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August 30, 2004

American Jobs are Going Abroad
by Hans F. Sennholz

Prosperity usually is the first theme of politics. It is rather unpredictable in the never ending sequence of economic boom and recession and yet so meaningful and consequential for politicians vying for position and power. For many Americans prosperity means steady employment and satisfactory pay. Unemployment is a curse regarded with fear and apprehension. It seems to obsess many politicians; their eyes are glued on the numbers which are adjusted and readjusted continually. All want to know: what are today's numbers?

Some politicos and newsmen like to focus on the employment figures of major American corporations. It disturbs them greatly to observe business reducing employment in the United States and simultaneously increasing it in off-shore branches abroad. In their view, it is unpatriotic business behavior to desert their laboring countrymen and replace them with alien labor abroad. A new word describes their conduct; they are "outsourcing" American jobs.

It is true, numerous companies in the fields of information technology and manufacturing are known to outsource jobs to countries where wages are lower. Some observers even predict that by 2008 a quarter of all technology jobs will be located in lesser-developed countries with lower labor costs. Unfortunately, they do not explain; they merely spread fear which weakens judgment and invites that which they fear.

Throughout most of the 20th century American workers earned higher wages and enjoyed higher standards of living than their peers abroad. Yet there was no outsourcing of jobs to countries with cheaper labor. On the contrary, many foreign jobs found their way to the U.S., giving employment to a rapidly growing population. Many millions of immigrants flocked to these shores, seeking and finding employment with wages among the highest in the world. Yet labor costs, when calculated per unit of output, were among the lowest in the world. They were low because American labor was very productive.

Labor productivity and labor costs are a direct function of the tools and equipment used by labor. A 500-horse power tractor makes a farmer more productive than a team of mules or horses. Economists speak of the amount of productive capital invested per head of population that determines labor productivity and income. The amount of capital investment in turn depends on a number of psychological, sociological, and institutional factors such as the common habit of saving and investing, the regard and concern for the future, the safety of savings and investments, the laws and regulations that limit their use, and the level of capital taxation. In other words, people who are future-oriented, who are free and secure in their possessions, tend to be productive and prosperous. If they remain true to their proven ways from generation to generation, they may even excel all others.

Capital investment indeed is an important determinant of rates of income. Yet we must not overlook the effort and skill in the use of capital. Power tools and equipment that are used twenty-four hours a day make human labor more productive than tools used only eight hours or just five, four, or even fewer hours. Moreover, workers who lack the necessary skills to use the equipment efficiently and reliably are less productive than better-trained labor. And workers who work grudgingly and reluctantly, who call strikes and slow-downs undoubtedly are less productive than others who are eager and diligent. Angry workers may force employers to close their doors forever or move their jobs somewhere else.

China is a favorite corporate destination in the search for cheaper labor. Last year, foreign corporations invested some $60 billion in Chinese industrial facilities; this year, they are expected to invest more than $70 billion. Many corporation executives apparently do not realize that doing business with communist political authorities is highly speculative. In fact, it may prove to be outrightly reckless and foolish in years to come. After three years of futile negotiation, Chinese authorities, for instance, forced three oil and gas corporations, Shell, Exxon-Mobil, and Gazprom, to leave the country, leaving behind their designs, field-development plans and technology. A British utility firm that had built and was running a waste-water treatment plant in Shanghai was forced to pull out after the Beijing government suddenly decreed that a fifteen percent return, which had been agreed upon when the investment was made, was illegal. It takes courage, patience, and much labor to navigate through the country's opaque bureaucracy, to cope with ever changing rules and regulations, and deal with communist officials who distrust and despise entrepreneurial profits. Moreover, to contend with piracy and outright fraud in a communist legal system tends to be outrightly disheartening.

A business project fraught with danger, uncertainty, or perplexity requires a higher return than one without such impediments. An investment in China or any other country where political and institutional conditions are antagonistic to private capital surely merits a double-digit return consisting not only of ordinary business return but also an additional political risk premium. Loan funds offered to the U.S. Treasury may yield three or four percent; funds extended to a government or enterprise in many foreign countries may need to earn some twenty percent or more. If they yield lesser returns, the investment, in our judgment, is imprudent and foolhardy. Yet some investors may be tempted in hope of improving conditions in the future.

Some businessmen run away to other countries because they are unhappy in their own, and then run back to their own because they fail abroad. Most have no choice but to bravely meet all difficulties and challenges at home. A few corporate leaders interested in economic ideas and policies even venture to participate in intellectual discussions about the ideological and institutional setting of business. Some may reach out to their own employees, offering economic instruction which may make them more knowledgeable and productive. Others may support schools and foundations specializing in economic education or underwrite media programs dealing with economic issues. They all labor in the dissemination of economic and social ideas that shape public opinion and thereby influence the institutional setting of business.

Few economic problems, if any, are as meaningful and consequential as the questions of employment and unemployment. They are discussed and explained by every school of economic, social, political, and ethical thought; every religion visits the poor and unemployed. Yet the causes of their plight are rarely discussed without preconception, predilection, emotion, and bias. It is more popular to charge "unpatriotic business behavior," "malicious outsourcing," or "employer greed" than to analyze the demand for labor. Few speakers and writers have the courage to analyze and point at popular labor laws and regulations that paralyze the market and condemn millions of men and women to a life of chronic unemployment.

A few economists dare apply basic economic principles to human labor. They insist that free labor markets would suffer no mass unemployment -- just as free goods markets suffer no chronic surpluses. And they argue that every mandatory boost in labor costs reduces the demand for labor -- just as government fixing of prices that are higher than market prices reduces the demand for economic goods. Many politicians are attorneys, counselors, and solicitors unschooled in the intricacies of inexorable economic principles; they revere the power of manmade law. To command improvements in income and living conditions, they may legislate a minimum wage or impose valuable fringe benefits which raise the cost of labor and thereby reduce the demand for labor. They create surpluses of labor especially of workers directly affected by the minimum wage law and other fringe benefits. Having created a surplus, they grant generous unemployment benefits which they exact from some hapless taxpayers.

In order to eradicate the evil of mass unemployment, economists would merely remove the institutional restraints and lower the costs imposed on labor. Every dollar of cost reduction undoubtedly would increase the demand for labor by many thousands of unemployed workers. Every rescission of labor restraint would render many idle Americans productive again. Economists would immediately reduce the burden of fringe costs that weigh heavy especially on unskilled labor; the fringes may actually double labor costs and cause much unemployment. A five percent rate of national unemployment always hides the fact that fifty percent of unskilled labor may be unemployed; the rate may even be higher for minority youth in inner cities. When seen in this light, labor laws that boost the cost of labor inflict much economic harm on the poor and breed much social strife. They gnaw at the very foundation of society.

Labor fringes are costs to those individuals who are forced to pay them; they are benefits to those who enjoy them. Because every reduction in benefits would be spurned, condemned, and vilified, no matter how baneful it may be for the young and unskilled, some economists are proposing a simple moratorium of labor-cost legislation and regulation, that is, a temporary halt in adding costs; it would give the labor market a chance and time for readjustment. A ten-year moratorium may suffice to reduce significantly the unemployment rate. It undoubtedly would allow our minority youth to work again.

A moratorium of error merely suspends the harm; it does not change old habits, predispositions, and deeply ingrained attitudes. The true spirit of improvement is a spirit of liberty, it is the limitation of government power.

Hans F. Sennholz
www.sennholz.com

Copyright © 2002-2007 Hans F. Sennholz

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