long as the world economy was expanding—as was the case throughout most of the nineties. But when the recession of 2000-1 hit compounded by the 9/11 events, demand suddenly plummeted yet the capacity remained.
Producers found themselves in an obvious dilemma: they had to continue to grow, to show increased profits, to impress Wall Street and the stock market. However, the global overcapacity meant they could not grow by simply selling more units as usually the case. Furthermore, pricing increases were out of the question due to the overcapacity issue. Yet profits had to be made and continually increased. If you could not grow the business the typical way, by increasing sales or prices, the only other way was to cut costs. Profits, after all, are the difference between revenues and costs, and if one could not be raised, the other would have to be cut. Wall Street could care less as long as income rose. So costs it was.
Major cost cutting programs were implemented. The technology of the nineties was finally beginning to pay off and as costs cutting became foremost in executive minds, the productivity effects became obvious. In addition, management ranks were pillaged and any expendable workers were gone. Productivity means output per worker. In the past, productivity increases meant more output for the same amount of workers.. Productivity increases have been averaging between 3 and 4% per year (with last quarter of 2003 reaching an astounding 8+%), almost 2 percentage points higher on average than occurred during the 90-91 recession. But under this new world global order, demand was flat thus inhibiting any rise in output; instead it was the same amount of goods with fewer workers. Therefore, as has been seen, productivity increases meant a similar amount of job decreases (One percentage point of productivity growth can eliminate up to 1.3 million jobs per year). .
Now productivity is not all bad. Normally, the company shares the productivity increases with the employees, in the form of higher wages. Not in this cycle (Corporate earnings which are only 12% of national income have contributed 44% of the growth over the past year while workers’ wages, salaries and benefits, some 63% of income have accounted for only 36% of the gains). Companies soon learned that the supply shortage that evolved in 2000-2 had caused employees to be overly fearful over their jobs and future. That not only would they be glad to have their jobs at the same salary, but oftentimes would negotiate away part of their income to maintain their jobs. Which is why economists have found real weekly incomes fell in 2003 for most workers and overall labor incomes have been virtually stagnant for the last three years. At this point in a typical recovery, real labor compensation would be up by nearly 3 percent, instead it is down by a like amount.
Employers also found they could easily get workers to take on additional responsibilities. As they laid-off “non-essential” workers and burdened the remaining lucky employees with the workload, a funny thing happened. Work continued to get done at nearly the same pace. Workers did not quit. They just worked longer hours to get the job done. If you could browbeat John Doe into working his normal job and doing the work of his laid- off companion, why not get him to do the job of another as well. And so it went. America’s workers, uncomplainingly, worked longer and harder, without any increases, and sometimes with decreases, just to keep their jobs (the sorry fate of an employee forced to train his replacement, sometimes from India, before being summarily terminated clearly displays these fears). Best estimates are this overworking accounts for at least one percentage point of productivity increases and perhaps higher
Even in blue collar manufacturing you can see similar events. Instead of hiring additional workers, just add on the overtime. A new variable in the equation made this move logical and reasonable. Health care premiums and employee benefits kept climbing, often at double digit rates. From an employer’s perspective, it makes economic sense to pay overtime, even at double time, rather than hire another worker. Although a company may pay an employee $A in wages earned, by the time social security, unemployment compensation, health care benefits, pension, etc, are factored into the equation, often total compensation costs amount to $2A, costing the company double the wages the employee actually receives.
This phenomenon is directly accountable for another new factor on the employment scene: the rise in part-time and temporary employees. With the additional burdens of non-wage benefits, many employers are going to extremes not to hire additional full-time workers and, instead, are hiring part-timers or temps. Often, entire departments are terminated, only to be rehired back as consultants at the same pay but without any benefits. Or entire departments (IT, maintenance, food services are typical) are outsourced to other companies who are paid a flat fee for the services rendered. Therefore, the work is still accomplished but the burdens of additional employees are not present on the income statement..
What about off-shoring? Isn’t this where the jobs have gone? The answer is no, not right now. Even the most liberal estimates indicate fewer than a million jobs, probably closer to half a million, were off-shored during the last several years (2000-2003). Even if it were 500,000, this would have only explained less than one-fifth of the job losses seen. Clearly the cause of the job losses have been productivity—both technological and due to overworking. Off-shoring will be a concern for the future but it was not the primary cause of the past job losses (While just 5% of domestic IT jobs have been off-shored as of now, as much as 25% could be situated overseas by 2010.).
Are the jobs coming back? Will this jobless recovery end? Clearly as long as the global overcapacity remains, additional unit sales and price increases will be minimal. However, the good news is that with the growing economic power and needs of China, commodity markets are exploding (as the rising prices of steel, oil, and other basic needs of industry clearly show). Overcapacity in finished goods appears to be loosening somewhat as a result of the China factor. But China could well overheat its economy. I would predict a loosening in both rising units and prices before the end of this year.
Will productivity increases continue? The bad news is that technology will continue to play a vibrant role in keeping productivity around 2-3 percent (this implies a doubling of output or an equivalent halving of work force for the same output every 30 years—are we literally putting ourselves out of work?). The good news is that the human side of the productivity increases, those forced to work two and three jobs, will not continue. As soon as the economy begins to improve and other opportunities present themselves, those overburdened workers will be jumping ship. The employers will soon find out they cannot locate new slaves to replace the ones that have left and hence will have to find two workers for two jobs instead of one doing it all. That may happen by the end of 2004 but it certainly will break lose in 2005.
The benefits of productivity according to economic theory are higher profits, lower inflation, rising stocks, lower cost goods, and higher housing prices. Not to workers. Their real incomes have fallen. A review of jobs added or loss over the past year tells another alarming story: Temps and health care up nearly 200%, restaurant and bars up 163%, building and gardening supply stores up 50% and construction jobs up 123%. All of which have one great commonality: propensity for relatively low paying jobs (Leisure and hospitality industries, which have gained 285,000 jobs in the last two years, pay on average less than $9 an hour, almost half that of average manufacturing jobs lost). Mean while, manufacturing, telecommunications, and information technology are all severely down: these are well paying jobs. What we are seeing is a shift from middle-class paying jobs to working poor jobs. Then who are the winners? Corporations profits are up 25% with stock prices rising more so as noted by S&P 500’s 39.2% gain. Investors are doing great. Managers and Executives are up sharply. Homeowners got a double boost by low interest rates and rising housing prices. Since most middle class and working poor have little stock and low housing, it is obvious those who have gained the most from productivity are not the workers or low level managers but the corporate executives and investors.
The main problem in the coming years will be off-shoring. To date, although hundreds of thousands of jobs is nothing to ignore, it has been but a minor player in the overall jobless recovery. As productivity increases begin to slow down due to inevitable marginal returns and human limits, Its role will considerably increase in years to come, with major social and economic implications. The difference between off- shoring now and past is the types of occupations affected. White-collar jobs, professionals, highly educated positions are increasingly being off-shored A recent Wall Street Journal article describes the occupations that are currently being off-shored: medical transcriptionists, architects and drafters, analysts—legal and investment research, accountants and tax professionals, technical writers, insurance claims processors, desktop publishing, animators, claims processing for insurance and medical industries, customer-service, telemarketing, ticketing and reservations. All these positions are relatively well paying and contribute significantly to middle-class aspirations.
India is now eyeing a massive sector of Western economies, which basically includes anyone who works on-screen. That starts with the back office, dealing with data entry, account reconciliation and transaction reporting. It is now continuing through travel and expenses departments, order processing and even human resources, then into professional services and some of the top-earning jobs. If a process is digitized or routinized, it can be outsourced, probably done in India, and more cheaply. Pay rates can be one-tenth of those in the U.S. or Britain, and once other costs are factored in, overall savings tend to come out between 40-60%. For India, that next wave will be a much bigger bonanza than call centres. An American consultancy reckons that the value of off-shored business processing will rise from last year’s $1.3 billion to $24billion in 2007, meaning growth at 79% per year.
Estimates are that as many as 11% of the entire U.S. workforce is at risk to be off-shored (over 15 million jobs). One study indicates global outsourcing of computer software and services will grow at a compounded annual rate of almost 26% from about $10 billion in 2003 (7% of all IT spending). Forrester Research, a leading Massachusetts-based analyst firm, recently predicted that $136 billion in wages, or 3.3 million jobs, will move offshore in the next 15 years. Deloitte Research announced predictions that by 2008, 275,000 jobs in the telecom industry will be off-shored. That number accounts for five percent of the industry's 5.5 million member labor force. That is not the worse of it: Silicon Valley investors are pressuring entrepreneurs to shrink personnel costs by as much as 60 percent by sending jobs overseas. Within the past year, startups have taken the outsourcing trend to extreme lengths, migrating entire development teams to India, China, and Russia and leaving only skeletal crews in Silicon Valley and tech hubs such as Boston and Seattle.
What to do? The United States needs to add over 100,000 jobs per month merely to stay even with its population growth. Jobs being added appear to be primarily government and low paying retail and service (including health care). Meanwhile, the higher wage positions are being terminated, outsourced, or off-shored. The middle class has suffered the brunt of this jobless recovery by spiraling downward mobility while the upper class has gotten richer and more powerful. Over 40% of the unemployed have been out of work 15 weeks or longer compared with only 23% in 2000. The number of people unemployed for 27 or more weeks rose to two million from 1.9 million the last week of March. Unemployment for information technology workers 7.8% compared to 2.7% for managers.
Economists indicate productivity and off-shoring are good for the country (in the long run that is). Supposedly, the dynamic duo lowers costs and produces higher corporate profits that companies then can use to expand, to become more competitive, to spend more on R&D and create more and better products. Consumers gain from lower product costs. Jobs lost now will be more than made up during the next big thing, whether it be nanotechnology, biotech, or another yet to be determined technology. Yet, the problem is these new fields will create very few jobs for years—the IT industry that grew the economy so fiercely during the 1990s was an infant in the fifties and sixties and took at least 30 years to mature to the point to take up the slack left from the auto and steel debacles. Perhaps the new technologies will provide the badly needed jobs—but not until 2020 at the earliest and more than likely 2025. What are today’s workers suppose to do in the meantime: wait 15 years?. It is a short term (as if 15 years is short term for anyone except economists) dilemma that needs careful management today. Tata Consulting Services TCS chief for Britain and Ireland, AS Lakshminarayanan, told the London Sunday Herald the only functions that need to be kept near headquarters will be governance, managing customer expectations, quality assurance and strategy
The worst scenario and the most likely one is a continuation of the jobless recovery, job growth will remain sluggish, demand will eventually sag, incomes will be driven down by relentless off-shoring pressure by India and China heading for lowest common denominators (labor arbitrage as it is called, dragging down worldwide wage rates with it). The middle class gets off-shored and trades in their higher paying jobs for ones that pay half as much. In this scenario, the winners are the investors and executives while the middle class keeps drifting downwards in mobility. Constant job losses in the professional ranks and constant worries about further job losses will keep the labor pool in a constant state of stress allowing the overworked employees to continue being further overworked while the large labor pool will create downward pressures on the wages of those who remain employed. The eventual outcome is a dual class system of the upper class and the lower class—working and non-working.
Economists say today’s workers need to add skills and be retrained to more value added occupations. The official solution is to “move up the value chain,” training to do higher end functions while Indians do the grunt work. What few seem to have noticed is that Indians are already heading up the same chain. Basic programmers need to move up to software engineers and complex systems analysts. The former jobs are likely moving overseas while the latter ones will probably stay in the U.S. Yet the higher value added jobs require higher education, higher basic mental abilities, and skills levels, characteristics not all have. For every 10 programmers, perhaps one software engineer and one systems analyst are required: the simple fact is even if all programmers became software engineers and systems analysts, not enough higher value-added jobs would be available. So the question remains: where are the ones who cannot migrate upwards to go? And secondly, most middle class Americans are riding on the edge: living nearly paycheck to paycheck (as record bankruptcies, foreclosures, and credit card defaults can readily testify). If calamity comes, they are poorly suited to ride out the storm. To upscale requires education. Education requires time and money, neither of which luxuries the newly laid-off workers often have. For most workers, no matter if blue collar or white collar, new employment is mandated at whatever wage level is obtainable. And the last inevitable question a newly laid off professional asks is “For What do I retrain? What position will not be off-shored or downsized? “ For which, no one has a real answer.
What to do?
1) It is clearly obvious that existing safety net provisions are inadequate. Jobless benefits should be expanded to include all workers laid-off or off-shored, for a period of up to 2-3 years, and be of a living wage. Some of the corporate billions could easily go to helping their former employees. To those who say this is overdoing it, a little reminder of what happened to the last person who uttered ”let them eat cake” should suffice. I would encourage reconsideration of Milton Friedman’s negative income tax notion to provide a basic level of income for all.
2) Vocational training and additional education is mandatory to increase the skill levels of those off-shored or laid off. These should be free or highly subsidized. Emphasis should be given to those industries and professions where skilled workers are required or future industries. No, retraining to be a nurse’s aide at $7 per hour is not considered acceptable. All jobs should be those with annual incomes exceeding $35,000 or a middle class income.
3) With 15 million unemployed, underemployed (those part-time or temps who prefer to work full time), or those who have given up looking, it makes little sense to wink at the millions of illegals in this country and to accept the cross border traffic that occurs. The same goes for skilled foreign workers (H-1b Visa program). Until every citizen has a job that wants one, no foreign workers should be permitted. American companies who constantly seek foreign workers because they can’t find skilled American workers have not looked hard enough. The true tale is more than likely the companies can’t find American workers willing to work for what they are willing to pay. It is probably time to pay living wages and not use illegals or foreign workers as an instrument to lower wages for all.
4) The corporations have prospered during these past few years. Almost all the gains from the productivity and outsourcing have gone to corporate profits and not to the workers. It is time to share those gains with workers. An increase in the minimum wage to “liveable” wage levels would be a good starting point, indexed to inflation. In addition, overworked workers are slowly being worked to death with any gains going straight to the company and not to the worker being exploited or to the workers let go. Perhaps it is time to a restructuring of the wage structure. The last restructuring occurred during the thirties with the advent of the 5 day 40 hour week (when previously a 6 day 50 plus hour week was the norm). Cutting the work week to a 4 day 30 hour work week with double time (not time and a half) for overtime and extending the work week protection not just to hourly workers but to all salaried workers as well, could be just what the doctor ordered. No longer would it be permitted to have one man do the work of two.
5) Off-shoring is the element that could lead to the U.S. becoming a third world country within twenty years. It needs to be headed off at the pass. If all government expenditures at all levels (federal, state, county and municipal) were required to contract for services and goods only to companies that perform the work in the U.S. using American workers and American made components, the net effect of over $4 trillion would create many a new job and rejuvenate American companies to invest here instead of abroad. Tax breaks for off-shoring should be abolished and more strenuous conditions on off-shoring programs should be put in place (longer lead time, more monies per employee for retraining, etc). Kerry’s tax reform plan includes the removal of tax breaks for companies that create jobs overseas. These prized tax incentives allow U.S. companies to not only enjoy the substantially lower taxes levied on foreign income but also defer paying them until that income is brought back home. The U.S. tax laws for foreign income have become so complex over the years that loopholes can be readily found to escape taxes altogether. Kerry aims to scrap the system entirely and use the savings to spur domestic job creation. A good start.
6) One of the major factors behind the jobless recovery is the cost of hiring an additional worker has become prohibitive to many companies. This is not due to wages but to benefits, in particular health care premiums. A revised health care national policy is required to make health care available to all citizens. When over 40 million Americans are without health insurance and to many workers, what they fear more than losing their job is losing their health benefits, something needs to be done and quickly. Getting that expensive benefit off company books would be a good first step.
7) Encourage “buy American” programs and exporting of American goods. With a $500 billion trade deficit, every dollar spent not on an American made good is a dollar not spent towards an American worker. Tougher enforcement of existing trade provisions and increased pressure to protect intellectual property rights will assist in increasing American export dollars and as a result Jobs.
8) The rich are getting richer and the poor poorer. All the gains from the productivity efforts of the past few years have gone to the upper class, corporate executives and investors. While middle managers, skilled professionals, and blue collar employees were being laid off or off-shored, record bonuses and wages were being paid to the corporate elite. Unless reversed, this will eventually lead to a two-class system with serious social repercussions. Limits on corporate executive pay need be introduced. Wealth gained by the upper class must be shared with the rest of the country in some form.
In summary, the jobs lost are lost forever but are only the tip of the iceberg for the future with many times as many jobs yet to be lost. Good paying middle class professional jobs are going while their replacement jobs are retail or service jobs that pay half or less and are not livable wages. Serious considerations must be given to policy changes to righten the ship of the nation lest a brewing social unrest becomes manifest in ugly class conflict violence. I have provided a set of recommendations as a starting point to correct the ship’s course before it is too late. We do not have much time before the situation becomes irreversible. If one believes one is worse off now then four years ago, if unchecked, four years hence, today will seem a picnic comparatively.
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By Paul Herbig
What is going on here? Since the beginning of the recession, the United States has lost nearly 3 million manufacturing jobs. That alone is not unusual. However, the recession officially ended, according to Economists, nearly 2 years ago (2002), yet the typical pattern of jobs increase mirroring the economy has yet to be seen. (Job growth has averaged just over 100,000 per month since August 2003, half the pace of a normally growing economy). This “jobless recovery” has many (particularly those unemployed, under employed, or those who see the handwriting on the wall) nervous and asking why? At this point in a typical recovery, all the lost jobs should have been recovered and then some. But ‘tis not the case. Instead, lay-offs continue to be reported, unemployment rate is still uncommonly high, off-shoring has rejuvenated an usually passive electorate, and despite interest rates not seen for fifty years, jobs continue to be flat. Why?
Some clues can provide the answer:
1. Growth in productivity almost matches the rate of lost manufacturing jobs
2. Over the last few years, American workers have climbed well past the Japanese to claim the world title of average hours worked.
3. Global overcapacity in a host of industries
4. Soaring cost of employee benefits especially health care
5. Although the unemployment rate has fallen from 6.5% in June 2003 to 5.7% in March 2004, the labor force participation rate has dropped even lower to a level lower than that seen during the 90-91 recession (if it were included in the unemployment rate, the unemployment rate would have been 7.4%).
What does it all mean? The start of this jobless recovery and the ominous future it portrays for America can be traced, obviously, back to the Dotcom collapse in March 2000, the initial eventual recession, the 9/11 events and the deepening recession caused. But here the scenario differs from traditional recessions. Globalization over the last two decades has significantly increased as well as technology (internet, telecommunications, computing power) to bring the world closer together. Part of the effect of globalization has been increase in manufacturing capacity throughout the world. Growth exceeded even robust demand causing deflationary pressures throughout the system. This was great as long as the world economy was expanding—as was the case throughout most of the nineties. But when the recession of 2000-1 hit compounded by the 9/11 events, demand suddenly plummeted yet the capacity remained.
Producers found themselves in an obvious dilemma: they had to continue to grow, to show increased profits, to impress Wall Street and the stock market. However, the global overcapacity meant they could not grow by simply selling more units as usually the case. Furthermore, pricing increases were out of the question due to the overcapacity issue. Yet profits had to be made and continually increased. If you could not grow the business the typical way, by increasing sales or prices, the only other way was to cut costs. Profits, after all, are the difference between revenues and costs, and if one could not be raised, the other would have to be cut. Wall Street could care less as long as income rose. So costs it was.
Major cost cutting programs were implemented. The technology of the nineties was finally beginning to pay off and as costs cutting became foremost in executive minds, the productivity effects became obvious. In addition, management ranks were pillaged and any expendable workers were gone. Productivity means output per worker. In the past, productivity increases meant more output for the same amount of workers.. Productivity increases have been averaging between 3 and 4% per year (with last quarter of 2003 reaching an astounding 8+%), almost 2 percentage points higher on average than occurred during the 90-91 recession. But under this new world global order, demand was flat thus inhibiting any rise in output; instead it was the same amount of goods with fewer workers. Therefore, as has been seen, productivity increases meant a similar amount of job decreases (One percentage point of productivity growth can eliminate up to 1.3 million jobs per year). .
Now productivity is not all bad. Normally, the company shares the productivity increases with the employees, in the form of higher wages. Not in this cycle (Corporate earnings which are only 12% of national income have contributed 44% of the growth over the past year while workers’ wages, salaries and benefits, some 63% of income have accounted for only 36% of the gains). Companies soon learned that the supply shortage that evolved in 2000-2 had caused employees to be overly fearful over their jobs and future. That not only would they be glad to have their jobs at the same salary, but oftentimes would negotiate away part of their income to maintain their jobs. Which is why economists have found real weekly incomes fell in 2003 for most workers and overall labor incomes have been virtually stagnant for the last three years. At this point in a typical recovery, real labor compensation would be up by nearly 3 percent, instead it is down by a like amount.
Employers also found they could easily get workers to take on additional responsibilities. As they laid-off “non-essential” workers and burdened the remaining lucky employees with the workload, a funny thing happened. Work continued to get done at nearly the same pace. Workers did not quit. They just worked longer hours to get the job done. If you could browbeat John Doe into working his normal job and doing the work of his laid- off companion, why not get him to do the job of another as well. And so it went. America’s workers, uncomplainingly, worked longer and harder, without any increases, and sometimes with decreases, just to keep their jobs (the sorry fate of an employee forced to train his replacement, sometimes from India, before being summarily terminated clearly displays these fears). Best estimates are this overworking accounts for at least one percentage point of productivity increases and perhaps higher
Even in blue collar manufacturing you can see similar events. Instead of hiring additional workers, just add on the overtime. A new variable in the equation made this move logical and reasonable. Health care premiums and employee benefits kept climbing, often at double digit rates. From an employer’s perspective, it makes economic sense to pay overtime, even at double time, rather than hire another worker. Although a company may pay an employee $A in wages earned, by the time social security, unemployment compensation, health care benefits, pension, etc, are factored into the equation, often total compensation costs amount to $2A, costing the company double the wages the employee actually receives.
This phenomenon is directly accountable for another new factor on the employment scene: the rise in part-time and temporary employees. With the additional burdens of non-wage benefits, many employers are going to extremes not to hire additional full-time workers and, instead, are hiring part-timers or temps. Often, entire departments are terminated, only to be rehired back as consultants at the same pay but without any benefits. Or entire departments (IT, maintenance, food services are typical) are outsourced to other companies who are paid a flat fee for the services rendered. Therefore, the work is still accomplished but the burdens of additional employees are not present on the income statement..
What about off-shoring? Isn’t this where the jobs have gone? The answer is no, not right now. Even the most liberal estimates indicate fewer than a million jobs, probably closer to half a million, were off-shored during the last several years (2000-2003). Even if it were 500,000, this would have only explained less than one-fifth of the job losses seen. Clearly the cause of the job losses have been productivity—both technological and due to overworking. Off-shoring will be a concern for the future but it was not the primary cause of the past job losses (While just 5% of domestic IT jobs have been off-shored as of now, as much as 25% could be situated overseas by 2010.).
Are the jobs coming back? Will this jobless recovery end? Clearly as long as the global overcapacity remains, additional unit sales and price increases will be minimal. However, the good news is that with the growing economic power and needs of China, commodity markets are exploding (as the rising prices of steel, oil, and other basic needs of industry clearly show). Overcapacity in finished goods appears to be loosening somewhat as a result of the China factor. But China could well overheat its economy. I would predict a loosening in both rising units and prices before the end of this year.
Will productivity increases continue? The bad news is that technology will continue to play a vibrant role in keeping productivity around 2-3 percent (this implies a doubling of output or an equivalent halving of work force for the same output every 30 years—are we literally putting ourselves out of work?). The good news is that the human side of the productivity increases, those forced to work two and three jobs, will not continue. As soon as the economy begins to improve and other opportunities present themselves, those overburdened workers will be jumping ship. The employers will soon find out they cannot locate new slaves to replace the ones that have left and hence will have to find two workers for two jobs instead of one doing it all. That may happen by the end of 2004 but it certainly will break lose in 2005.
The benefits of productivity according to economic theory are higher profits, lower inflation, rising stocks, lower cost goods, and higher housing prices. Not to workers. Their real incomes have fallen. A review of jobs added or loss over the past year tells another alarming story: Temps and health care up nearly 200%, restaurant and bars up 163%, building and gardening supply stores up 50% and construction jobs up 123%. All of which have one great commonality: propensity for relatively low paying jobs (Leisure and hospitality industries, which have gained 285,000 jobs in the last two years, pay on average less than $9 an hour, almost half that of average manufacturing jobs lost). Mean while, manufacturing, telecommunications, and information technology are all severely down: these are well paying jobs. What we are seeing is a shift from middle-class paying jobs to working poor jobs. Then who are the winners? Corporations profits are up 25% with stock prices rising more so as noted by S&P 500’s 39.2% gain. Investors are doing great. Managers and Executives are up sharply. Homeowners got a double boost by low interest rates and rising housing prices. Since most middle class and working poor have little stock and low housing, it is obvious those who have gained the most from productivity are not the workers or low level managers but the corporate executives and investors.
The main problem in the coming years will be off-shoring. To date, although hundreds of thousands of jobs is nothing to ignore, it has been but a minor player in the overall jobless recovery. As productivity increases begin to slow down due to inevitable marginal returns and human limits, Its role will considerably increase in years to come, with major social and economic implications. The difference between off- shoring now and past is the types of occupations affected. White-collar jobs, professionals, highly educated positions are increasingly being off-shored A recent Wall Street Journal article describes the occupations that are currently being off-shored: medical transcriptionists, architects and drafters, analysts—legal and investment research, accountants and tax professionals, technical writers, insurance claims processors, desktop publishing, animators, claims processing for insurance and medical industries, customer-service, telemarketing, ticketing and reservations. All these positions are relatively well paying and contribute significantly to middle-class aspirations.
India is now eyeing a massive sector of Western economies, which basically includes anyone who works on-screen. That starts with the back office, dealing with data entry, account reconciliation and transaction reporting. It is now continuing through travel and expenses departments, order processing and even human resources, then into professional services and some of the top-earning jobs. If a process is digitized or routinized, it can be outsourced, probably done in India, and more cheaply. Pay rates can be one-tenth of those in the U.S. or Britain, and once other costs are factored in, overall savings tend to come out between 40-60%. For India, that next wave will be a much bigger bonanza than call centres. An American consultancy reckons that the value of off-shored business processing will rise from last year’s $1.3 billion to $24billion in 2007, meaning growth at 79% per year.
Estimates are that as many as 11% of the entire U.S. workforce is at risk to be off-shored (over 15 million jobs). One study indicates global outsourcing of computer software and services will grow at a compounded annual rate of almost 26% from about $10 billion in 2003 (7% of all IT spending). Forrester Research, a leading Massachusetts-based analyst firm, recently predicted that $136 billion in wages, or 3.3 million jobs, will move offshore in the next 15 years. Deloitte Research announced predictions that by 2008, 275,000 jobs in the telecom industry will be off-shored. That number accounts for five percent of the industry's 5.5 million member labor force. That is not the worse of it: Silicon Valley investors are pressuring entrepreneurs to shrink personnel costs by as much as 60 percent by sending jobs overseas. Within the past year, startups have taken the outsourcing trend to extreme lengths, migrating entire development teams to India, China, and Russia and leaving only skeletal crews in Silicon Valley and tech hubs such as Boston and Seattle.
What to do? The United States needs to add over 100,000 jobs per month merely to stay even with its population growth. Jobs being added appear to be primarily government and low paying retail and service (including health care). Meanwhile, the higher wage positions are being terminated, outsourced, or off-shored. The middle class has suffered the brunt of this jobless recovery by spiraling downward mobility while the upper class has gotten richer and more powerful. Over 40% of the unemployed have been out of work 15 weeks or longer compared with only 23% in 2000. The number of people unemployed for 27 or more weeks rose to two million from 1.9 million the last week of March. Unemployment for information technology workers 7.8% compared to 2.7% for managers.
Economists indicate productivity and off-shoring are good for the country (in the long run that is). Supposedly, the dynamic duo lowers costs and produces higher corporate profits that companies then can use to expand, to become more competitive, to spend more on R&D and create more and better products. Consumers gain from lower product costs. Jobs lost now will be more than made up during the next big thing, whether it be nanotechnology, biotech, or another yet to be determined technology. Yet, the problem is these new fields will create very few jobs for years—the IT industry that grew the economy so fiercely during the 1990s was an infant in the fifties and sixties and took at least 30 years to mature to the point to take up the slack left from the auto and steel debacles. Perhaps the new technologies will provide the badly needed jobs—but not until 2020 at the earliest and more than likely 2025. What are today’s workers suppose to do in the meantime: wait 15 years?. It is a short term (as if 15 years is short term for anyone except economists) dilemma that needs careful management today. Tata Consulting Services TCS chief for Britain and Ireland, AS Lakshminarayanan, told the London Sunday Herald the only functions that need to be kept near headquarters will be governance, managing customer expectations, quality assurance and strategy
The worst scenario and the most likely one is a continuation of the jobless recovery, job growth will remain sluggish, demand will eventually sag, incomes will be driven down by relentless off-shoring pressure by India and China heading for lowest common denominators (labor arbitrage as it is called, dragging down worldwide wage rates with it). The middle class gets off-shored and trades in their higher paying jobs for ones that pay half as much. In this scenario, the winners are the investors and executives while the middle class keeps drifting downwards in mobility. Constant job losses in the professional ranks and constant worries about further job losses will keep the labor pool in a constant state of stress allowing the overworked employees to continue being further overworked while the large labor pool will create downward pressures on the wages of those who remain employed. The eventual outcome is a dual class system of the upper class and the lower class—working and non-working.
Economists say today’s workers need to add skills and be retrained to more value added occupations. The official solution is to “move up the value chain,” training to do higher end functions while Indians do the grunt work. What few seem to have noticed is that Indians are already heading up the same chain. Basic programmers need to move up to software engineers and complex systems analysts. The former jobs are likely moving overseas while the latter ones will probably stay in the U.S. Yet the higher value added jobs require higher education, higher basic mental abilities, and skills levels, characteristics not all have. For every 10 programmers, perhaps one software engineer and one systems analyst are required: the simple fact is even if all programmers became software engineers and systems analysts, not enough higher value-added jobs would be available. So the question remains: where are the ones who cannot migrate upwards to go? And secondly, most middle class Americans are riding on the edge: living nearly paycheck to paycheck (as record bankruptcies, foreclosures, and credit card defaults can readily testify). If calamity comes, they are poorly suited to ride out the storm. To upscale requires education. Education requires time and money, neither of which luxuries the newly laid-off workers often have. For most workers, no matter if blue collar or white collar, new employment is mandated at whatever wage level is obtainable. And the last inevitable question a newly laid off professional asks is “For What do I retrain? What position will not be off-shored or downsized? “ For which, no one has a real answer.
What to do?
1) It is clearly obvious that existing safety net provisions are inadequate. Jobless benefits should be expanded to include all workers laid-off or off-shored, for a period of up to 2-3 years, and be of a living wage. Some of the corporate billions could easily go to helping their former employees. To those who say this is overdoing it, a little reminder of what happened to the last person who uttered ”let them eat cake” should suffice. I would encourage reconsideration of Milton Friedman’s negative income tax notion to provide a basic level of income for all.
2) Vocational training and additional education is mandatory to increase the skill levels of those off-shored or laid off. These should be free or highly subsidized. Emphasis should be given to those industries and professions where skilled workers are required or future industries. No, retraining to be a nurse’s aide at $7 per hour is not considered acceptable. All jobs should be those with annual incomes exceeding $35,000 or a middle class income.
3) With 15 million unemployed, underemployed (those part-time or temps who prefer to work full time), or those who have given up looking, it makes little sense to wink at the millions of illegals in this country and to accept the cross border traffic that occurs. The same goes for skilled foreign workers (H-1b Visa program). Until every citizen has a job that wants one, no foreign workers should be permitted. American companies who constantly seek foreign workers because they can’t find skilled American workers have not looked hard enough. The true tale is more than likely the companies can’t find American workers willing to work for what they are willing to pay. It is probably time to pay living wages and not use illegals or foreign workers as an instrument to lower wages for all.
4) The corporations have prospered during these past few years. Almost all the gains from the productivity and outsourcing have gone to corporate profits and not to the workers. It is time to share those gains with workers. An increase in the minimum wage to “liveable” wage levels would be a good starting point, indexed to inflation. In addition, overworked workers are slowly being worked to death with any gains going straight to the company and not to the worker being exploited or to the workers let go. Perhaps it is time to a restructuring of the wage structure. The last restructuring occurred during the thirties with the advent of the 5 day 40 hour week (when previously a 6 day 50 plus hour week was the norm). Cutting the work week to a 4 day 30 hour work week with double time (not time and a half) for overtime and extending the work week protection not just to hourly workers but to all salaried workers as well, could be just what the doctor ordered. No longer would it be permitted to have one man do the work of two.
5) Off-shoring is the element that could lead to the U.S. becoming a third world country within twenty years. It needs to be headed off at the pass. If all government expenditures at all levels (federal, state, county and municipal) were required to contract for services and goods only to companies that perform the work in the U.S. using American workers and American made components, the net effect of over $4 trillion would create many a new job and rejuvenate American companies to invest here instead of abroad. Tax breaks for off-shoring should be abolished and more strenuous conditions on off-shoring programs should be put in place (longer lead time, more monies per employee for retraining, etc). Kerry’s tax reform plan includes the removal of tax breaks for companies that create jobs overseas. These prized tax incentives allow U.S. companies to not only enjoy the substantially lower taxes levied on foreign income but also defer paying them until that income is brought back home. The U.S. tax laws for foreign income have become so complex over the years that loopholes can be readily found to escape taxes altogether. Kerry aims to scrap the system entirely and use the savings to spur domestic job creation. A good start.
6) One of the major factors behind the jobless recovery is the cost of hiring an additional worker has become prohibitive to many companies. This is not due to wages but to benefits, in particular health care premiums. A revised health care national policy is required to make health care available to all citizens. When over 40 million Americans are without health insurance and to many workers, what they fear more than losing their job is losing their health benefits, something needs to be done and quickly. Getting that expensive benefit off company books would be a good first step.
7) Encourage “buy American” programs and exporting of American goods. With a $500 billion trade deficit, every dollar spent not on an American made good is a dollar not spent towards an American worker. Tougher enforcement of existing trade provisions and increased pressure to protect intellectual property rights will assist in increasing American export dollars and as a result Jobs.
8) The rich are getting richer and the poor poorer. All the gains from the productivity efforts of the past few years have gone to the upper class, corporate executives and investors. While middle managers, skilled professionals, and blue collar employees were being laid off or off-shored, record bonuses and wages were being paid to the corporate elite. Unless reversed, this will eventually lead to a two-class system with serious social repercussions. Limits on corporate executive pay need be introduced. Wealth gained by the upper class must be shared with the rest of the country in some form.
In summary, the jobs lost are lost forever but are only the tip of the iceberg for the future with many times as many jobs yet to be lost. Good paying middle class professional jobs are going while their replacement jobs are retail or service jobs that pay half or less and are not livable wages. Serious considerations must be given to policy changes to righten the ship of the nation lest a brewing social unrest becomes manifest in ugly class conflict violence. I have provided a set of recommendations as a starting point to correct the ship’s course before it is too late. We do not have much time before the situation becomes irreversible. If one believes one is worse off now then four years ago, if unchecked, four years hence, today will seem a picnic comparatively.
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