Offshoring is not to Blame (and Hi-Tech may not be Enough)
One of the best thing about studying at the LSE is the frequency which the school receives visiting economists from all over the world. Singapore universities do invite renowned economists – including Nobel Prize winners – to give public lectures (at no small expense I would imagine). I have attended some of these. My impression was that big established names usually meant that the ideas were sometimes already old. By the time a Nobel Prize winner comes to town to give a lecture, you probably have seen his (no female winners yet) ideas in many textbooks.
Assistant Professor Esteban Rossi-Hansberg is not a Nobel Prize winner, but a rising star whose best is still probably ahead of him. He visited LSE in the past week, and presented a paper “A Simple Theory of Offshoring”. The mathematics was elegant, but it was the economic conclusion that took the breath away. Despite widely held beliefs, offshoring was not to blame for the falling wages of lower-skilled workers in the US. In fact, Esteban showed it was possible that offshoring actually increased the wage of low skilled workers. How? It did so by increasing the efficiency of firms (reducing their costs) and allowing these firms to produce more, thereby increasing the wages of even the lower-skilled home workers.
Of course, this is not to deny that wages have fallen for lower skilled workers in the US. The increase in the supply of lower-skilled labour (think East Europe, China, India) means that the prices of goods produced by them will fall. Even without offshoring, the cheaper imports will ensure the decline of lower-skilled wages. The stunning point was that offshoring actually boosted US lower-skilled wages, compared to a baseline had offshoring not been allowed, by inreasing the efficiency of US firms.
What are the lessons here? Placing artificial restrictions or constraints on domestic firms, however well intentioned, cannot possibly improve the lot of lower-skilled workers. In fact, it may not even be an issue of high or low skills. So long the skill that you have is similar to those that are embedded in say, Chinese imports, your wage is likely to fall (see The China Effect by LSE).
Take the DVD player – it is really difficult for me an economist to conclude that it is a low-tech equipment. Most of us do not have the faintest idea how this piece of equipment works. But it hardly matters in economics. A worker or engineer skilled in producing DVD players in Singapore will always feel the wage pressure because the Chinese are making it. This explains the insecurity of even supposedly well qualified production engineers, let alone the production workers.
How then to help our lower income workers? Skill upgrading may not be enough. You upgrade, others also upgrade. You run hard, but you are actually standing still. More skill differentiation may be necessary. The ex-Chief Economist Tan Kong Yam said – take advantage of our weather, grow frogs, because the Chinese love frog legs and import a lot of them. High-tech growing frogs is not, but I think you can see his point.
One of the best thing about studying at the LSE is the frequency which the school receives visiting economists from all over the world. Singapore universities do invite renowned economists – including Nobel Prize winners – to give public lectures (at no small expense I would imagine). I have attended some of these. My impression was that big established names usually meant that the ideas were sometimes already old. By the time a Nobel Prize winner comes to town to give a lecture, you probably have seen his (no female winners yet) ideas in many textbooks.
Assistant Professor Esteban Rossi-Hansberg is not a Nobel Prize winner, but a rising star whose best is still probably ahead of him. He visited LSE in the past week, and presented a paper “A Simple Theory of Offshoring”. The mathematics was elegant, but it was the economic conclusion that took the breath away. Despite widely held beliefs, offshoring was not to blame for the falling wages of lower-skilled workers in the US. In fact, Esteban showed it was possible that offshoring actually increased the wage of low skilled workers. How? It did so by increasing the efficiency of firms (reducing their costs) and allowing these firms to produce more, thereby increasing the wages of even the lower-skilled home workers.
Of course, this is not to deny that wages have fallen for lower skilled workers in the US. The increase in the supply of lower-skilled labour (think East Europe, China, India) means that the prices of goods produced by them will fall. Even without offshoring, the cheaper imports will ensure the decline of lower-skilled wages. The stunning point was that offshoring actually boosted US lower-skilled wages, compared to a baseline had offshoring not been allowed, by inreasing the efficiency of US firms.
What are the lessons here? Placing artificial restrictions or constraints on domestic firms, however well intentioned, cannot possibly improve the lot of lower-skilled workers. In fact, it may not even be an issue of high or low skills. So long the skill that you have is similar to those that are embedded in say, Chinese imports, your wage is likely to fall (see The China Effect by LSE).
Take the DVD player – it is really difficult for me an economist to conclude that it is a low-tech equipment. Most of us do not have the faintest idea how this piece of equipment works. But it hardly matters in economics. A worker or engineer skilled in producing DVD players in Singapore will always feel the wage pressure because the Chinese are making it. This explains the insecurity of even supposedly well qualified production engineers, let alone the production workers.
How then to help our lower income workers? Skill upgrading may not be enough. You upgrade, others also upgrade. You run hard, but you are actually standing still. More skill differentiation may be necessary. The ex-Chief Economist Tan Kong Yam said – take advantage of our weather, grow frogs, because the Chinese love frog legs and import a lot of them. High-tech growing frogs is not, but I think you can see his point.
posted by Bart JP at
8:53 pm
3 Comments:
Hi Bart,
My impression is that offshoring causes the US to lose jobs to China and India. The fact that offshoring doesn't actually depress wages is not completely surprising since the fellas who manage to keep their jobs notwithstanding the bleeding of jobs are probably the better lower-skilled workers.
It would be a surprise if the conclusion is that there is no loss of GDP and no increased unemployment arising from offshoring, which I doubt can possibly be true.
How then to help our lower income workers? Skill upgrading may not be enough.
Absolutely. The KTM never bought the Garmen's dunno what training and retraining strategy.
What we need is some sort of national Nokia. Singapore's population is small enough that one BIG successful company together with the supporting industries is sufficient to provide enough jobs. We kinda need the national part 'cos we want the fella to STAY in Singapore to keep the jobs local notwithstanding profit-pressures. :-P
By
kwayteowman, at 5:50 pm
KTM,
But US unemployment indeed fell during the 1990s, economy expanded strongly, even as real wages for blue collar workers declined. Your intuition of unemployment and GDP loss does not quite show up in the data.
Our intuition is shaped by popular media. But when one really thinks through theory and look at the empirical evidence, it is difficult to support the idea that offshoring is to be blamed.
The influx of Chinese imports changes the terms of trade greatly. Even without offshoring, the US firms competing with cheap Chinese imports would have come under strain. Offshoring some parts of the value chain actually helps some of these firms*, and therefore helping blue collar workers in a way.
The real irony is therefore offshoring might have helped the blue collar workers.
(* There is a infra marginal effect, hard to explain here).
By
Bart JP, at 10:30 am
Hi Bart,
Actually, it is not true that the KTM's impression is shaped by the media (at least for this particular case). It's more logic than media really.
It is a fact that it is cheaper to make shoes and computers in China. Factories in US close shop and shift to China. Jobs are lost. People unemployed. Therefore unemployment should go up. Since less goods are made, GDP should go down too. :-) That was the KTM's logic.
But US unemployment indeed fell during the 1990s, economy expanded strongly, even as real wages for blue collar workers declined. Your intuition of unemployment and GDP loss does not quite show up in the data.
That's very interesting and counter-intuitive. Would you happen to know why this is the case?
To some extent, do we know for a fact that there is no other effect that is keeping the unemployment numbers afloat, i.e. perhaps there is some other booming industry that is not exportable and the unemployed are absorbed by this new industry?
In other words, suppose there was no offshoring, does it mean that the employment figures and GDP will look even better? :-)
Thanks.
By
kwayteowman, at 6:55 am
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