Wednesday, July 07, 2010

Retaining US jobs

Yves Smith commented on Andy Grove's post about retaining US jobs. I am worried about the very idea of job exports.

Job profile of the economy
In an ideal state, every economy should have a job profile of its citizens. Job profile will be based on skills available in the workforce. For example, (pardon all the cliches across the post) France and Italy will have higher clothes designers than manufacturers while China will have more clothes manufacturers than designers. This is result of natural specialization and, as such, ties in with two great works by Michael Porter and Adam Smith. So there is nothing fundamentally wrong with exporting jobs. the problem is what jobs do you export.

America is exporting the keep-jobs
Based on the education, skills and experience of workers, we may possibly conclude that America needs these jobs. It needs the car-manufacturing jobs and IT hardware jobs. But these jobs are going overseas. Why? The only reason why jobs are being exported is because it is cheaper to get the job done elsewhere. The labour in developing countries is cheaper in US dollar terms. This could be true because of two reasons:

First is the well understood relative currency valuation reason. If in relative terms Chinese auto worker is paid the same as US auto worker, then the only reason will be currency disadvantage. But is Chinese auto worker paid the same as US auto worker in relative terms? I don't think so. The relative wages are similar in high-tech industry like Pharma, IT services industry, computer chip design, architectural firms etc. But not in auto basic skill industries like auto, garmenting etc.

Second, if there is relative difference in wages, it could be because Chinese labour is poor and hence ready to work at cheaper prices. This is a fundamentally sound case and more applicable to auto, garmenting and other basic skill jobs. These jobs will eventually move.

Implication of job migration
There are some critical points we can decipher from this reality.

First, every job profile seems to have an average purchasing power parity wage. So for each combination of skill, output, education, experience and productivity there is a world parity wage. I call this wage content of a job (in my book) where job refers to one requiring standard profile. If your wage is higher than the wage content of that job you are doing, then you are at high risk of being laid-off.

Second, if Americans are desperate for these jobs, it implies that skill levels in America are more aligned with these jobs. In other words, the American skills difference and wage difference does not reconcile. It means US wages are out of line and need to come down to international wage content levels. We can achieve it by deflation or by resetting the currency. Either ways, it is not pleasant.