[Paleopsych] Reason: 10 Truths About Trade: Hard facts about offshoring, imports, and jobs
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Wed Apr 27 19:26:07 UTC 2005
10 Truths About Trade: Hard facts about offshoring, imports, and jobs
[I sent this before, but it's worth reading again, since I'm still looking for
Hard facts about offshoring, imports, and jobs.
Is globalization sending the best American jobs overseas? If you get
your news from CNNs Lou Dobbs, the answer is "of course" and the
real issue is how many trade restrictions should be applied to stem
But the recent scare about "offshoring" is just the latest twist on
inaccurate, decades-old complaint that global trade is stealing jobs
and causing a "race to the bottom" in which corporations
scour the world for the lowest wages and most squalid working
conditions. China and India have replaced 1980s Japan and 1990s
as the most feared foreign threats to U.S. employment, and the old
fallacy of job scarcity has once again reared its distracting head.
The truth is cheerier. Trade is only one element in a much bigger
picture of incessant turnover in the American labor market.
Furthermore, the overall trend is toward more and better jobs for
American workers. While job losses are real and sometimes very
painful, it is important -- indeed, for the formulation of sound
public policy, it is vital -- to distinguish between the painful
aspects of progress and outright decline.
Toward that end, and to counter protectionist "analysis"
as fact, here are 10 core truths about global trade and American
1. The Number of Jobs Grows With the Population
As Figure 1 shows vividly, the total number of jobs in the American
economy is first and foremost a function of the size of the labor
force. As the population grows, the number of people in the work
grows; then market forces absorb that supply and deploy labor to
different sectors of the economy.
Consider all the major events that have increased the supply of
during the last half-century: the baby boom, the surge in work force
participation by women, and rising rates of immigration after
of restrictionist policies. Consider as well the key developments
have slashed demand for certain kinds of labor: the growing
competitiveness of foreign producers and falling U.S. barriers to
imports; the shift by American companies toward globally integrated
production and the consequent relocation of many operations
the deregulation of the transportation, energy, and
industries and the wrenching restructuring that followed; and, most
important, the many waves of labor-saving technological innovations,
from the containerization that replaced longshoremen to the dial
phones that replaced switchboard operators to the factory-floor
that replaced assembly-line workers to the automatic teller machines
that replaced bank tellers.
Yet in the face of all this flux, no chronic shortage of jobs has
materialized. Over those tumultuous five decades, a growing economy
and functioning labor markets were all that was needed to
huge shifts in labor supply and demand. Now and in the future, sound
macroeconomic policies and continued flexibility in labor markets
suffice to generate increasing employment, notwithstanding the rise
China and India and the march of digitization.
2. Jobs Churn Constantly
The steady increase in total employment masks the frenetic dynamism
the U.S. labor market. Gross changes -- total new positions added,
total existing positions eliminated -- are much greater in
Large numbers of jobs are being shed constantly, even in good times.
Total employment continues to increase only because even larger
numbers of jobs are being created.
According to economist Brad DeLong, a weekly figure of 360,000 new
unemployment insurance claims is actually consistent with a stable
unemployment rate. In other words, when the unemployment rate holds
steady -- that is, total employment grows fast enough to absorb the
ongoing increase in the labor force -- some 18.7 million people will
lose their jobs and file unemployment insurance claims during the
course of a single year. Meanwhile, even more people will get new
More detailed and dramatic evidence of job turnover can be found in
Table 1. According to data compiled by the Department of Labors
of Labor Statistics, total private-sector employment rose by 17.8
million between 1993 and 2002. To produce that healthy net increase,
breathtaking total of 327.7 million jobs were added, while 309.9
million jobs were lost. In other words, for every one net new
private-sector job created during that period, 18.4 gross job
additions had to offset 17.4 gross job losses.
In light of those facts, it is impossible to give credence to claims
that job losses in this or that sector constitute a looming
catastrophe for the enormous and dynamic U.S. economy as a whole. It
is as inevitable that some companies and industries will shrink as
is that others will expand. Localized challenges and problems should
not be confused with national crises.
3. Challenging, High-Paying Jobs Are Becoming More Plentiful, Not
The ongoing growth in total employment is frequently dismissed on
ground that most of the new positions being created are low-paying,
dead-end "McJobs." The facts show otherwise.
Managerial and specialized professional jobs have grown rapidly,
nearly doubling between 1983 and 2002, from 23.6 million to 42.5
million. These challenging, high-paying positions have jumped from
23.4 percent of total employment to 31.1 percent.
And these high-quality jobs will continue growing in the years to
come. According to projections for 2002-12 prepared by the Bureau of
Labor Statistics, management, business, financial, and professional
positions will grow from 43.2 million to 52 million, increasing from
30 percent of total employment to 31.5 percent.
4. "Deindustrialization" Is a Myth
Opponents of open markets frequently claim that unshielded exposure
foreign competition is destroying the U.S. manufacturing base. That
charge is flatly untrue. Figure 2 sets the record straight: Between
1980 and 2003, American manufacturing output climbed a dizzying 93
percent. Yes, production fell during the recent recession, but it is
now recovering: the industrial production index for manufacturing
2.2 percent in 2003.
It is true that manufacturings share of gross domestic product has
been declining gradually over time -- from 27 percent in 1960 to
percent in 2002. The percentage of workers employed in manufacturing
likewise has been falling, from 28.4 percent to 11.7 percent during
the same period. But the primary cause of these trends is the
productivity of American manufacturers. As shown in Figure 3, output
per hour in the overall nonfarm business sector rose 50 percent
between 1980 and 2002; by contrast, manufacturing output per hour
up 103 percent. In other words, goods are getting cheaper and
relative to services. Since this faster productivity growth has not
been matched by a corresponding increase in demand for manufactured
goods, the result is that Americans are spending relatively less on
manufactures. Accordingly, manufacturings shrinking share of the
overall economy is actually a sign of American manufacturing
Exactly the same phenomenon has played out over a longer period in
agriculture. In 1870, 47.6 percent of total employment was in
By 2002 the figure had fallen to 1.7 percent. In the future,
manufacturing will in all likelihood continue down the trail blazed
agriculture. People who bemoan this prospect dont recognize economic
progress when they see it.
International trade has had only a modest effect on manufacturings
declining share of the economy. It is true that imports displace
domestic production. On the other hand, exports boost sales for
American manufacturers. The U.S. has been running a manufacturing
trade deficit in recent years, but even if trade had been in balance
between 1960 and 2002 the manufacturing share of GDP still would
fallen sharply, down to an estimated 16 percent (as opposed to the
actual 13.9 percent). Innovation creates a steady, relentless drop
manufacturings share of economic activity.
5. Imports Have Not Been a Major Cause of Recent Manufacturing Job
Employment in the manufacturing sector has taken a beating in recent
years. Between 1965 and 1990, the total number of manufacturing jobs
fluctuated in a stable band between 16 million and 20 million;
the 1990s, the upper limit dropped to around 18 million; but between
July 2000 and October 2003 jobs plummeted 16 percent, from 17.32
million to 14.56 million.
Although the losses have been severe, the charge that those jobs
eliminated by foreign competition simply doesnt square with the
As shown in Table 2, manufacturing imports rose only 0.6 percent
between 2000 and 2003. By contrast, manufacturing exports fell by
percent. In other words, during this period the drop in exports
accounted for 91 percent of the growth in the manufacturing trade
Accordingly, imports played at best a trivial role in the recent
decline in manufacturing employment. The main culprit was the
worsening domestic market for manufactures during the recent
-- in particular, a big drop in business investment. Between the
fourth quarter of 2000 and the third quarter of 2002, total fixed
nonresidential investment fell by 14 percent. Looking abroad, it was
softening overseas markets, much more than stiffening import
that added further downward pressure on domestic manufacturing jobs.
Consequently, anti-trade activists who cite manufacturing job losses
as a reason to turn away from trade liberalization couldnt be more
wrong. Expanding overseas markets and commercial opportunities for
American exporters would be a shot in the arm for manufacturing
6. "Offshoring" Is Not a Threat to High-Tech Employment
In recent months, historical fears about vanishing manufacturing
have been compounded by growing anxiety about trade-related job
in the service sector. Advances in information and communications
technologies now make it possible for many jobs -- from customer
service calls to software development -- to be performed anywhere.
In particular, the offshoring of information technology (I.T.) jobs
India and other low-wage countries has received a flurry of
According to a survey of hiring managers conducted by the
Technology Association of America, 12 percent of I.T. companies
already have outsourced some operations abroad. As for future
Forrester Research predicted in a widely cited study that 3.3
white-collar jobs -- including 1.7 million back-office positions and
473,000 I.T. jobs -- will move overseas between 2000 and 2015.
Adding to the fear, I.T. employment has experienced a significant
recent decline. In 2002, according to the Department of Commerce,
total number of I.T.-related jobs stood at 5.95 million, down from a
2000 peak of 6.47 million. Although some of those jobs were lost
because of offshoring, the major culprits were the slowdown in
for I.T. services after the Y2K buildup, followed by the dot-com
collapse and the broader recession. Moreover, it should be
that the recent drop in employment took place after a dramatic
buildup. In 1994, 1.19 million people were employed as mathematical
and computer scientists. By 2000 that figure had jumped to 2.07
million -- a 74 percent increase. As of 2002, the figure had
only slightly to 2.03 million, still 71 percent higher than in 1994.
Despite the trend toward offshoring, I.T.-related employment is
expected to see healthy increases in the years to come. According to
Department of Labor projections, the total number of jobs in
and mathematical occupations will jump from 3.02 million in 2002 to
4.07 million in 2012 -- a 35 percent increase. Of the 30 specific
occupations projected to grow fastest during those 10 years, seven
computer-related. (See Figure 4 for the fastest-growing
computer-related occupations.) Thus, the recent downturn in I.T. is
likely only a temporary break in a larger trend of robust job
The wild claims that offshoring will gut employment in the I.T.
are totally at odds with reality. I.T. job losses projected by
Forrester amount to fewer than 32,000 per year -- relatively modest
attrition in the context of 6 million I.T. jobs. These losses,
meanwhile, will be offset by newly created jobs as computer and
mathematical occupations continue to boom. The doomsayers are
confusing a cyclical downturn with a permanent trend.
7. Globalization of Services Creates Enormous Opportunity for
Offshoring of I.T. services to India and elsewhere has been made
possible by ongoing advances in computer and communications
technologies. If those advances indeed pose a threat to domestic
services industries, then it should be possible to trace the
of that threat in trade statistics, since offshoring registers as an
increase in services imports.
Yet the fact is that the U.S. runs a trade surplus precisely in the
I.T. services most directly affected by offshoring. In the
of "computer and data processing services" and "database and other
information services," American exports rose from $2.4 billion in
to $5.4 billion in 2002, while imports increased from $0.3 billion
$1.2 billion. Thus, the U.S. trade surplus in these services has
expanded from $2.1 billion to $4.2 billion.
Meanwhile, the same technological advances that have given rise to
offshoring are facilitating the international provision of all kinds
of services -- banking, accounting, legal assistance, engineering,
medicine, and so on. The United States is a major exporter of
generally and runs a sizable trade surplus in services. In 2002, for
example, service exports accounted for 30 percent of all U.S.
and exceeded service imports by $64.8 billion. Accordingly, the
increasing ability to provide services remotely is a commercial boon
to many U.S.-based service industries. Although some jobs are
doubtless at risk, the same trends that make offshoring possible are
creating new opportunities, and new jobs, throughout the domestic
8. Offshoring Creates New Jobs and Boosts Economic Growth
Although offshoring does eliminate jobs, it also yields important
benefits. To the extent that companies can reduce costs by shifting
certain operations overseas, they are increasing productivity. The
process of competition ultimately passes the resulting cost savings
to consumers, which then spurs demand for other goods and services.
Whether caused by the introduction of new technology or by new ways
organize work, productivity increases translate into economic growth
and rising overall living standards.
In particular, offshoring encourages the diffusion of I.T.
the American economy. According to Catherine Mann at the Institute
International Economics, globalized production of I.T. hardware --
that is, the offshoring of computer-related manufacturing -- has
accounted for 10 percent to 30 percent of the drop in hardware
The resulting increase in productivity encouraged the rapid spread
computer use and thereby added some $230 billion in cumulative
additional GDP between 1995 and 2002.
Offshoring offers the potential to take a similar bite out of prices
for I.T. software and services. Those price reductions will promote
the further spread of I.T. and new business processes that take
advantage of cheap technology. As Mann notes, health services and
construction are two large and important sectors that today feature
low I.T. intensity (as measured by I.T. equipment per worker) and
below-average productivity growth. Diffusion of I.T. into these and
other sectors could prompt a new round of productivity growth such
that provoked by the globalization of hardware production during the
9. The Digital Revolution Has Been Eliminating White-Collar Jobs for
The attention now being paid to offshoring creates the impression
it is an utterly unprecedented phenomenon. But the very same
technological advances that are making offshoring possible have been
eliminating large numbers of white-collar jobs for many years now.
The diffusion of I.T. throughout the economy has caused major
in the job market during the last decade. Voicemail has replaced
receptionists; back-office record-keeping and other clerical jobs
been supplanted by computers; layers of middle management have been
eliminated by better internal communications systems. In all these
cases, jobs are not simply being transferred overseas; they are
consigned to oblivion by automation and the resulting reorganization
of work processes.
The increased churn in white-collar jobs shows up in the Department
Labors statistics on displaced long-tenured workers, defined as
workers who have lost jobs they held for three years or more (Figure
5). During the 1981--82 recession blue-collar workers bore the brunt
of long-tenured displacement, but by 1991-92 more than half of the
long-held jobs lost were white-collar. Even in the better years that
followed, innovation and job churn continued to displace
workers at a higher rate than during the 1981-82 recession.
Offshoring is merely the latest manifestation of a well-established
process. The only difference is that, with offshoring, I.T. is
facilitating the transfer of jobs overseas. In either case, domestic
jobs are lost to technological progress and rising productivity. Why
is this downside taken in stride when jobs are eliminated entirely
considered unbearable when the jobs are taken as hand-me-downs by
Indians and other foreigners?
10. Fears That the U.S. Economy Is Running Out of Jobs Are Nothing
Because of the recent recession, the U.S. economy has suffered from
shortage of jobs, as evidenced by the rise in the unemployment rate.
There is a natural temptation under these conditions to fear that
temporary setback is the beginning of some permanent reversal of
fortune, that the shortage of jobs is here to stay and will only
To calm such fears, it is useful to recall that similar anxieties
surfaced before. Again and again, over many decades, cyclical
downturns in the economy have prompted predictions of permanent job
shortages. And each time, those predictions were belied by the
Back in the 1930s, the brutal and persistent unemployment caused by
the Great Depression gave rise to theories of "secular stagnation."
number of leading economists -- including, most prominently,
Alvin Hansen -- argued that declining population growth and the
increasing "maturity" of the industrial economy meant that we could
longer rely on private-sector job creation to provide full
The stagnationist thesis eventually fell out of fashion once the
postwar economic boom gathered steam.
The return of higher unemployment in the late 1950s and early 60s
to a revival of the stagnationist fallacy, this time in the guise of
an "automation crisis." The ongoing progress of factory automation,
combined with the growing visibility of electronic computers, led
Americans to believe, once again, that the economy was running out
jobs. During the 1960 presidential campaign, John F. Kennedy, who
on a pledge to "get the country moving again," warned that
"carries the dark menace of industrial dislocation, increasing
unemployment, and deepening poverty." The American Foundation on
Automation and Unemployment, a joint industry-labor group created in
1962, claimed breathlessly that automation was "second only to the
possibility of the hydrogen bomb" in its challenge to Americas
economic future. For the record, U.S. employment in 1962 stood at
million jobs -- roughly half the current total.
In the early 1980s, the coincidence of a severe recession and a
of competitive successes by Japanese producers at the expense of
high-profile American industries sparked predictions of the imminent
"deindustrialization" of the American economy. As financier Felix
Rohatyn complained, in a fashion typical of the time, "We cannot
become a nation of short-order cooks and saleswomen, Xerox-machine
operators and messenger boys....These jobs are a weak basis for the
economy." Along similar lines, Sen. Lloyd Bentsen (D-Texas) fretted
that "American workers will end up like the people in the biblical
village who were condemned to be hewers of wood and drawers of
waters." It should be noted that U.S. manufacturing output has
doubled since 1982.
In the early 1990s, another recession resulted in yet another job
shortage scare. Ross Perot won 19 percent of the presidential vote
1992 with a campaign that, among other things, railed against the
"giant sucking sound" of jobs lost to Mexico and other foreign
countries. That same year, Pulitzer Prize-winning journalists Donald
L. Barlett and James B. Steele published a widely discussed
America: What Went Wrong?, about the decline and fall of the
middle class. That hand wringing was followed in short order by one
the most remarkable expansions in American economic history.
Again and again, serious and influential voices have raised the cry
that the sky is falling. It never does. The root of their error is
always the same: confusing a temporary, cyclical downturn with a
permanent reduction in the economys job-creating capacity.
In recent years, many Americans have lost their jobs and suffered
hardship as a result. Many more have worried that their jobs would
next. There is no point in denying these hard realities, but just as
surely there is no point in blowing them out of proportion. The U.S.
economy is not running out of good jobs; it is merely coming out of
recession. And regardless of whether economic times are good or bad,
some amount of job turnover is an inescapable fact of life in a
dynamic market economy.
This fact cannot be wished away by blaming foreigners, and it cannot
be undone by trade restrictions. The innovation and productivity
increases that render some jobs obsolete are also the source of new
wealth and rising living standards. Embracing change and its
unavoidable disruptions is the only way to secure the continuing
of economic advancement. -------------------------------------
Brink Lindsey is a senior fellow at the Cato Institute and director
its Center for Trade Policy Studies. He is the author of Against the
Dead Hand: The Uncertain Struggle for Global Capitalism (John Wiley
Sons). This article is based on a longer paper published by the Cato
Institute, available online (PDF) . Sources for all the figures
this article are available in the original Cato study.
6. mailto:blindsey at cato.org
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