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Actually, the Chinese Can Do the High-Skilled Jobs at Lower Cost Too

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Tuesday, 02 September 2014 05:46

Joe Nocera had a good piece discussing the plight of factory workers in the United States subjected to low cost competition from China and other developing countries. He argues that the government has done too little to help the workers and the communities that have suffered from such competition. However his prescription, that workers should get more skills, is somewhat misleading.

While it is always better to have a more skilled workforce, one of the main reasons that more skilled workers have done better in the era of globalization is that they have been largely protected from the same sort of competition faced by less-educated workers. While trade agreements were explicitly designed to put manufacturing workers in direct competition with the low-paid workers in the developing world, there has been no similar effort to subject our doctors, dentists, lawyers and other highly paid professionals to the same sort of competition.

Trade agreements could have focused on reducing barriers that make it difficult for qualified professionals from the developing world to work in the United States. For example, we could have fully transparent sets of standards to become a doctor or lawyer in the United States, with tests administered in other countries (by U.S. certified test givers). Anyone from Mexico, India, or China who passed these tests would have the same ability to work in the United States as someone who grew up in Kansas.

The potential benefits to consumers and the economy would run into the hundreds of billions of dollars annually. And this would have the effect of shifting income downward rather than upward. (Yes folks, we can design a mechanism to reimburse developing countries for the professionals they educated who come here, which would ensure they gain as well.)

Trade agreements did not put professionals into competition because they are a powerful enough lobby to block such actions. However it is important to be clear in our understanding. It was not "globalization" that redistributed income upward. It was a pattern of trade that was intended to put downward pressure on the wages of the bulk of the population while protecting those at the top.

 

Addendum:


Just a few quick points - doctors and lawyers (especially doctors) are not members of the middle class in the normal usage of the term. About 25 percent of doctors are in the one percent and the vast majority are in the top two percent. If the rest of us are going to get more, they must be among the group that gets less.

Second, lower wages for manufacturing workers have translated into lower prices. Part of it has gone to profits, but shirts and cars are cheaper than they would be if we didn't have low-paid labor doing much of the work.

Finally, there is no way that a lower valued dollar is going to bring us to developing country living standards as fans of arithmetic everywhere can verify. Imports are equal to roughly 20 percent of our GDP. Suppose a 30 percent drop in the dollar leads to a 20 percent rise in import prices (both very large changes). This implies that we can buy 4 percent less than we did previously. That still leaves us far ahead of Mexico and China. And for debt-phobia fans, we are saving this amount today by borrowing.

Comments (25)Add Comment
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written by LSTB, September 02, 2014 6:56
For example, we could have fully transparent sets of standards to become a doctor or lawyer in the United States, with tests administered in other countries (by U.S. certified test givers).


I'm in favor of harmonizing bar admission standards in the U.S., but there are plenty of states that have long allowed foreign-trained lawyers to sit for the bar exam without any beneficial effects on prices, such as California and New York, which have some of the most expensive attorneys in the country. These are not "Mexican avocados," either; they're the real deal.

Often foreign bar-takers fail the exam because of their language abilities, and many of those who pass the exam, at least in New York as I've read, return to their home countries.

Some states have adopted the Uniform Bar Exam in recent years, but not the large ones.

Readers can learn for themselves by reading the American Bar Association's Comprehensive Guide to Bar Admission Requirements. (http://www.americanbar.org/con...eckdam.pdf)
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written by Michael, September 02, 2014 7:15
Instead of knocking even more Americans out of the middle class by replacing professionals with foreigners, wouldn't a better middle out growth strategy be to extend protections from foreign competition to our less educated fellow citizens, such as by reducing immigration?
The American Way: Compensate Losers So Winners Can Create Gains by Avoiding Competition
written by Last Mover, September 02, 2014 7:17

Exactly. The long standing tradition in America has been because gains are so large, it's easy to compensate losers with plenty left over for winners.

That's why labor in America was allowed to collect the same absolute, yet declining share of productivity gains beginning more than 30 years ago - but no more, so the winners in the 1% could keep the economy moving under increasingly fierce global competition from all sides.

If those winners had to face the same competition as labor anyone knows what would happen. Everyone loses. So a choice was made to give the highly skilled winners market power to shield their occupations from competition ... so they could collect 95% of the productivity gains starting over 30 years ago, while allowing the losers - labor - to keep a whopping 5% as compensation for facing global competition so studiously avoided by the winners.

Imagine what productivity gains and comparative advantage through global competition would look like if those winners had not been handed those gains for free on a silver platter. How else could they possibly protect the remaining 99% with growth, jobs, skill creation and the mother of them all - innovation. It would have been horrible, just horrible.

For example there could have been a Great Recession if not for the winners that would have wiped out trillions in real output and millions in jobs.

But thanks to the winners who didn't have to face competition, that gave them enough incentives to work, invest and innovate to save the economy from a disaster for the rest of us didn't it.

It's the American way. There's so much to go around no one has to lose. Listen up 99%. Be glad you could stay even for the last 30 years. If winners in the 1% had to compete for living like you do, well then, we know where you would be about now don't we ...

... in a meritocracy based on merit instead of a plutocracy based on economic predators.
Confusing
written by juan valdez, September 02, 2014 7:52
I am sure you've seen the results of globalization on the environment... greenhouse gas emissions have exploded as a result of allowing China and others to enter the world trading bloc with reduced tariffs. Unfortunately, economists always miss this and fail to mention anything about carbon tariffs.

You keep shifting the discussion from the low skilled workers to high paid, protected jobs like lawyers while leaving out: what happens to the supposed low skilled worker?

Folks need growing salaries. We would be interested to hear your thoughts on that.
With friends
written by joe, September 02, 2014 9:14
As progressives, with friends like Dean, who needs enemies.

There's no way that Dean's ideas would shift income downward. We'd just have lower middle class doctors, while the people at the very top take even more.

Why strip away protections for professionals, why not extend protections to labor? Exporting is a bad strategy anyways. Why labor to produce goods you don't get to consume?

Chinese economists are probably better than American ones (who are notoriously bad, I bet the Chinese could even understand how interest rates work), and they will probably work for less. Why do you want a race to the bottom. Everyone loses.
The Question No One Has the Sense or Courage to Ask
written by Jesse, September 02, 2014 10:14
The great unanswered question in 'free trade' is how does one maintain local sovereignty in the face of nationless corporations arbitraging labor and laws across borders?

Child labor, environmental protections, health benefits, pensions, workplace safety, freedom of association, and all the other issues that form the core of a social contract can easily fall away in the face of a homogenizing force like unrestrained capitalism that seeks to drive the work force and the middle class to the lowest common denominator across the globe.

That is the great question, which seems to dance around like a phantom, untouched by the economist class.

These questions are not insubstantial. When the euro was conceived, the issue of disparities of regional economic performance were hand waved away, and masked in large part through financial tricks. But it ought to have been obvious that a common currency without transfer payments to ameliorate the difficulties imposed by a common monetary policy without common governance and true financial unity was going to create stresses that would ultimately tear that union apart.

Why do the intellectuals almost always act irresponsibly until the smoke of their own disasters wakes them from their bookish slumbers?
...
written by JDM, September 02, 2014 10:15
The point is that, well, you know how rich people, including pundits and politicians, say the middle class and poor should have "skin in the game" and this is why they should take big hits to their lifestyle, cause after all having to eat ramen for dinner twice a week is exactly the same sort of sacrifice as having to substitute Chandon for Christal on the yacht. Well, this is a way for professionals to have skin in the game, and if professionals did the same would get changed in a hurry, to all classes benefit. They're obviously not going to change the game because it's the right thing to do.

A few years ago I read about a local paper outsourcing reporting on city council meetings to India. The meetings were videoed, the reporter was one of literally billions of English-speaking Indians. This is the sort of thing that can be done that pundits don't think will happen, that people like them could be shut out of jobs or higher pay via outsourcing. I also have a friend who is a certified financial planner, who except for a restrictive professional organization could find his job done very easily and well by an Indian with English and math skills. Right now he has no incentive to join with factory workers to protect US jobs, but if his job was threatened alongside theirs he'd have that incentive.
Huh....seems to conflict with prior posts...
written by pete, September 02, 2014 10:45
When tech companies say they need more H1Bs, you say they should just pay more and hire our vast army of unemployed Americans. Now you are arguing for more H1Bs to drive the salaries down. So confusing...
Interesting Thought About Solidarity With the Professional Class
written by Jesse, September 02, 2014 12:41
JDM raises an interesting point, that subjecting the professional classes would cause them to join in solidarity with the middle and lower classes.

However, this assumes that politics is being influenced by anything but big corporate money and armies of lobbyists. And there is plenty of evidence to the contrary.

Rather than broaden the misery and injustice, and hope for a revolution therein, perhaps serious reform now might be a better and more productive course.

History suggests that we will get change, one way or the other, as the powerful take a trend to an extreme and keep pressing their advantages against all common reason.
If capital and jobs can flow across borders...
written by Carl, September 02, 2014 1:33
How about trade pacts that allow Americans to work in Europe?

I'd kill for the 25-35 paid national holiday and sick days and the near impossibility of being fired.


http://reliablenewsupdate.com/in-america-labor-day-is-a-lie-vox/
...
written by skeptonomist, September 02, 2014 4:12
The problem is that workers in China and other developing countries have a much lower standard of living than US workers and are willing to work for much less, regardless of their level of education. They are glad to make iPads for enough money to buy rice and own a bicycle, but not enough for them to buy the expensive products. Immigration is not the main problem; we don't have factories in the US manned by Mexicans or other immigrants, the factories have fled the country completely.

Dean's solution (apart from importing doctors) is to adjust currencies, but he doesn't seem to realize that this is largely a means of flattening real wages and standards of living, not preserving the standard of living of workers in the US and other advanced countries. Eliminating the trade imbalance this way would mean an immediate drop in real wages in the US. Reduction of the value of the dollar - more specifically putting an end to currency manipulation by China and Japan (which has the second highest foreign currency reserves) - is probably necessary but is not a cure-all. Globalization has to be slowed to preserve the living standards of workers in the US, although this may mean a slower rate of growth of world production.

Of course what is driving globalization is not the maximization of global production but that of profits. One thing which capitalists consider vital to maximizing profits is minimizing wages, and globalization gives them more opportunities to do this. They can shop around for the countries which give them the best deals, for example. There is no particular reason why minimization of wages should be a major objective of society as a whole, but that's what you get when you allow things to be controlled by capitalists.
Skepto..."minimizing wages" raises wages....
written by pete, September 02, 2014 4:46
You fail to note that by globalization, in particular seeking the lowest wages, companies actually raise the wages where they set up shop, having to coerce workers (kicking and screaming?) from the long hours in the rice paddies to the factory floor. This is the dirty secret, that what looks like horrible working conditions vis a vis the West, are wonderful conditions compared to the past. A more holistic approach, instead of what is best for US workers, is clearly needed, by those who care. A return to the 1880s immigation policy (i.e., y'all come on in) would do much to bring the jobs to the US instead of overseas. Doctors, nurses, plumbers, carpenters...why keep them overseas, why not here?
lawyers tend to do better than doctors
written by Squeezed Turnip, September 02, 2014 8:50
There are about 15000 more lawyers than doctors in the top 1% (113,000 versus 98,000). Interactive graphic here.
Oops, user error once again
written by Squeezed Turnip, September 02, 2014 9:01
I took subtotals from the graphic, mistaking them for totals in each block, so my numbers are wrong, but it still looks like lawyers in the top 1% outnumber doctors in the top 1% (and most of those lawyers work on Wall Street, according to the NYT graphic)..

The data was pulled from IPUMS.
Very few doctors are middle class.
written by J, September 02, 2014 9:03
"In 1940, in inflation-adjusted 2010 dollars, the mean income for U.S. physicians was about $50,000. By 1970, it was close to $250,000—nearly six times the median household income."

http://online.wsj.com/articles/the-u-s-s-ailing-medical-system-a-doctors-perspective-1409325361?mod=WSJ_hppMIDDLENexttoWhatsNewsSecond
...
written by JDM, September 02, 2014 9:43
However, this assumes that politics is being influenced by anything but big corporate money and armies of lobbyists. And there is plenty of evidence to the contrary.

So you're saying these professionals have had their high salaries protected by politicians despite having no political clout. How does that happen?
IT Worker Laments
written by deanx, September 03, 2014 4:45
Despite studies showing the number of Information Technology graduates roughly equals the creation of IT jobs in the US... The President and Congress wants to flood the industry with 800,000 workers per year, roughly 4 times the number of jobs created.

Perhaps my slightly more than average wages are not really merited by my many years of service and my Ivy League education, yet I understand how factory workers feel. It's one thing to always prove my value on the job, its another when politicians and the Chamber of Commerce flood the market to destroy wages.
The advice to get more skills is a palative sold by the media to the workforce
written by John Wright, September 03, 2014 9:06
The article mentions: "Shouldn’t we instead be trying to educate these workers’ kids to get them into high-skilled jobs and away from what’s basically an archaic industry?”

My employment in the high tech industry has taken me to other countries such as Austria, Malaysia, Singapore and Israel and in my limited view, there is no shortage of skilled global workers who can compete with USA skilled workers.

The USA does have good capital markets, relatively good infrastructure, a willing workforce, a good resource base and little fear of foreign invasion.

If I recall correctly, there are about 300 million college educated English speaking people in the combined India-China population, which is a large educated population to draw new skilled workers from via outsourcing or insourcing (H1-B).

And the University of Oregon economist Bruce Blonigen quoted in the NYT article, must know of the Bureau of Labor Statistics estimates for future STEM workers by 2022.

For example: (all from www.bls.gov)

Incremental Job growth outlook for these occupations 2012-2022:

Electrical and Electronics Engineers +12,600
Mechanical Engineers + 11,600
Software Developers + 1,018,000
Computer Programmers + 28,400
Chemical engineers +1500
Mathematicians +800
Economists +2300

For all these STEM jobs, outside software developers,
the estimated TOTAL number of incremental jobs by 2022 is
about 57,200 or about 25% of the number of jobs created in the USA in a slow month.

In the one job above with relatively good incremental growth, software developers, USA companies are continually pushing for more imported workers.

I don't buy the notion, of Tom Friedman and the media, that foreign countries will let the USA keep the good jobs as low paid jobs are shifted overseas.

I've talked to enough foreign workers who, understandably, want the well paid jobs.

To expect otherwise is a stretch.

The American worker needs a political class and government looking out for them by restricting the supply of imported workers and discouraging the outsourcing of manufacturing.

But I do not see any will for this in the political/financial centers.

...
written by skeptonomist, September 03, 2014 9:30
Of course real wages in the US are not going to be drawn down instantly to those in China, but the point is that eliminating the trade deficit doesn't work unless they are drawn down (and those in China drawn up). Wage costs are only a part of the total, but obviously they are important enough to cause industries to relocate. In principle currency valuation could eliminate the trade deficit, increasing US GDP somewhat and reducing unemployment, but this would be at the cost of bringing real wages down towards a global mean. Nobody knows exactly how much this would be, nor does anybody know exactly how much the dollar would have to be reduced to eliminate the deficit - the calculations are far too complex, depending on unpredictable factors

There is a major political dimension to this in that there would be outcry against inflation. There would be immediate price increases of most things in Walmart (and maybe also of French wines and German cars), but no immediate increase in jobs. In order for industry to move back to the US CEO's would have to be convinced that there would be a permanent low-dollar policy - which they themselves would probably be opposing. Politicians would not like to be held responsible for policies that cause any kind of inflation, no matter what the promised long-term benefits.
...
written by Alex Bollinger, September 03, 2014 10:53
Dean's addendum enticed me to scan the comments, and I really can't say anything in response. Except to Joe who said that Chinese economists are much better than their American counterparts. Yes, yes, clearly that's true! That's why American economics graduate programs are about half Chinese right now while Americans rarely go to China to study economics! Oh, wait....
We already had a large decline in the dollar and no burst of inflation and no outcry
written by Dean, September 03, 2014 12:45
Skeptonomist,

we already saw a decline in the dollar and the trade deficit. The dollar fell in real terms by around 20 percent between 2002 and the present compared with the currencies of our trading partners. The trade deficit from from a peak of 6 percent of GDP in 2006 to around 3 percent today. There was no big burst of inflation, no big outcry.

Can't see why we should expect one if there is a similar decline in the value of the dollar and the trade deficit going forward.
wages shouldn't just grow with inflation
written by tew, September 03, 2014 2:01
J quoted "In 1940, in inflation-adjusted 2010 dollars, the mean income for U.S. physicians was about $50,000. By 1970, it was close to $250,000—nearly six times the median household income."

Is J implying that physicians should have received no increase in real wages during the past 70 years? According to FRED U.S. real (inflation-adjusted) GDP per capita has risen by about 5x since 1940. So according to J physicians have simply kept pace with per capita GDP growth. So... what's the point?

See http://research.stlouisfed.org...X0Q048SBEA
clarification 1970 vs. 2010
written by tew, September 03, 2014 2:05
J had posted something from the WSJ indicating physicians' salaries from 1940 to 1970. The WSJ said that by 1970 physicians were earning $250,000 (in 2010 dollars). But according to the BLS physician and surgeon median salary in 2012 was $187,000. http://www.bls.gov/ooh/healthc...rgeons.htm
More on lesser developed countries wanting better jobs
written by john Wright, September 03, 2014 2:57
Here is a link that discusses tech firms and dealing with China

http://electronicspurchasingstrategies.com/2014/09/02/tech-firms-fret-chilly-china/

Quoting from the article:

"China has since expressed its desire to move beyond being simply a provider of low cost manufacturing services. It wants to move up the food chain to provide innovative solutions and enjoy the associated higher profit margins. The country also wants to provide better jobs for its citizens many of whom could not afford some of the products they assembled."

Not surprising at all.

Always missing from economist's analyses:
written by Dave, September 05, 2014 5:43
There is always something significant missing from the public trade analyses:

A breakout by products with a low elasticity of demand and those with a high elasticity of demand, and then further broken down into the fraction of labor in such products.

A proper analysis would most likely show that it isn't just the trade deficit that lends itself to our high unemployment, but the structure of that deficit contributes greatly.

For goods coming from low-wage countries, here's how to do the analysis:
Figure out the elasticity of demand. For those products with a low elasticity of demand, calculate the foreign value of labor in those products, then multiply by the difference in wages from here to there (20-1 or 10-1). Add this to the price of the product and how much is quantity demanded reduced? If not much, it gives a huge bump in the number of people we could employ here if that product did not use imported labor.

Nobody is collecting the data, and we know it is a conspiracy. There's no question about it.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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