Economix: Globalization and the Labor Market

Uwe E. Reinhardt is an economics professor at Princeton.

Recent reports of the bleak jobs outlook for the United States brought to mind an eye-opening report for the Council on Foreign Relations by Michael Spence, a Nobel laureate, and Sandile Hlatshwayo. I highly recommend that report, at the very least its summary, “Globalization and Unemployment,” in the current issue of Foreign Affairs. It clearly explains our current dilemma in the labor market.

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The authors break down our economy into those sectors whose output is traded across international borders (the tradable sectors) and is thus subject to competition from foreign producers, and those sectors whose output is not traded across international borders (the nontradable sectors).

In the tradable category are manufactured goods, farm products, raw materials and financial, consulting, educational, computing and other technical services. Prominent in the nontradable sector are government, health care, retailing, construction, restaurants and, for the most part, legal services.

The authors then explore the question of how employment and value added per employee developed in both sectors from 1990 to 2008. The chart below, based on Figure 5 of the report, answers the first of these questions.

The Tradable Sector
Jobs in the tradable sector were added primarily in high-value services. They were lost in manufacturing, through outsourcing of the lower value-added components of the value chain to other countries.

The net effect has been that of the 27.3 million jobs created in the American economy from 1990 to 2008, only 662,000 new jobs were added by the tradable sector. That is only 2.3 percent of total job creation in the economy.

The concept of the “value chain” is fundamental to understanding the impact of globalization on the American economy. The value chain for a product consists of the entire series of discrete steps from development and design to final sales, including transportation and marketing.

The value added by a particular step in the chain is created by the capital and the labor that step employs. It is calculated as the value of the output by that step minus the cost of intermediate goods and services used by that step but produced outside that value chain by other producers and minus the cost of raw materials and energy used by the particular step in question.

The value added produced by all industries in a nation adds up to the nation’s gross domestic product.

In a global economy with very cheap transoceanic transportation, the various steps in the value chain of a final product may be performed by different countries, depending on the value added of the step and the cost or labor used to perform that step. No aircraft or automobile sold by an American manufacturer, for example, has been produced wholly in the United States.

Until now, the developed countries have tended to retain the steps that create high value added per employee and outsourced the rest to other countries. That practice naturally contributes proportionately more to gross domestic product in the United States than to employment. Furthermore, it tends to yield high incomes to highly educated people and depress the wages of lower-skilled American workers competing with foreign labor in the lower value-added segments of the value chain.

The Apple iPad, for example, was designed and developed by highly educated employees of Apple Inc. and is marketed by that company. But the device is assembled by the Taiwanese company Foxconn in its manufacturing plants in China, with components manufactured in South Korea, Japan and Europe.

It has been reported that of the retail price of an iPad of $499, Apple spends about $291 on components, typically produced in other countries. It retains a gross profit of about $208 per iPad, or about 42 percent of the retail price. Some of that gross profit covers marketing and administration; with worldwide sales, even those outlays produce jobs both in the United States and abroad.

Thus, the iPad adds proportionately much more to G.D.P. in the United States than to employment there. It supports some high-paying jobs in the United States, but few if any middle-income and lower-middle-income jobs in manufacturing. It shows that technical innovation in the United States is great and can contribute to the growth of G.D.P. per capita, but it may not offer Americans many jobs.

A problem for the United States, noted by the authors of the report, is that the so-called emerging market economies — notably China, Brazil and India — appear poised to climb the value chain into the higher value-added segments hitherto kept in the developed economies.

That will give unaccustomed new competition to even highly educated employees in the United States. We are likely to see this trend, for example, in aircraft manufacturing, medical devices, the pharmaceutical and biotech industries and eventually higher education.

The Nontraded Sector
Although a few links in the value chains of the nontraded sector may have been produced abroad as well, the bulk of their links tend to be home-produced.

Thus it is not surprising that, according to the authors of the report, close to 98 percent of the 27.3 million new jobs in the American economy in the last two decades were created in the nontradable sectors, led by government and health care in first and second place.

These two sectors alone accounted for 40 percent of the total job growth over the last two decades. They were followed by retailing and construction, both of which grew on the back of heavy debt financing and a real-estate bubble.

Whence the Future Job Growth?
The American people look to the president and Congress to create jobs — or, more precisely, to create the economic conditions in which job growth occurs.

At the same time, the American people now look to the president and Congress to rein in government spending in general and health-care spending in particular, at a time when a sizable deleveraging by consumers and business has sharply put the brakes also on retailing and construction.

So how can these desiderata –- creating jobs and, at the same time, cutting back on government and health care spending –- add up to a rosy future jobs picture? Can any government actually deliver on these conflicting goals?

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