Hot U.S. elections issue: 'Our jobs were taken'

David Dapice , Yale Center for the Study of Globalization, Medford, U.S.

As the U.S. presidential election nears, globalization might be on the dock again for the growing number of jobs that have gone abroad. Pressure is likely to build to do something about it not only from the traditional labor unions but from the white collar unemployed as well.

There has been no net job creation in the U.S. economy for three years in spite of a mild recession in 2001 and strong recent growth. The payroll data show that 2.7 million jobs have vanished, while according to a household survey 750,000 jobs have been created since 2000.

But over 1.5 million jobs are needed each year to match labor force growth. Economists explain this jobless recovery by gains in productivity, running 4 percent to 5 percent a year since 2001.

So unless we can grow about 1 percent to 1.5 percent per year faster than productivity growth, we will face increasing unemployment. Labor leaders more often point to the US$500 billion trade deficit and the leakage of jobs to countries such as China. Some blame the increasing outsourcing of white-collar jobs -- not just to call centers but to back offices doing all sorts of jobs, including information technology, medical, and legal work.

The reasons for this phenomenon of jobless recovery, however, are not just a matter of theoretical debate. It is likely to be a major issue in next year's presidential elections. If job growth is still negative or anemic, peoples fears will be intense, and Democrats' promises to "do something" about it will resonate with American voters.

But what can be done? Monetary and fiscal policy are already highly expansionary. Attempts to force China to stop pegging its currency would no doubt cause its currency to appreciate and would also force U.S. interest rates to rise.

However, cost differences are so large that a plausible appreciation of the Chinese currency might have little impact, except to drive up prices in U.S. supermarkets gorging with "made-in-China" goods.

Increased subsidies to farmers are not only hard to justify, but will run into increasing objections of larger developing nations, hurting other sectors.

Steel tariffs cause many other nations to threaten retaliation and also cause more job loss in American steel-using industries than they save in the American steel-making industry. Reducing hi-tech visas to foreign information technology personnel has a limited impact on a small segment of the job market.

It is hard to stop U.S. companies from seeking to be competitive by exporting jobs to low-wage countries. It is not clear what policy measures will create new jobs. This lack of direction could help boost an all-out attack on free trade and globalization.

The flip side of increased productivity is that more goods are produced with less labor. Manufacturing is going the way of agriculture, where technology increased crop output but shrank the number of farmers needed for the job.

Real manufacturing output doubled from 1980 to 2000, but manufacturing jobs fell nearly 10 percent. Since 2000, output has fallen 6 percent and jobs have slumped more than 10 percent. About one in nine workers is in manufacturing now, half of the 1980 ratio, and this will likely continue to fall. Nearly 90 percent of jobs are in services now, and all net job growth has come from services since 1980.

Perhaps the most unsettling trend for likely voters is the outsourcing of "white collar" jobs. It is not clear how pervasive this practice is or is likely to become. One estimate, by Forrester Research, is that U.S. employers might move 3 million jobs worth $136 billion in wages over the next 15 years.

Estimates of savings through outsourcing was $4 billion in 2000, although a more recent estimate is almost $16 billion. If we assume $40,000 saved per job, that would be a stock of 400,000 jobs outsourced. That is less than 3 out of 1,000 of the civilian labor force or of those employed.

The impact might be the same as having labor force growth at 1.55 percent instead of 1.4 percent each year -- not a huge change. However, if this displacement began to include highly educated workers who are more likely to vote and complain effectively, it could become an electoral issue with traction. Being older and more educated is a good predictor of being likely to vote. Older workers have recently been faring better than younger ones -- suggesting that they may be less unhappy with the status quo.

Joblessness could be resolved when baby boom generation workers begin to retire in two to three years. This will be bad for funding social security, but it will open up many replacement jobs. A drop of one-half of 1 percent in labor force growth means about 750,000 fewer net additions each year. This would dwarf any outsourcing impact.

It is also not clear to what extent high value added jobs can be outsourced. Would Indian lawyers or doctors be used in large numbers to solve U.S. problems? Perhaps, but the scale of this displacement is unclear.

Retiring baby boomers, however, won't help in the next election. Very fast gross domestic production growth may reduce political pressure, if it were enough to create new jobs and bring the unemployment rate down. However, with the high consumer debt, and the lift from tax cuts and mortgage refinancing fading, many think that the U.S. will head for a period of slower growth compared to the late 1990s.

Even with export demand picking up with a weak dollar, without faster growth abroad the U.S. economy is unlikely to get a noticeable lift. In any case, it is unlikely to sustain growth of 5 percent or more a year, the amount now needed to make a dent in the surplus of workers with no jobs.

So in spite of easy money and deficits, the lack of jobs and fear of losing them would be a major political issue. Fears over white-collar outsourcing might add to the unease, causing globalization to become the target of politicians next year. The fact that there is no silver bullet for the problem might make protectionism and calls for tighter immigration rules the populist solution.

Free traders and globalizers, hang on to your hats.

The writer is Associate Professor of Economics at Tufts University and the economist of the Vietnam Program at Harvard University's Kennedy School of Government. This article appeared in YaleGlobal Online, (www.yaleglobal.yale.edu) a publication of the Yale Center for the Study of Globalization, and is reprinted by permission.