Productivity, outsourcing, and employment

Business Week has a cover story on the mystery of low job growth in the United States. Some of the highlights:

[I]f the outsourcing of jobs to India, China, and other low-wage centers has caused some of the U.S. job losses of the past three years, it is hardly the primary explanation for the weak job market. Instead, the continued ability of U.S. companies to squeeze out productivity gains on the order of 5% annually, since the recession ended, is having a far greater impact on the jobs picture. What’s more, thanks to a late-’90s binge on technology, a broader array of industries is now finding ways to eke out efficiencies from their workforces than in the past. That means that the dearth of hiring, long a fact of life in the manufacturing sector, is becoming a reality in the service businesses — retail, finance, transportation — that account for 80% of U.S. jobs…. As innovation has brought ever-cheaper computing power and new ways to make use of it, capital has become increasingly cheap relative to labor. The returns on investment in new labor-saving, high-tech equipment have soared. Given that labor accounts for about two-thirds of the cost of making and selling products, greater labor productivity in today’s global economy is tantamount to corporate survival. As a result, productivity is growing even faster now than in the late 1990s. And it’s a real job killer this time: A one-percentage-point increase in annual productivity growth costs about 1.3 million jobs…. As for companies considering hiring, they increasingly face a situation that has long plagued their European rivals: The soaring cost of employee benefits is making companies increasingly hesitant to add workers unless absolutely needed. Benefits costs, fueled by sky-high health-care premiums and the need to restore underfunded pension plans, are up 6.5% from a year ago. After adjusting for inflation, that’s the fastest clip on record. If a company can get three people to do the work of four, that’s one less health-care premium it has to pay…. Given a dearth of new jobs, why is the unemployment rate falling, from a peak of 6.3% last June to 5.6% in February? Chiefly, people are dropping out of the labor force, which has reduced the amount of job growth needed to push the jobless rate lower. The labor force participation rate — the percentage of the working-age population that is either employed or seeking work — has dropped to a level even lower than during the 1990-91 recession. However, almost all of the decline has occurred in the 16- to 24-year-old age group, while participation in the 25-and-older segment has held up…. Which comes back to the vexing issue of outsourcing. No one doubts that it is having an impact — though exactly how strong is hard to say since good numbers are unavailable. While some put the number higher, Forrester Research Inc. estimates that of the 2.7 million jobs lost in the last three years, only 300,000 have been from outsourcing. (emphasis added)

Given that Forrester’s estimates on the effect of outsourcing on the American economy have been at the high end of this debate, this should be treated as an upper bound estimate. This USA Today editorial — the contents of which are otherwise none too friendly to business — says, “Many economists estimate that only about 1 in 100 layoffs are caused by outsourcing. By contrast, the bulk of job losses stem from domestic factors. (emphasis added)” Back-of-the-envelope calculations would imply that only 27,000 gross jobs (as opposed to net) have been lost due to offshore outsourcing. Which would be the lower bound estimate. Technological innovation is responsible for the vast improvements in labor productivity, which explains the combination of seemingly robust economic growth and seemingly weak job growth. One wonders whether this will foster the the rise of a neo-Luddite movement in the United States. UPDATE: Hmmm…. maybe the USA Today figure was not a lower bound. This Economist story says:

As for outsourcing, it is implausible now, as Lawrence Katz at Harvard University argues, to think that outsourcing has profoundly changed the structure of the American economy over just the past three or four years. After all, outsourcing was in full swing—both in manufacturing and in services—throughout the job-creating 1990s. Government statisticians reckon that outsourced jobs are responsible for well under 1% of those signed up as unemployed. (emphasis added)

Plenty more on this topic from Steven Bainbridge, Tyler Cowen, and Alex Tabarrok.