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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