September 15, 2010
09/15/2010 - One of the most pressing challenges now facing the US and other advanced industrial countries is creating a sufficient supply of high-quality jobs to sustain or continue to improve the living standards of the average citizen. The last decade represents the first time in modern US history when there was a net loss of jobs, contributing to the long-term decline in the prospects of the American middle class.
This societal challenge has been greatly magnified by the deepest recession since the Great Depression. Projections by my Rutgers colleagues James Hughes and Joe Seneca suggest that even if the US is able to begin creating new jobs at the robust rate of the 1990s – which is still far from the case in the current tepid recovery – it will be 2018 at the earliest before the unemployment rate comes back down to the level at the start of the global financial crisis (http://economix.blogs.nytimes.com/tag/joseph-j-seneca/).
Many explanations have been offered for the slow rate of new job creation in the current recovery: weak aggregate demand; deep uncertainty about whether growth will continue/risk of a double-dip recession; an insufficient stimulus package; imports replacing domestic jobs; and skills mismatches slowing the filling of some specialized job vacancies. While all of these factors appear to have contributed to anemic US job growth, I believe there is a deeper, structural problem that has been magnified by the current recession: the combination of the realization by many US companies that they are better off not employing US workers at a time when the Chinese government and Chinese firms are working closely together to grow both the number and quality of jobs in China.
The gap between the fortunes of US firms and workers is widening: as demand has begun to recover, productivity is soaring because firms have discovered ways to expand output without hiring more workers in the US. Through a combination of optimized supply chains, automation, and heavy reliance on temporary workers and consultants, firms are finding ways to expand the products and/or services they offer while reducing their payroll costs. The recent healthcare reforms have added to the incentive to avoid hiring by requiring companies with more than 25 employees to provide healthcare coverage to their workers. And as SMLR alum Linda Stamato notes in her latest Blog post http://blog.nj.com/njv_linda_stamato/2010/09/is_there_reason_to_celebrate_o.html),firms are using the leverage created by the presence of more than 5 unemployed workers for every vacancy to avoid wage increases, and in some cases, like Dr. Pepper subsidiary Motts, even pushing for concessions on wages and benefits because they have the power to do so, despite recording large profits.
Even those firms that are hiring are increasingly doing so in China, India or other parts of the world in which their growth is greatest, and where labor costs are significantly lower. IBM, for example, has reduced its US workforce by over 20,000 employees while rapidly expanding its Indian employee base, which will soon total 100,000 workers. This combination of strategies, combined with low credit costs, has kept profits high. But rather than reinvest the bulk of this surplus in R&D to generate new innovation or to hire new employees, Prof. Bill Lazonick’s research has shown that companies are buying back their own stock at unprecedented levels, in large part because this is the most certain way to ensure they meet the targets that will trigger large executive bonuses (Sustainable Prosperity in the New Economy: Business Organization and High-Tech Employment in the United States). It is particularly disturbing when companies like Amgen, one of the pioneers in the research-driven biotechnology sector, are spending more on stock buy-backs than R&D.
The global shift in labor sourcing applies not just to multinationals, but also to new high-tech start-up companies that remain one of the US’s main sources of competitive advantage, as the New York Times reported last week (Once a Dynamo, the Tech Sector Is Slow to Hire ). It is now difficult to get an IT start-up funded in Silicon Valley without a plan in place from the outset for what programming and other work will be performed in India and/or China, because venture capitalists recognize their investment will go farther if they can keep costs down in this way. And our own research on early-stage bioscience start-ups in New Jersey shows that, well before these drug development firms have a product on the market, many are employing graduate-level chemists and biologists in India and China on R&D projects at one quarter of the US labor costs (https://www.novapublishers.com/catalog/product_info.php?cPath=23_29&products_id=7760&osCsid=33ffe76a005424dfe534e1b607e27a9f).
It is not just employment, however, that is shifting within the key sectors for a 21st-century economy. Increasingly, US firms are competing with companies from these emerging economies for industry leadership, and they are playing according to different rules. I’m referring here not just to the differences in government policy – e.g. maintaining a low currency, providing cheap land and other subsidies – that have persisted despite China’s entry into the WTO, and helped it rapidly become a global leader in clean energy sectors like solar panels and electric vehicles (Union Accuses China of Illegal Clean Energy Subsidies ). Rather, I draw attention to the less discussed factor that firms themselves are pursuing different objectives. While US executives are focused on maximizing short-term profitability and “shareholder value,” Chinese firms are seeking to grow long-term market share and expand the amount of high-end work being performed in China. This is particularly true of the approximately 130 large state-owned enterprises (SOEs) that dominate strategic sectors of the economy. These are not the old SOEs that existed to provide employment, with little concern for product quality or global competitiveness. Instead, these SOEs have been reinvented to work in tandem with China’s foreign policy of economic nationalism to win share in global markets. As Financial Timesreporter Richard McGregor describes in a fascinating new book, The Party, while these firms operate predominantly according to market principles, the Communist Party retains ultimate control over key decisions through selection of key executives. See: http://www.harpercollins.com/books/The-Party-Richard-Mcgregor/?isbn=9780061998089.
My comments are not intended to be critical of China; on the contrary, I greatly admire the rapid progress they have made in upgrading their economy and creating better opportunities for their citizens, in particular the huge investments that the government and families are making in education that will generate long-term returns.
In sum, it is difficult to see how the crisis facing current and future US workers will be reversed so long as both US and Chinese companies can optimize their own measures of success by moving jobs to China.
The next blogs in this series will share other observations from my visit to China and other key issues facing the US workforce.