The offshoring of the American Dream

By all accounts, Americans continue to experience the worst economy since the Great Depression. Unemployment remains unacceptably high, many of the jobs that produce real income have been offshored and the middle-class earnings are stagnant. Looking ahead, it’s likely to get worse before it gets better.

Yet corporate profits are doing just fine, thank you. Today they make up about 12.5 percent of  America’s gross domestic product. Just two years ago, they reached their largest percentage of GDP since the 1950s. On the other hand, wages and salaries, which accounted for 47 percent of GDP in 1985, are currently at around 42 percent.

Among the reasons for the combination of lower wages and high corporate profits in a weak economy is that American firms have discovered the advantages of exporting manufacturing and service jobs to countries with an abundance of productive, low-wage workers. Firms substitute cheap foreign labor for American workers. All the while, those Americans are told that offshoring is part of free trade and globalization.

Early offshoring was focused on manufacturing, but in recent years, U.S. firms have taken advantage of modem communication technology to outsource service activities. This trend cuts across all industries and occupations, ranging from lower-skilled manufacturing jobs to those requiring more skill and education, including those in the information technology sector. Put bluntly, they are exporting jobs to countries where wage rates are low, causing higher unemployment and lower living standards in the U.S.

Cheerleaders for offshoring argue that the money companies save will, in the long term, create new and better domestic jobs. These jobs must be disguised in the employment statistics; very well disguised, indeed. Moreover, they argue that when firms save money, consumers benefit from lower prices. So while free trade causes some dislocation, the benefits outweigh the costs. This pitch has become a totem of belief among free-trade advocates but it’s cold comfort for those whose jobs have been exported.

It was reported last month that IBM now employs more people in India than it does in the U.S. Its Indian workforce has grown from 3,000 in 2002 to about 112,000 last year. The reason is simple: The cost of labor in India is only a fraction of what it costs to employ the equivalent workers in the U.S. The average annual salary for an IBM employee in India is $17,000 compared with $100,000 for a senior American IT specialist.

Given such wage differentials, it’s not surprising that we are now witnessing the great migration of white-collar American service jobs. While India is the largest destination, the jobs have also gone to Eastern Europe, the Philippines, China and Mexico.

The offshoring of jobs may be one of the underlying reasons why Great Recession job losses look quite different from those of past recessions. American unemployment is becoming structural rather than cyclical and may worsen over time no matter how much public stimulus is provided.

So we have finally figured out how to make income redistribution happen on a global scale: American workers have to be less rich so their overseas counterparts can be less poor. Offshoring increases income levels in developing countries and the theory is that with greater wealth, those people will be able to demand and receive better treatment. The question is whether these interests should outweigh the interests of American workers.

Maybe jobs will return when American wages are as low as those of our foreign competitors and corporations decide to come home to exploit cheap labor. But it seems they first have to impoverish domestic workers so those workers can become rich again in the future.

originally published: November 6, 2013

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