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Offshoring - - Implications for the States Prepared for National Association of Workforce Boards Chairs, Denver August, 2004 Graham Toft & Nadine Jeserich Hudson Institute [email protected] [email protected] 317 549 4103 1 Outline 2 Global Job Shift: Economic & Political Buzz Refresher: Growth Economics 101 What Jobs Are On The Move and to Where? What Increased Income in Developing Countries Means for U.S. Markets and Workers Where is the Wealth Being Created? What Global Job Shift Means for State Policies Bottom Line Global Job Shift: Economic & Political Buzz 3 Manufacturing Jobs Steady worldwide decline in employment, including in many developing countries such as China But productivity increases ensure growth in output and family wages in the U.S. Changing from product focus to “total solutions”, which includes services. Service Jobs Services present 80% U.S. GDP White-collar jobs represented 87 % of U.S job growth in the 1990s Share of high-skill service jobs provided overseas or by third-parties is rising Global Job Shift: Economic & Political Buzz Countries gaining Significant wage and unit labor cost convergence mainly among advanced countries Several East Asian nations show remarkable productivity improvements U.S. productivity growth remains robust. IT still continues to transform. Five key U.S. productivity industries: Semiconductors & electronics manufacturing Post and telecommunications services Wholesale trade Retail trade Financial services 4 Global Job Shift: Economic & Political Buzz (cont.) The Political Buzz IUE-CWA : “…what Brazilian workers do best is: get fired for organizing; what we do best in the U.S. is: get laid off. And what GE does best is: make $16 billion a year in profits!” The Economic Development Buzz Clusters Creative Class Innovation Development 5 Refresher: Growth Economics 101 Import Substitution Theory: Replace imports with locally competitive substitutes Self-sufficiency Strategies Both require efficient government and large internal market and even then limits efficiency improvements and therefore growth Export Base Theory: Sell competitive goods and services to the outside in exchange for direct imports The traded sector – now very competitive; costs and productivity matter. The derivative sector – lots of jobs here! But some being lost to offshore also. High quality of life – health, education, environment, amenities – still depends on traded wealth Talent Base Theory: 6 Not what you make or sell, but what brain and skill power you have. But if you train, educate and nurture creativity will they stay? Attracting and retaining the “creative sector” is important. Refresher: Growth Economics 101 (cont.) A new Force: Creative Destruction (Schumpeter) 7 “Knowledge Economy” requires constant innovation and technological adaptation in products and services Changes in productivity or trade competition upset traditional comparative advantage Human talent is displaced, then redirected at expanding and higher-value economic needs – “skills on the run” e.g. displaced defense and aerospace engineers & scientists from the 80’s ended up in the .com 90’s boom. New Policy Issue: Agglomeration vs. “Disagglomeration” (Clusters yes / no) Very difficult to pick winners. What Jobs Are On The Move and To Where • Main Driver: Fragmentation of Production Chain due to Technological Advancement and Globalization (integration of global markets) • Two Forces: Outsourcing and Off-shoring: Both have increased in last decades: Campa & Goldberg (1997) estimated U.S. outsourcing activities doubled between 1975 and 1995 in MFG “Survey of Current Business”: Employment and Gross Product of U.S. affiliates abroad has not changed dramatically relative to the size of the economy Reports on IT and financial industry outsourcing predict several million jobs shipped abroad in the next 5-10 years (McKinsey, Deloitte, Gartner, Forrester) 8 What Jobs Are On The Move and To Where (cont.) • India: but has to improve infrastructure and control wage costs; now already outsourcing its outsourcing sector to China • China: but has to invest in infrastructure, language skills and cultural competencies • Latin America – Free Trade of the Americas, the next frontier? • Countries with % of workforce with postsecondary education above the U.S. average: Canada, Israel, Lithuania, Singapore. • Overall, 70% of trade and investment is among advanced economies and their wages are equilibrating. • Only 11% of jobs have been identified as at risk, mostly in computer, support and administrative services and only 2.5% of total U.S. employment is expected to leave by 2015 . But this means a lot of dislocation at all knowledge & skill levels. 9 What Increased Income in Developing Countries Means for U.S. Markets Growth of U.S. Exports (% of GDP in constant dollars) 1980: 6.8% 1990: 8.6% 2000: 12.4% 10 Categories of exports today: Top 5: Valves/transistors, Aircraft/spacecraft, Motor vehicle parts/accessories, Telecomm. & Computer equipment Services account for 28%, doubled in last decade Growing Exports in the future Capital & financial acumen Technology and Know How Education and training. Where is the Wealth Being Created? The Value Chain Today: Domestic and international Networks of contracts and trade; Focusing on efficient highvalue-added stages and outsourcing the rest - - the “sweet spots”. Trading Partner China: Largest Trade Deficit with China (although official numbers exaggerate), but both Imports and Exports are growing. U.S foreign direct investment flows to China are less than 2% of total outflows. China’s Value-Added: Of $1 U.S. product value going through China only 20 cents are value-added there 11 What Global Job Shift Means for State Policies Research, Innovation and Commercialization Advanced products / services at home (e.g. Design) Exports of know-how! Entrepreneurship (all ages, all ethnic and racial groups) - - a U.S. growth engine! Policies for Firm Agility 12 Avoid picking industry winners (create climate for clusters but don’t pick them) Create conducive, solid economic foundations (tax, regulatory, information policies, strong basic education / skills) Let the entrepreneur do his / her thing. Nurture inter-firm collaborations around education / training. Know who your growth companies are. What Global Job Shift Means for State Policies (cont.) 13 Policy for Worker Adjustment / Agility Re-think economic adjustment policy - - not just for large, extreme situations Provide accurate, up-to-date, easily accessible labor market information. (real time state / local LMI – needs business cooperation) Keep moving One Stops to physical and virtual full service “success stores”. Policy for Youth and Adult Educational Advancement. Focus on transportable critical skills Find ways to link WIA training / support with career technical education and adult education (a quasi-state “skills corporation”?) Support the growth of community-based, lifelong learning centers. Work with others to ensure seamless web of education / training offerings and career pathways. What Global Job Shift Means for State Policies (cont.) 14 Policies Concerning Social Services Act as catalyst to help human services organizations link client – centered services through networked case management. (help employers get help) Policies for Community and Regional Development Create “regional investment corporation” that integrates career technical education, adult education, workforce preparation, regional planning and economic development. Pool funding sources, seek federal waivers. Could WIB’s be a lead? Create state “onshore” regions in rural, non-metro parts of the state through competitive matching grants – highly efficient, lower labor cost competition to offshore alternatives. Bottom Line: You don’t win with the most production workers or lowest wages but with an attractive and aggressive economic and workforce environment (Ireland) China’s and India’s economic futures are still very unpredictable, but offer promise of a more prosperous, stable world. They should not be taken as a threat but an opportunity Outsourcing domestically or overseas is a necessary and profitable business strategy for certain production stages and products if carefully planned - - global business strategies are here to stay. 15 These trends are neither temporary nor avoidable American Outlook, April 2004: Nadine Jeserich and Graham Toft “China and the New Geography of American Jobs” www.americanoutlook.org Progressive Policy Institute May & July 2004: Robert D. Atkinson “Understanding the Offshoring Challenge” ; “Meeting the Offshoring Challenge”. www.ppionline.org 16