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Wednesday, August 30, 2006



But it increased wages only in 1997 and they have been falling since although productivity continues to climb.


As usual headlines of this sort clever omit the very serious provisos the research comes with, for example:

«When some of the tasks performed by a certain type of labor can be more readily performed abroad, the firms that gain the most are the ones that use this type of labor intensively in their production processes. The augmented profitability of these firms gives them an incentive to expand relative to firms that rely most heavily on other types of labor, which in turn enhances their labor demand. Some of the this increased labor demand falls on local workers, who perform tasks that cannot be easily moved offshore.»

A rather weasely worded piece of dissembling, starting with the «more readily» euphemism for ''more cheaply''. But the fantastic level of intellectual dishonesty is reached at end of this quote, where «falls on local workers» omit the vital qualification ''on a small number of local workers'', and is worded to give the impression that «on local workers» means ''all local workers'' without of course saying so.

So far the thesis is the banality that offshoring redistributes from the offshored workers to protected workers, and some of these may be even ''blue collar'', like cleaners or receptionists.

But a little below the authors have to be clearer (my emboldening):

«Our observation that the residual is positive amounts to a claim that low-skill wages have not fallen as much as one should have expected given the combined forces of terms-of-trade movement and TFP improvement. A possible interpretation is that then productivity gains associated with U.S. firms' moving some tasks offshore have served to bolster U.S. wages, consistent with our theory but contrary to the fears of Lou Dobbs and others.»

Here the story is better explained: most salaries go down, but the average not as much as most, because some, those of workers in protected positions, have gone up.

Note the astute weaseling of stating «have served to bolster U.S. wages», again to give the impression that ''all'' wages have been increased, when instead it is the average that has been increased, but not absolutely, only relative to a fall, as «low-skill wages have not fallen as much» admits. Very astute dissembling here too.

More cleverness in writing «productivity gains associated with U.S. firms' moving some tasks offshore» where the productivity (not cost) gains are wished into existence, where instead the paper actually says that the effects of offshoring are similar to those of improvements in productivity:

This is quite similar to the process generated by technological progress that improves the productivity of a certain type of worker. Although fewer of these workers are needed to produce a given amount of output, the adjustement in output levels in response to the new technology can lead to a net increase in the demand for the type of labor whose productivity has increased.»

Except that productivity has not improved, and the increased demand for workers will mostly take place offshore. Vital qualifiers still missing.

But there is a much bigger, and splendid, bit of prevarication in the paper:

«Accounting for all the effects of a reduction in the cost of offshoring requires a general equilibrium model of production and trade.»

Hahahahahaha. It is all made up...

Now, applying a made up model to semi-real data, as described in their paper, they get this:

«The evidence for the United States for the period from 1997 to 2004 suggests that the productivity effect has been positive and responsible for raising low skill wages by about a quarter of a percent per year»

Well 0.25% is amply within any reasonable error boundary, given the shakyness of the data used, and of the model used to tease the numbers out of the data.

Given these the only honest conclusion is that the effect, if any, is so small even assuming that it exists (and it does for sure: some low skilled jobs are not offshorable indeed, so their relative pricing power must have increased) it is imperceptible.

But of course the disingenuous sycophants boldly put in their title the unvarnished truth:

«US offshoring boosts blue collar wages»

which reminds me of another slimy ''legerdemain'' by Mankiw and other bloggers, presenting as follows:

«Greg Mankiw points to a new paper indicating that 70% of the burden of the corporate income tax falls on employees

when it actually says that even when building a suitable general equilibrium model and using extreme assumptions one cannot get a lower figure than 30% for the incidence of corporate tax on capital income, no empirical evidence used.

Taking the 0.25%/y as good for the sake of argument, that means a contribution of around 1.8 percent over those seven years. While several percents of productivity have not quite gone to workers over those seven years:

«The real wages of the least skilled among the blue collar workers have risen by about 3.7 percent during this period (the real wage of the average blue collar workers have risen by 6.3 percent over these seven years). Total factor Productivity (TFP) has been rising in the United States dusing this period at an average annual rate of 1.6 percent, which alone should have pushed wages for all workers by 11.8 percent between 1997 and 2004, including the least skilled among them.»

So offshoring and other factors mean that the pricing power of low skilled workers is so low that they get only a fraction of their own productivity improvements, but at least a minority of them get a bit more pricing power so on average they lose 1.8% less over 7 years that they should have lost?

Final note: that all this is for low skilled workers that have still got a job. Never mind those who have lost it...

Awesome. Especially when summarized pithily as

«US offshoring boosts blue collar wages»

When some of the tasks performed by a certain type of labor can be more readily performed abroad, the firms that gain the most are the ones that use this type of labor intensively in their production processes.

Let’s look, for a moment, at what this actually means. What is, “some tasks”?

Gardening is not one of them. Barbering is not another. These are local service offerings and not dis-locatable.

By a certain type of labor is meant rote manipulations within the manufacturing process. This means nimble fingers at work to conduct a process. A most notable example is putting some house gadget together – like a television. Meaning, assembly line work. Not much skill is necessary to fit a seat or a dashboard into a car’s carcass that has been welded together by robots.

These jobs are being frittered away to the Far East, where nimble female fingers are at work. American females are, in the bottom of the unskilled ladder, flipping hamburgers or putting pizzas into cartons for delivery. These are not manufacturing jobs, but localized service-sector work. It is also the vast territory of the minimum wage.

So, what is left to manufacturing? The bigger the object to be manufactured, the larger its cost-of-transportation to market and, therefore, the more likely that it will not be dislocated abroad. (Exception: Airplanes, which, with a top up of the fuel tank, will deliver themselves.)

However, there is another niche. It is automated manufacturing. The largest importer nation of robot technology has been … Germany. Which also has not only some of the world's highest average manufacturing wage rates, but the largest (gross) export trade of any country as well. What are the Germans doing differently?

The Germans are using advanced manufacturing techniques to keep in-house as much manufacturing as they can – but it is decidedly upscale hi-tech component manufacturing and assembly. It is NOT counter-top coffee machines that are being made in the land of Wagner.

I submit that America/Europe have NOT made enough effort to exploit this particular niche. Both have the resources necessary (intelligence, skilled workforce, capital and sizeable markets that would support production consolidation to obtain volumes) to do so.

Industry finds it simpler to outsource, when its products are being out-priced by lower productivity and higher local wages. This means the base calculations being made that justify outsourcing must be reformulated. How? I suggest by advanced amortization of hi-tech product manufacturing processes. This will create far fewer jobs, but higher paid workers as well. (Aside from the basic European handicap of humongous wage social charges, which must be addressed sooner or later.)

Maybe one out of four people presently working in a low-skill manufacturing job today can be retrained to run a hi-tech production line that replaces them. Still, isn’t it better to light one candle than to curse the darkness?

Arthur Eckart

Lafayette, it seems, the Germans could also learn from U.S. manufacturing. See links below:



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