Times are tough out there.
We would like to blame China, incompetent politicians, Federal Reserve Chairman Ben Bernanke, the banking system, or some unseen forces for this phenomenon.
But in reality, the answer is no further than our pockets. The real culprit is your cell phone.
The arrival of these gadgets changed everything...
That's because before the cell phone boom, it was very difficult to run an efficient international outsourcing operation. Until then, there were no means of communicating between different offices other than fax, telex, and the balky international telephone system.
Consequently, these communication barriers made manufacturing products overseas cumbersome and expensive.
And since there were relatively few outsourcing operations at the time, there was also an acute shortage of skilled employees in poor countries, making a difficult situation even worse.
As for competition, there wasn't much. That meant the jobs of workers in rich countries were still relatively secure.
But not for long.
Starting in 1995, the Internet and the modern telecommunications revolution changed everything.
The Race to the Bottom
Suddenly, these same barriers began to come down. The job market was changed forever.
Now it was possible to communicate on a real-time basis with factory or service operations in poor countries all across the globe. Outsourcing had been born.
At about the same time, the retail behemoth Wal-Mart Stores Inc. (NYSE: WMT) discovered a China and the price advantage it could gain by manufacturing goods overseas. Wal-Mart's new world began to take shape.
Goods could now be designed by Wal-Mart, made to Wal-Mart's specifications and delivered to Wal-Mart stores in just a few weeks, enabling the retail giant to keep up with trends in fast-moving markets.
The rest, as they say, is history.
There was only one problem. This sea of change wasn't self-limiting.
On the contrary, workers in emerging markets became better educated and were made more knowledgeable by these new job opportunities. The wave of competition that followed continues to this day.
In software, for example, Indian companies were initially able to perform only simple repetitive tasks, while the fancy design jobs remained in the United States.
Of course, once they got established doing simple software jobs, the Indian workers quickly became more capable and sought to do the more complex jobs, perhaps setting up as subcontractors to their original employer.
Due to this same trend, you now also see a Taiwanese company, Foxconn, that does almost all the manufacturing for Apple Inc. (Nasdaq: AAPL) and its competitors from its gigantic Chinese factory, leaving very little manufacturing capability in the United States.
The Cost of Cheap Labor
Of course, Americans have benefited greatly at the cash register from international outsourcing.
It has enabled apparel prices, for example, to decline about 20% since 1993 while other prices have risen close to 50%.
It's true in Europe, too - the fancy (French cuffs, stiff cotton, pajama stripes) Harvie and Hudson shirts I used to buy in London cost $100 in 1999. They were so expensive you could only wear them on special occasions.
Today, Harvie and Hudson will sell me identical shirts, made in China to their specifications, for just $50. At half-price I can wear them considerably more often.
Of course, the charming and deferential elderly salesmen in the Jermyn Street store still have their jobs, but I'll bet they are paid less. What's more, I know somewhere in England there is a group of shirt makers now unemployed.
I feel guilty every time I go there.
Naturally, with manufacturing in China and services in India now so competitive, there is huge pressure on U.S. wage and employment levels.
If Chinese factory workers and Indian telesales reps and software engineers can do the same job for 1/10 the price, why should American workers be paid more in a free market?
The answer is that it's not going happen.
There are just two sets of people who are relatively safe these days.
One is the group of top corporate executives and bankers who have increased their profits by arranging of all this international manufacturing. Their earnings have actually increased as jobs have gone overseas.
At the other end of the scale, some occupations such as hairdressers and plumbers have to deliver their services locally, so are much less subject to international competition unless immigration is high.
There are also a few occupations - say, doctors and lawyers -- where cartels and licensing restrictions limit international competition artificially. Even so, I'll bet the cold wind of the free market will hit them too, eventually.
The Good News is This Won't Last Forever
At the end of the day, though, manufacturing in the U.S. still has its benefits.
For one thing, you don't need a cadre of expensive Chinese-speaking executives to deal with the outsourcing. Second, the United States still has, by and large, a better-educated workforce than China and India.
On top of that, the United States still has a massive amount of capital compared to emerging markets - though Ben Bernanke's ultra-low interest rates are eroding that advantage all the time.
So with unemployment numbers improving and Chinese wage inflation high, maybe we are approaching a new equilibrium of stable U.S. wages, which won't be disrupted until some other new innovation makes Chinese, Indian, and African workers even more competitive.
The good news is that technology and productivity improvements will undoubtedly continue, so there's a good chance that the world as a whole will get richer.
Still, if you've recently lost your job, or been forced to take a pay cut remember: your cell phone is to blame!
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I'm 89 years young, retired farmer,exposed to my first computer about 20 years ago,it was an old Apple that I bought for $50 bucks, it had no internet capablities but did have the Oregon trail game on some small square disks. What a piece of junk but after I took it to the dump I found out that it was a collectors item and one's like it were selling on ebay for $5000 bucks.
Since then I have owned three computers which have opened up a whole new world for me. Mid year 2008 I started investing on line . Lost more than a few bucks during the learning process. Bad timing was part of the problem. Have been trying since to recoup those losses, I'm alive to tell you that urging young people to invest in the stock market because social security is going to fail will call for a lot more education than they are receiving in our schools.
As for cell phones and how they are changing the world, your article is probably right, I do have one which was purchased for me by my daughter just as my computers have been. Now she is urging me to accept a gift of a Smart Phone. All this is almost more than this old tired brain can handle, I have not mastered the old 4 year cell phone and now I'm supposed to master this smart phone that can do every thing but wipe my butt.
Getting back to investing, I'm finding that technology is changing so fast that what seems like a good investment today may be dead property tomorrow. Your advise is a lot better than picking up a hot tip at the bar or a after church brunch and I do thank you for that. My days are spent taking care of my wife and trying to find the stock that will make it possiable for me to help with the funds for my great grand children to invest because social security is going to fail. Thank God and the young people who contribute for the check I get every month. Donald W.
Donald, so good to read a 'real life' perspective. I was computer literate 35+ years ago – now age 75 i'm fast losing it! Frankly i'm very concerned. More advanced technology means more room for disastrous failure – e.g. the Cruise Ship wreck yesterday. We all soon begin to rely on our 'technological servants' – they fail – what then?
This comment of yours, "trying to find the stock that will make it possiable for me to help with the funds for my great grand children to invest because social security is going to fail", needs serious thought – by everyone. I dont blame you – you have lost – try to get it back, but if you do or dont, what has your efforts done in the interests of humanity? Nothing, as I see it! As a farmer you helped feed others, they helped build your home, made your clothes, built your machines, etc etc. Not so your present activity.
Apart from 'religion' & 'political' groups, the one other 'occupation' that is now a 'curse' is those who sit at desks (computers mostly now) using yours and my saved up toils stored as money, for their own selfish benefit. Actually computerisation has made it possible for this to rapidly expand – hopefully computerisation and the 'net' will open up the shady complexities of the money world resulting in a drastic simplication of it making it fairer to all.
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Next disruptive innovation in labor: crowdsourcing. Companies like CrowdControl Software are tapping into a global global workforce of people who have PC's and Internet connections and willing to do tasks for pennies at a time. It completely upends the model of 'employees' working in a company or even in an outsourcing firm.
In the article, you wrote: "There are also a few occupations – say, doctors and lawyers — where cartels and licensing restrictions limit international competition artificially. Even so, I'll bet the cold wind of the free market will hit them too, eventually."
Those licensing restrictions aren't entirely artificial. Having been involved in international contracts among Fortune 500 sized companies and IP disputes for over 30 years, I can assure you that laws, procedures and even underlying legal principles are quite different even among highly developed, modern, western civilized nations, and more so when those of USA and Europe are compared and contrasted with those of China and Japan. Between USA and European countries and even within Europe between European countries, there exist substantial differences in interpretation of identical language in contract terms, often to the shock and surprise of USA attorneys who think they know what a contract clause written in English as its official controlling language means when it is agreed between the parties that the Swiss Code of Obligations shall be used to interpret that contract and than any dispute shall be settled if necessary by litigation in a Swiss court. I know this from personal experience and the chagrin of some Cum Laude Harvard law graduates who learned they really did not know what the contract terms meant when their interpretation was quite different from that provided by qualified Swiss legal counsel.
Also, I have employed legally trained personnel in India to assist in studies of technology and IP strategies. They can be of help, but they cannot replace competent locally resident and locally trained and license counsel in all regards and matters. Some of the work will always be analogous to that of the plumbers — it must be done on site.
Hi, Martin!
Your article was certainly very interesting. I never thought of the cell phone as being the culprit!
Hi, Donald!
I'm impressed by your thankfulness for what you have. So few are these days.
Regards!!
Hi,
Good article, but if we are relyng on falling wages combined as you say with more capital (and therefore better access to technoly.machines) then wages will be aflling for at least the next ten years. It is a double edged sword, but huge oil price rises, taking the competitive advantage of long distance outsourcing might also well Us and European manufacturing.
As an ex casual Lecturer in Economics, the standard of the international students work and the hours they put in, these guys are going to be stiff competition for us. Maybe I am wrong, but I fear the pre-eminance of the Us and West generally is over, guilds are forming in areas like plumbign where they lobby the Giovernment to stop us doign our own lpumbing in the interest of public health, but to boost their income of course. I now work in Government and see this day in day out, hope the market picks up soon 14 months of Government is already too long for me.
One US advantage may be food, it can like Australia be an exporter of a quasi renewable resource whose price should keep rising.
All the best,
Stuart
well most think that not the cell phone but the Free Trade cost the job market to shift it to China
Asian's have inexpensive cell phones that work all over the world and have a great job market, thanks to the Free Trade not their cell phone
Like water seeking its own level, so does the cost of labor. As more manufacturing shifted to the East from the West, so did the general level of wealth. Though greatly aggravated by Frank-Dodd welfare that forced banks to make loans to those who couldn't afford them, our housing market collapse is primarily due to the loss of good-paying jobs to China and others. As wages deteriorated and layoffs increased, folks borrowed more and more to maintain their lifestyle. The deadly combination of over-financing, disappearing jobs, and shrinking wages have all contributed to the current mess. Add to this the inability for many to sell their homes and relocate for work and you have the perfect storm.
The only solution that comes to mind: start making the countless everyday products we buy from foreigners here in America again. How? By giving manufacturers the tax breaks needed to be competitive and if necessary with tariffs. Not only will this restore millions of lost jobs, but it will result in cash being kept at home instead of exported. This will strengthen the entire domestic economy, raise tax revenue, improve our balance of foreign trade, and help bring down the national debt.
Sending jobs overseas began well before the cell phone explosion. In my opinion the U. S. corporate tax structure has forced U. S. Internationals to seek cheaper labor, ie, General Electric has been following this tactic for more than 3 decades. GE prospered very well before and after the cell phone. I hesitate to bring this up; but our country became a world economic force based upon the cheapest form of labor.