When Bad Things Happen to Good Jobs
Eight years ago in the early spring, when the mud is still frozen
here in northern Indiana, a TV journalist called me late one night.
News had just broken in Europe that the German company Bosch had
purchased Allied Signal, which employed 430 South Bend workers.
Within minutes of my hanging up the phone a camera crew was in
my living room. During the interview, where I was serving as the
local economics expert, I remarked that in one sense the news
was good for area workers: German executives didn't act like the
"Corporate Killer" American CEOs, as Newsweek
had dubbed the new breed of business leaders who use
massive layoffs to make shareholder profits soar. The jobs in
Michiana were likely to be secure.
The 11 p.m. WNDU newscast featured my interview (I was grateful
my pajamas looked like a pantsuit on screen) and televised the
now-famous Newsweek "Corporate Killer" cover of February
26, 1996. It featured mug shots of four CEOs, including "Chainsaw
Al" Dunlop of Sunbeam and "Neutron Jack" Welch of General Electric.
In 2001, a spokeswoman for Nortel Networks Corporation, the
Canadian-based international communications company, described
what is called a share-value layoff to a Boston Globe reporter,
explaining why Nortel was shedding more than 8,000 American jobs.
"They felt they had to do something quickly," she said of the
extra layoffs. "The latest earnings forecast deeply disappointed
investors." Such share-value layoffs, where employees are laid
off to increase the company's profits, are a breed apart from
the so-called "distressed" layoffs that businesses reluctantly
resort to in bad times.
Nortel had learned something from Neutron Jack, who got his
nickname because GE's exceptional growth in the value of its shares
was partly a result of Welch's deep downsizing. Like a neutron
bomb, he keeps the buildings standing and vaporizes the people.
In December 2001, Notre Dame students, administrators and faculty
greeted retiring GE chief Welch with overflow audiences at the
Mendoza School of Business. Ironically, in the same year, GE acquired
OEC Medical Systems, a company that manufactured X-ray equipment,
and closed its Indiana factory, not because the plant was unprofitable,
but because Mexican production offered more profits.
The Broken Economy and Jobless Recoveries
Fast forward to the strange economic news of spring 2004. Officially,
the economic recovery started in November 2001. Instead of an
expected 1 to 3 percent monthly increase in job growth, however,
the average job creation rate was negative. Using the weak job
numbers as a backdrop, President Bush successfully implored Congress
to cut taxes two years in a row, partly to stimulate economic
activity. In April 2003, the president predicted an average 306,000
new jobs would be created each month by economic growth and his
second half-trillion dollar tax cut. Yet, the average increase
in the number of jobs has been under 58,000 per month between
April 2003 and March 2004.
Today we are 5 million jobs short of the president's prediction.
Worse, workers face conditions found only in nasty recessions:
sickly wage growth and an unprecedented average job search time
of more than 20 weeks. Most ominous is that the labor force is
actually shrinking. That has never happened in an economic expansion.
This recovery deserves the moniker "jobless recovery."
The causes of this twisted economy are not recent. The seeds
of these perversions were planted in the late 1980s and '90s when
the rules of making profits in America changed.
Layoffs to increase a company's bottom line were pioneered by
celebrated CEOs and are partly responsible for the unprecedented
"jobless recovery" and stagnant wage growth. Another factor, contrary
to commonplace wisdom, is low prices. Inflation can help create
jobs. Companies searching for ways to maintain profits when they
can't raise prices cut costs by making the same number of employees
work harder. Louis Uchitelle of The New York Times links
our Wal-Mart, low-price nation to job loss; he quotes Larry Geiger,
a vice president for the American Management Association, who
says in this environment "the goal of companies is not to hire."
Economists don't disagree much about the numbers. The debate
over causes and solutions is where the intellectual fur starts
to fly.
Some policy responses take aim at outsourcing and offshoring.
In outsourcing, companies fire employees and transfer work to
lower-cost firms in the United States. When U.S. companies transfer
work to lower-cost firms abroad, it's called offshoring. According
to the research firm Gartner Inc., more than 40 percent of Fortune
500 companies are expected to move some of their work out of the
country. GE, for example, has moved most of its research and development
overseas. More than one-fourth of information technology jobs
are expected to move to China and India by 2008.
In early 2004, IBM announced, with some flourish, that it would
add 5,000 jobs in the United States. This was partly to distract
from its unpopular announcement in early December 2003 to move
more than 4,700 jobs to India. IBM plays a vigorous role in helping
other firms outsource. High-paying firms, such as AT&T and
J.P. Morgan Chase, use IBM to do work not related to their core
function of communications or banking. For example, AT&T contracts
with IBM to update software, and AT&T transfers its workers
to IBM to complete the project. IBM employment roles swell, but
when the project is finished the jobs at IBM disappear and the
workers have lost any attachment to AT&T.
My 67-year-old mother sells newspaper classified ads for the
Sacramento Bee. In her department, people who leave are
not being replaced. She comes to work early, eager to get ads
left on the answering machine and website to make the higher quotas
for a merit pay increase. Since the California newspaper outsourced
to a New York call center, three times zones away, those ads are
already picked up. The call center, fewer full-time staff and
higher production quotas help expand the newspaper's profitable
classified ad section. The Bee's workers pay for this
with more work and smaller paychecks.
Federal Reserve Board Chairman Alan Greenspan understands the
sweating at my mom's work place well. He explains the miracle
economy -- the miracle where a company's profits can increase
but prices don't -- by workers' fear of being laid off and of
being unable to find a replacement job as good as the one they
lost. MIT's Paul Osterman tells a parable to illustrate the effects
of a strategic layoff. When only one worker out of a hundred loses
her or his job, the measured job loss is tiny but the 99 workers
left are changed forever. They are scared. Magnify this example
many times over as thousands of educated workers -- accountants,
industrial engineers, computer systems analysts, database administrators,
among others -- lose their jobs to cheaper domestic and foreign
vendors. That explains the jobless, wageless recovery. Those who
are still working don't ask for health insurance, don't unionize,
don't quit when their work load doubles or when they are asked
to train their replacements. Companies enjoy the effects of workers'
fear. In this way offshoring and outsourcing result in lower quit
rates, soaring productivity and too many workers faint of heart
to demand pay hikes.
As I write this, in late April 2004, no less than three bills
in Congress aim to save American jobs shipped overseas. The proposed
legislation shares the conviction that the economic reasoning
of the Bush administration is dead wrong. N. Gregory Mankiw, chief
economic adviser to President Bush, in mid-February explained:
"outsourcing was probably a plus for the economy in the long run"
because it reflected businesses taking advantage of free trade
and cheaper labor abroad. Mankiw has been apologizing ever since,
saying he was unclear and he didn't mean the president praises
U.S. job losses.
But Mankiw was clear. He was repeating orthodox economic theory
that teaches that free trade will make everyone better off in
the long run even though, at first, companies win and workers
lose. It's a kind of "I win, you lose, I win again and then you
win" proposition.
Most economists agree that losing jobs abroad -- offshoring
-- explains only about 10 to 15 percent of the U.S. job losses.
Outsourcing is the larger phenomenon and causes an even larger
problem. When jobs are farmed out, the result is a fall in the
pay and working conditions of U.S. jobs. America has a job quality
problem.
The enduring problem is that millions of better-paying jobs
have not been created in the United States. Stopping the offshoring
of good jobs won't transform bad jobs to good ones, but that's
the ticket many mistakenly want us to buy. According to the current
economic plans, bad jobs dominate America's future. The Bureau
of Labor Statistics, in its understated but fascinating report,
Occupational Outlook for the U.S., shows that the top
two fastest-growing occupations (adding more than a million jobs
together) are college teachers and registered nurses. This is
great news, not because I am in one of those professions but because
these jobs are high paying -- average wage over $41,000. The bad
news is that 3.5 million jobs in seven of the eight next fastest-growing
occupations -- service representatives, food preparation workers,
cashiers, janitors and cleaners, waiters and waitresses -- pay
the worst, less than $15,000.
Where the president matters, and what the government has control
over, is how labor markets are regulated and encouraged to raise
job quality. After September 11 Congress and President Bush turned
thousands of minimum-wage jobs at airports into jobs with health
insurance and pensions, which shows government actions can establish
job quality.
The peculiar situation of being in a business-cycle recovery
in which profits and the quantity of goods and services are growing
without job growth is just one symptom of a broken economy. According
to Harvard economist David Ellwood, in the last 20 years the earnings
ability of male workers with only high school diplomas fell by
more than 13 percent and those with less than a high school degree
fell by an incredible 20 percent. College graduates got a 4 percent
boost in earnings.
The consequences still make me pause. No other advanced industrial
democracy has seen more than two-thirds of its male workers, those
at the middle and lower end of wages and education distribution,
doing worse than their counterparts 20 years ago. Full-time, year-round
work at minimum wage once raised a family out of poverty. Now
it gets you only halfway there. Unions helped transform many secondary
jobs -- such as steel making, plumbing, meatpacking, bus driving
and garment work -- into secure, adequately paid occupations.
Today, as the economic future of the NASCAR dad grows worse, his
family stays afloat by a working NASCAR mom. Any relevant job
policy must promise to create middle-class jobs.
What Happened to the Good Jobs?
Disagreement about the causes of anemic job and wage growth reflect
the differences in proposed fixes. Orthodox economists explain
that the transfer of jobs abroad and the growing gap between high-income
and low-income workers are caused by technology. The orthodox
explanation is basically that shifts in production processes favor
computer-based work and college-educated workers. Communications
and finance can zip around the globe in nanoseconds. For the first
time in human history capital can move faster and cheaper than
labor. You can't blame anyone for technologically driven job losses
and income inequality, the orthodox, free-trade economists say.
There is no villain and no victim. The solution for the workers
who lose their jobs is to get more skills and be patient because
the economic rewards of low prices and higher profits will benefit
all people involved in the exchange.
The school of economics called "institutional" places more emphasis
on how economic conditions and laws and regulations alter the
balance of economic power. Economists date the idea of outsourcing
to the first capitalist who wanted cheaper labor. Adam Smith,
back in 1776, called for free trade, in part to give labor a chance
against the new factories and the enclosure laws that didn't allow
workers to leave their assigned communities. Smith reasoned that
his plan would leave workers free to seek an employer with the
best offer for their skills. Capitalists would vie with better
techniques and higher wages. Everyone would win with free markets,
because it was assumed workers could more easily leave a chiseling
employer or a nation with low labor standards than factories could
move to find cheap labor.
An institutional economist recognizes that these conditions
don't exist now because capital has become more mobile than labor.
A medical conglomerate can set up communication uplinks and computers
so lower-paid radiologists in India can read X-rays taken in the
United States. That's faster than waiting for those same lower-paid
Indian radiologists to move to U.S. hospitals. Workers don't go
to better-paying capitalists; capital goes to lower-paid and worse-treated
workers. The balance of power has shifted so that outsourcing
and the threat of outsourcing cause workers to lower their expectations
and for companies to enjoy more profits.
More important, institutionalists note, the orthodox economists
can't explain Europe. Among developed democratic nations, only
the United States has experienced a growing gap between the rich
and the poor. In European nations, the middle class thrives even
though Europeans face the same technological changes.
The difference between Europe and the United States is the rules
that regulate economic activity. When the Europeans formed the
European Union they devised an elaborate and patient plan to shore
up the working standards of and transfer development aid to their
undeveloped partners, including Greece and Portugal, before Greek
and Portuguese exports could enter the EU markets. The aim was
to prevent Greek wages bringing down German pay.
Free-trade pacts between the United States and Mexico have different
rules; trade is not contingent on leveling working standards.
Institutional economists emphasize that technological changes
and mismatched skills do not explain declining wages and increasing
insecurity for U.S. workers; the loss of economic power does.
American radiologists are among the highest-skilled physicians,
but if they must now compete with radiologists in Slovakia and
India their pay will fall. Instead of mismatched skills causing
losses in job quality, these real-world economists cite the strategic
decisions by corporations, enabled by government policies, to
maximize share value by outsourcing and otherwise seeking cheaper,
more compliant labor.
My read is that the evidence tilts towards the institutionalists.
It is not that capital flight is inherently bad for workers; there
are always losers and winners during economic change. But in the
United States, the rules are tilted toward the winners. Losers
are not compensated, even if they helped benefit the winners.
The gains to trade and outsourcing are not paid back. The particular
conditions in America have made capital mobility bad for workers
and good for profits.
According to a study from the prestigious National Bureau of
Economic Research, sending jobs abroad has reduced pay for U.S.
workers affected by 6 to 8 percent. Bonehead economics could predict
that. Free trade, the free movement of capital across borders,
as Mankiw said, is good for shareholders in the short run. No
disagreement there. Mankiw also said trade is good in the long
run for workers, but the conditions for that to be true are very
specific. For workers to benefit there must never be any job shortages,
corporations must pay the full cost of their decisions and consumers
the full cost of the product.
Corporations have a lot of help moving their capital to find
cheap labor. Capital can move cheaply in many sectors because
of the Internet. The Internet was designed by the U.S. government
to help weapons researchers in universities across the country
collaborate. Corporations and their shareholders did not take
any risk in developing the Internet, which lowered the cost of
outsourcing. Taxpayers paid for the technology underlying global
supply chains, and shareholders reap the gains.
Long unemployment spells, even in economic recoveries, are caused
by the constant threat of outsourcing and offshoring. Low-paid
workers hope for low prices, but the search for low prices transforms
communities into "everyday-low-price economies." Wal-Mart's trek
across America requires thousands of community hearings to get
zoning rules changed for its big-box retail. These political debates
have left a trail of sophisticated analysis of the chain's effect
on towns and cities, mainly because of its policies of low wages
and benefits. A February 2004 Congressional Report documented
that a California Wal-Mart left a community's taxpayers paying
for free and reduced school lunches and health insurance for children
of Wal-Mart families as well as Section 8 housing assistance.
In other words, Wal-Mart's low wages causes welfare payments to
increase.
According to Purdue University's Richard Fineberg, Wal-Mart
drives away local grocery and retail stores while obtaining tens
of thousands of dollars of tax abatements and building assistance,
leaving less money for health care and education.
This dynamic of a downward spiral because of free trade was
made clear when I oversaw $21 billion in the Indiana Public Employees
Retirement Fund and the federal Pension Benefit Guaranty Corporation
fund. Top money managers, among the most successful in the world,
explained their investment strategy to my fellow board members
and me. They strategically chose companies that can move production
quickly to any part of the world because there are 2 billion peasants
in the world ready to work. That flexibility guarantees profits
and stock returns as far into the future as the actuarial software
can see. Yet, key economic goals were abandoned. Efficiency is
an important goal; companies should strive to produce more with
the same resources. But if 10 young teens do the work of one American
adult for less price, efficiency takes a step backward to profitability.
Ten people are now doing the work of one, though profits are up.
Profitability is divorced from efficiency, but the pension funds,
on behalf of the taxpayers, hired these money managers anyway.
Firms adopt high-wage strategies when they face steady demand.
For more than 150 years Studebaker's innovations were made possible
in part by military demand for its covered wagons then for its
Army jeeps. Government contracts keep Honeywell, EDS and Halliburton
on the cutting edge. Well-paying jobs do not just appear. Demand
from foreigners helps, but U.S. consumer demand, especially if
the consumer is the American government, makes the difference.
Creating Good Jobs for Americans and Global Workers
Orthodox economists agree with institutionalist economists that
free trade creates winners and losers. Some workers never recover
from a loss of the value of their skills. The inevitable imbalance
of who bears the costs of free trade and who benefits from outsourcing
justifies trade adjustment assistance programs like the Trade
Adjustment Act. Workers displaced because of NAFTA and other trade
agreements receive super-sized unemployment insurance. Economists
Lori Keltzer and Robert Litan go one step further and advocate
wage insurance that pays the difference between the wages of a
new job and the one lost to trade. These wage supplements are
a step in the right direction. They do not, however, bring back
middle-class jobs or do anything about strategic layoffs and outsourcing
that aim to maximize profits and discipline workers. These wage
supplement proposals are short-run shallow fixes -- though not
shallow for those immediately helped.
Transfers of money to losers from outsourcing make sense, but
transfers from whom? Who pays? Shareholders and CEOs who profit
handsomely from the transfers should help pay for the costs they
impose, not the taxpayers, who subsidized the technology making
capital mobility possible. If CEOs paid the full price of job
destruction, job creation might look more like a winning strategy.
More on target, but still weak, are current proposals to plug
tax breaks for companies earning profits abroad, to require longer
advance notice of offshoring and to require more outplacement
services for the job losers. Thirty proposals in 20 states curb
using offshore contractors by state and local governments, and
two Republican senators propose banning the offshoring of some
federal government jobs.
Members of the Bush Administration oppose these proposals. Their
response is steadfast; they insist that all parties will be better
off in the long run when businesses are encouraged to outsource
and offshore, just wait and see.
Many in business do not embrace orthodox economics. Industries
hard hit by trade have their own set of solutions featuring activist
government intervention. The Computer Systems Policy Project (member
firms include Hewlett Packard, IBM and Dell) wants the White House
to reverse spending cuts to 1,200 two-year community colleges
and for unemployed workers to get $3,000 for education and training.
They have even floated the idea of high-speed Internet installed
in public housing. For these policies not to be one-sided, where
the government and workers pay for an increased supply of skills
in their industry, there should be a quid pro quo. Firms
must adopt strategies that involve hiring Americans in well-paying
jobs. Improving the work force is not a policy for middle-class
jobs. Improve the people and the jobs.
Manufacturing-job losses continue to be a focus because this
industry provides middle-class jobs to people with average educations.
There is no doubt that some of the job loss in manufacturing is
a numbers game -- outsourced clerical, sales and janitorial work
is now classified as services. But these category shifts have
real consequences because the average service-industry wage is
half of manufacturing. The Bush administration floated an idea
in the brand new Economic Report of the President to
classify fast food restaurants as "manufacturing" (Mankiw made
his impolitic remarks at the press conference releasing the report).
The reasoning is that assembling a hamburger is assembly. The
idea is certainly dead on arrival, but we see how much room there
is for a job-quality agenda. Even the Bush administration realizes
that manufacturing-jobs growth looks better because typically
in the United States manufacturing provided middle-class jobs.
No one policy will create middle-class jobs, whether in the
United States or other nations. Mexico lost thousands of manufacturing
jobs to China last year. Pakistan, a former British colony with
an English-speaking population, is beginning to lure India's tech
sector jobs there by offering lower wages and weaker workers protections.
In addition to the existing proposals to eliminate tax advantages
to investing abroad, other proposals are part of a winning recipe
to raise job quality. These include tying tax abatements and subsidies
to job creation, using taxpayers' money to produce domestic jobs,
figuring out how to reduce the trade deficit so that the Chinese
yuan is not so cheap relative to the dollar (a high-priced currency
is bad for a nation's exporters), raising the minimum wage, protecting
workers who want to unionize, committing to full employment, raising
consumer demand and tolerance for higher-priced goods, and direct
government spending for health care and education. Those two industries
are great sources of middle-class jobs.
These initiatives will cost money, and someone has to pay --
candidates are the consumers and shareholders who benefit from
lower prices and cheaper wages. We also must do more for employers,
like the countless unsung owners and corporations that value efficiency,
loyalty and communities. These groups include Kmart and OEC Medical,
who are losing out to corporate killers.
Bosch now employs 10 more workers in South Bend than in 1996.
Trade can be good. Don't stop trade and outsourcing, but make
beneficiaries of trade help the losers -- especially if the losers
subsidized the beneficiaries. Economists can earn their daily
bread by sorting out who owes whom instead of issuing assurances
that everything will be all right in the long run.
Teresa Ghilarducci is a Notre Dame associate professor of
economics and policy studies and director of Monsignor Higgins
Labor Research Center.
(July 2004)
