USA High Labor Cost Not Primary Reason For Jobs Export

February 11th, 2011
in Op Ed

by Steven Hansen

The USA economy is at the stage where jobs losses (as measured by initial unemployment claims) are approaching a more normal range.  Yet employment growth, following one of the deepest recessions in history, has been mediocre.  The structure of employment has changed, and has been changing over the past twenty years.  This has produced a different employment growth pattern in recent recoveries compared to what was seen before the 1990-91 recession.  That pattern has been even more emphasized in the recovery from The Great Recession.

Follow up:

There are at least two major factors and both are related to globalization of the world economies:

  • Historically productivity has been more then offset by employment growth in new technology.  There is a natural life cycle in business.  Throwing open the borders to free trade has allowed a growing proportion of new technology employment growth to occur outside U.S. borders.   International business locates production to maximize profits.
  • Globalizing the USA economy not only has exported jobs which normally would have created in the USA, but has exported jobs which would have remained in the USA in a non-globalized economy.  Please read Free Trade Agreements = Evaporated Jobs Worldwide.

My colleague John Lounsbury documented Exporting Jobs this week and concluded:

If only some, even less than half, of the manufacturing that has been outsourced had been retained in the U.S., it is likely that there would still be an emerging market boom, but there would not be the severe structural unemployment problem that exists today in the U.S.  It seems, looking at these numbers, that where we are is not the result of doing a fundamentally bad thing.  It could be argued that it is actually the result of taking a good thing too far.  It seems we missed the sweet spot and simply botched a beautiful shot.

Free Trade is a very good thing, but free trade taken too far is destructive.  Hard data shows why.

Free trade is a good concept that is being applied in an uncontrolled manner.

One of my responsibilities in my past life was plant location.  Many believe that it is the USA labor cost which is the driving factor - it is a factor but normally not the dominant factor.  The dominant factors are cost of plant, transport (raw products in and finished products out) and cost of compliance (regulation plus insurance costs).

Depending on the product - cost of energy, quantity of labor, cost of labor, quality of labor, and/or taxes may become dominant also.  Needless to say, a location is not even considered which does not have a stable government and pro-business regulatory history.

  • Transport times and costs to California from the USA East Coast or Asia are similar;
  • Cost of plant are fractions in the emerging markets;
  • Cost of compliance is negligible in Asia - yes, some bacsheesh, but well tolerable;
  • Taxes in many countries are reimbursed upon export - what ends up within the USA borders is a USA product being totally taxed competing against an imported product which has never been taxed.
  • What product liability does a foreign producer have who has no assets in the USA?  Answer: literally none.  The cost of liability coverage exists for a USA company, or a foreign produced product imported under a USA producer's banner.  A totally foreign product has no cost for liability coverage.
  • USA companies working overseas (and USA citizens) must comply with USA laws even though working overseas.  Foreign producers only comply with the laws of the country of production (and even those they work to avoid compliance).

These are the growing headwinds to jobs creation in the USA.  When I worked with governments on feasibility studies for trade and manufacturing zones, the objective was to create as many cost advantages as possible to entice business. 

The stated objective of the countries sponsoring these trade and manufacturing zones was jobs.  Emerging economies see jobs creating GDP.

The USA believes GDP creates jobs,  and jobs creation is not that simple.

Economic News this Week:

Econintersect's economic forecast for February 2010 points to a slightly improving economy with all segments of its non-monetary index positive.  This week the Weekly Leading Index (WLI) from ECRI improved from a revised downward 3.6%  to 4.5%.  Although the overall level implies the business conditions six months from now will be approximately the same or slightly better then today.

Initial unemployment claims in this week’s release dropped significantly again following last week’s drop.  Econintersect believes the weather is influencing unemployment claims.   One week is not a trend, and it remains important to follow the four week moving average for analysis of unemployment to smooth out the reporting idiosyncrasies.

The data released this week was positive and consistent with Econintersect’s January forecast of slightly improving economic conditions overall.  The economy, similar to this period last year at this time - is gaining strength.

Weekly Economic Release Scorecard:

Item Headline Analysis
January Balance of Trade
Grew $2.3 billion
Trade balance is currently trending lower
December Wholesale Sales
Up 0.4%
Historical high for Decembers
William Black: How Wallison is Blind to Accounting Control Fraud
Deregulation, desupervision and de facto decriminalization drove accounting fraud
January Diesel Consumption
Off 0.3%
Blame it on the weather
Mortgage Applications down

This statistic is Irrelevant - there a lot of cash home purchases
Exporting Jobs

Explores relationship between goods trade import & jobs growth
2010 Rail traffic
Up 8.0%
Will growth continue into 2011?
January Small Business Sentiment
Up 1.5 points
Small Business optimism growing fast then consumer optimism
December JOLTS

Hiring and Separations are equal
Mortgage Defaults

Increase consumer spending?
December Consumer Credit
Up 2.5%
Improved yes MoM - but below "normal" December rises.
Income Distribution

Destabilizing and may have been a factor in the lead up to the Great Recession
China's 2010 GDP
Up 10.3%
When will China be the largest economy?
Opinion: China Currency Manipulation

Michael Pettis explores what is good and bad for China and the USA
Opinion: Investor vs Working Class

Derryl Hermanutz says you need a strong natural resource sector.

Bankruptcies this Week: None

Bank Failures this Week:

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1 comment

  1. Elliott Morss Email says :

    Two other factors to consider in discussing US job losses:

    1. The overvalued dollar resulting from Chinese and Japanese purchases of US government securities (the Chinese will hold more US government securities than the Fed even after QE2);

    2. Foreign direct investment in the US. FDI creates jobs at home, and there is far more FDI in the US than in any other country.

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