Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Dwight Jaffee Haas School of Business University of California, Berkley Global Strategies, Local Impact: Offshoring and the Domestic Real Estate Market Connection ©2004, D Jaffee, Page 1 Agenda ► Macroeconomics (points I will argue) The jobless recovery is not foreign outsourcing; Foreign outsourcing creates valuable economic changes; Foreign outsourcing is thus a benefit, not a threat, to US; The real threat is comparative advantage in the new information age—called the New Trade Theory; ► Microeconomics We may lose about 3.3 million office jobs a year, gross; How does this impact the market for office buildings; Don’t forget India’s office building market! ©2004, D Jaffee, Page 2 Comparing Current and Last Recovery: Real GDP Relative to Cyclical Trough 2001 Cycle 1991 Cycle 1.080 1.070 1.060 Recovery Recession Real GDP Relative to Trough 1.050 1.040 1.030 1.020 1.010 1.000 0.990 1991 and 2001 GDP Recoveries are Similar. 0.980 0.970 0.960 T-3 ©2004, D Jaffee, Page 3 T-2 T-1 Trough T T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8 Comparing Current and Last Recovery: Employment Relative to Cyclical Trough 1.020 Employment, Relative to Trough 1.015 "Jobless" Recovery =2.7 Million "Missing" Jobs 1.010 1991 Cycle 1.005 1.000 Recession Recovery 0.995 2001 Cycle 0.990 T-3 T-2 T-1 Trough T T+1 T+2 T+3 T+4 T+5 Quarters Relative To Trough Date ©2004, D Jaffee, Page 4 T+6 T+7 T+8 T+9 Real GDP, Employment, and Labor Force: (Index: 1947-1 = 1.00) Real GDP Total Employment Labor Force 7 6.5 6 5.5 5 4.5 4 3.5 3 2.5 2 Summary: Bad news is 6% unemployment rate (mostly not outsourcing); Good news is 250% increase in productivity (output per worker); Good news wins by landslide. Sources of productivity growth: Investment in physical capital; Investment in human capital; Investment in R&D; Spread of information technology; Domestic outsourcing; Foreign outsourcing. 1.5 19 47 19 49 19 51 19 53 19 55 19 57 19 59 19 61 19 63 19 65 19 67 19 69 19 71 19 73 19 75 19 77 19 79 19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99 20 01 20 03 1 ©2004, D Jaffee, Page 5 Cyclical Pattern of Productivity Growth Real GDP/Total Employment, 1947-1 = 1.00; Shaded areas are NBER Recessions 2.50 2.25 In recessions, productivity often falls, In recoveries, productivity generally rises. Recovery since 2001 exhibits very fast rise in productivity (jobless growth). 2.00 1.75 1.50 1.25 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 1.00 ©2004, D Jaffee, Page 6 Falling computer prices from foreign outsourcing was basis of high-tech boom. Lost jobs in high-tech manufacturing replaced 3 to 1 by high-tech services jobs. High-tech goods trade deficit offset by services. Retraining of workers is necessary and solvable. ©2004, D Jaffee, Page 7 Foreign Outsourcing of Imported Inputs Benefits Manufacturing Total Manufacturing High Tech 40% 35% Share of 30% Imported 25% Inputs in 20% Total 15% Inputs 10% 5% 0% 1987 Source: Bardhan, Jaffee and Kroll, Globalization of a High-Tech Economy, Kluwer. ©2004, D Jaffee, Page 8 1992 1997 How The Transition from Outsourcing to New Jobs is Achieved ► Job losses from outsourcing always come first. ► But new jobs will be created: Beneficiaries of reduced costs far outnumber the victims. (US steel industry has tiny workforce compared to industries using steel): In dynamic economy with technological advances, workers want to retrain, and firms want to expand; The record since 1947 speaks for itself (unemployment rate has fallen during the “jobless factory” revolution of last 50 years). ©2004, D Jaffee, Page 9 High-Tech Service Jobs Amply Replace Manufacturing Jobs 2200 2000 1800 1600 1400 1200 1000 800 600 400 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 Employment, Thousands High-Tech Manufacturing Employment High-Tech Service Employment Source: Bardhan, Jaffee, and Kroll, Globalization of a High-Tech Economy ©2004, D Jaffee, Page 10 What About Impact of Foreign Outsourcing on US Wage Rates? ► In simple cases, foreign outsourcing must raise US income levels: 1) International trade is voluntary; 2) International trade improves world productivity; 3) Higher foreign productivity does not reduce US productivity. ► In real cases, with multiple factors of production, specific factors or specific industries may suffer. ©2004, D Jaffee, Page 11 Foreign outsourcing is ¼ source of falling relative wages of US production workers (rest is domestic); Argues for need to retrain, but not to hide (which will clearly lower US incomes). A Foreign Outsourcing Parable ► An American entrepreneur announced he had discovered a new technology to create high-tech goods at half the price, using only American wheat. As his goods streamed into the market place, he was hailed as the epitome of US ingenuity and entrepreneurship. Of course, some production workers had to retrain, but consumers, wheat farmers, and the US economy on net clearly benefited. ► Alas, an enterprising reporter broke into the locked factory, to discover that the US wheat was just being shipped to China in trade for the goods. Politicians then denounced him as a fraud, closed his shipping centers, and were presumably happy when the goods prices doubled. ► Moral: Economists treat technological change and foreign outsourcing as similarly useful, but politicians may not. ©2004, D Jaffee, Page 12 The New Wave of Foreign Outsourcing ► Just as we finished book, news of “jobless recovery” and service job foreign outsourcing hit the street. ► 300,000 jobs lost to outsourcing is small part of jobs lost in recovery (mainly due to rising domestic productivity). ► But there is key issue: does service job outsourcing have same happy ending as manufacturing job outsourcing? ► Alarmists say this time is different: Where will the new jobs come from this time? We now stand to lose the high-paying jobs that are the heart of our comparative advantage. ► I hope to convince you that service outsourcing will be just as beneficial as manufacturing outsourcing. ©2004, D Jaffee, Page 13 Services, Next Step for Outsourcing (Price Deflators for Goods and Services Components of GDP (1947 = 1.0) ©2004, D Jaffee, Page 14 Goods Sectors: Real GDP and Employment (Index: 1947-1 = 1.00) Annual compound growth rates: Real GDP 3.4% Employment: 0.2% Productivity: 3.2% Source: BEA and BLS (with farm employment correction). ©2004, D Jaffee, Page 15 Service Sectors: Real GDP and Employment (Index: 1947-1 = 1.00) Annual compound growth rates: Real GDP 3.5% Employment: 2.5% Productivity: 1.0% Source: BEA and BLS ©2004, D Jaffee, Page 16 Forces Generating Expanding Outsourcing of Information-Based Jobs ► Rapidly Globalizing World Open economies; easy to link foreign production. ► Large Wage Disparities Economic incentive to transfer information jobs. ► Technological and Broadband Advances Feasible to transfer information-based jobs. ► Expanding Competition, US & Abroad Firms must adopt low-cost production centers. ©2004, D Jaffee, Page 17 The New Foreign Outsourcing: Occupations Rather Than Industries ► Occupations “At Risk”: No face-to-face customer service requirement, Low social networking requirement; Information the major component of the “product”, Work via remote communications, Internet; Low set-up barriers; High wage differentials. ► “At-Risk” is not “En-Route”: We estimate 14 million jobs in occupations at risk. We estimate 3.5 million jobs (= 25% of 14 million) over next 10 years) will actually go abroad. ©2004, D Jaffee, Page 18 At-Risk Occupations ► Computer and Math Occupations (Made up of 14 occupations) ► Medical Radiologic Technicians Medical Transcriptions ► Legal Paralegals, assistants ► Business/Fin Support Claim Adjusters Cost Estimators Benefits Specialists Management Analysts Accountants/Auditors Budget Analysts Credit Analysts Financial Analysts Insurance Underwriters Tax Preparers ©2004, D Jaffee, Page 19 ► Office Support Switchboard/Telephone Operators Bill and Account Collectors Billing/Posting Clerks Bookkeeping/Accounting Clerks Payroll/Timekeeping Clerks Procurement Clerks Brokerage Clerks Correspondence Clerks Credit Authorizers, Checkers Customer Service Representatives Interviewers (ex. Loan, Eligibility) Loan Interviewers/Clerks Order Clerks Human Resources Assistants Production Clerks Computer Operators Data Entry Desktop Publishers Insurance Processing Clerks Statistical Assistants Globalization and the “Convergence” of World Economies ► As globalization unifies the world’s markets for goods and services, it is natural to expect a comparable convergence in the cost of factors of production (wages and profits), and then income. Comments: Wage convergence occurs only if human capital is the same; education can retain advantage. Profit convergence requires same entrepreneurial talent (including venture capital assets). US business culture (rule of law, risk-taking, acceptance of losses etc…) very hard to replicate. Foreign gains are not US losses. ► Key Point: Convergence is issue of next 50 years, not next 5 or 10 years. ©2004, D Jaffee, Page 20 The Real Risk from Foreign Outsourcing ► With the information economy and globalization, a country’s comparative advantage in high-tech industries can be lost (this is “new” trade theory, unlike traditional theory based on labor and land). ► Key Point: US must maintain its position through Education, R&D expenditures, & Entrepreneurship. The foreign outsourcing of phone centers to India, if anything, aids and abets these endeavors. There is no sign that Silicon Valley, or other US high-tech centers, are losing their unique skills and resources. ©2004, D Jaffee, Page 21 Estimating Office Demand Losses Due to Foreign Outsourcing ► Total US office space is about 13 billion square feet. ► Estimate of loss within at-risk categories: 3.5 million jobs (= 25% of 14 million) ► ULI reports about 250 feet2 per office worker. Implies 875 million feet2 of lost office demand. Implies 6.7% of lost office space occupancy. ► Alternative estimates: Energy Information Administration uses 400 feet2 per worker; M. Leanne Lachman uses 150 feet2 per worker. ► These are gross losses; assume the workers disappear; History confirms this is only short-run issue; And the short-run is determined mainly by cyclical factors. ©2004, D Jaffee, Page 22 Office Demand At-Risk to Outsourcing By Metropolitan Regions and Occupations 20% 15% 10% 5% Bo st on C hi ca go D al la s D et ro it H ou st Lo o sA n ng Ph el es ila de lp hi N a ew Y or k W as h D C nt a A tl a U S 0% Office Support Computer and Math Professions Business & Finance Support Legal and Medical Source: FCREUE from Bureau of Labor Statistics data. ©2004, D Jaffee, Page 23 Office Demand At-Risk to Outsourcing Percent of Total Employment By Geographic Regions and Occupations 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 140,260 143,820 14,031,890 US 1,669,820 CA Office Support Computer and Math SJ MSA San Francisco Business/Finance Support Medical/Legal Source: FCREUE from Bureau of Labor Statistics data, 2002 data. ©2004, D Jaffee, Page 24 US MSAs with Highest Shares of Jobs in At-Risk Occupations (2002) MSA Stamford-Norwalk, CT PMSA Sioux Falls, SD MSA Washington, DC-MD-VA-WV PMSA Austin-San Marcos, TX MSA San Jose, CA PMSA Hartford, CT MSA Des Moines, IA MSA Tallahassee, FL MSA Trenton, NJ PMSA Seattle-Bellevue-Everett, WA PMSA Boulder-Longmont, CO PMSA Dallas, TX PMSA Denver, CO PMSA Boston, MA-NH PMSA San Francisco, CA PMSA ©2004, D Jaffee, Page 25 % At-Risk 17.6% 17.1% 16.5% 15.8% 15.8% 15.7% 15.6% 15.2% 15.1% 15.1% 14.9% 14.7% 14.6% 14.4% 14.4% The Impact of Outsourcing on Firm Location Within the US ► The increasing success of business services outsourcing may change firm location choice, especially for high-tech: Access to labor supply has been one key factor traditional affecting firm location choice. Foreign outsourcing has reduced the need to locate close to a pool of manufacturing workers, and now is reducing need to locate near service job workers (such as call center employees). On the other side, firm value added is increasingly determined by its intellectual property, related to R&D investments. Locations such as Silicon Valley are likely to benefit on net, given their key role in R&D. ©2004, D Jaffee, Page 26 A View from the Other Side: Why India? ► High favorable wage differentials; ► Human capital: large population of English speaking and technically sound graduates; ► Institutional and cultural compatibility: legal, accounting system, media, advertising. ► Time zones allow continuous processing; ► Diaspora effect creates vast networks; ► Entrepreneurial spirit and emerging financial dynamism. ©2004, D Jaffee, Page 27 India Has Its Own Backlash Factors ► Creation of wide range of income, both within an area and between regions creates tension. ► Long work hours in an office are not part of the culture. ► Family life also must change to match new work hours. ► Wage rates are rising, limiting the advantage. ► More advanced service jobs (banking back office for example) require costly infrastructure), raising costs significantly. ► Competition from other countries (China, Philippines, etc) is squeezing profits. ©2004, D Jaffee, Page 28 Outsourcing and Real Estate in India ► India’s real estate is booming in all sectors. Rapidly rising professional management industry. ► Business Process Outsourcing (BPO) accounts for 2/3rd of absorption in India’s Suburban Office Market; CBD outperformed; ► Demand for 100 million feet2 in BPO sector alone by 2008; Space Requirement in BPO estimated as 100-150 sq.ft. per person. ► REITS planned soon and growing interest and activity shown by foreign investors. ► Development of residential mortgage market. Source: FCREUE from various sources ©2004, D Jaffee, Page 29 Indian Metros and Outsourcing ► Bombay: Financial, accounting, tax preparation, data mining, insurance and banking back office transactions, legal “table work”. ► Bangalore: Software development, IT value-added services, turnkey projects, database management. ► New Delhi: Call centers, customer service, general “contact centers”, credit cards, payroll services. ► Chennai: Real estate transaction support, Financial data crunching, records management, billing and accounting. ©2004, D Jaffee, Page 30 Office Rents: Selected Asian Cities $/Sq.Ft. 120 100 80 60 40 20 0 Source: FCREUE from Various Sources ©2004, D Jaffee, Page 31 Manila Bangkok Bangalore Singapore New Delhi Hong Kong Bombay Tokyo ©2004, D Jaffee, Page 32 ©2004, D Jaffee, Page 33 ©2004, D Jaffee, Page 34 ©2004, D Jaffee, Page 35