Where the Jobs Went, Part II: Globalization

As I mentioned in my previous post in the series, one of the main headwinds to the job market is automation.  But, as mentioned before, not every job - not even in manufacturing - can be automated.

However, especially if shipping and fuel prices remain sufficiently low, production of simple goods can be offshored and "globalized."  This is especially the case for goods whose production does not necessarily require substantial training or education, but rather the simple ability to follow instructions and perhaps do some simple quality control.

Why might a company move its manufacturing offshore?  Well, there are several reasons, but the first and foremost of these is no doubt regulatory bypass.

Complying with red-tape regulatory restrictions in the U.S. companies $1.75 trillion per year.  To put that in perspective, that's $5,300 per American - retirees and infants included - just to comply with regulations.  The vast majority of these regulations have to do with either facility safety or environmental requirements, which are skirted by hosting the facility offshore, or employee well-being, which is skirted by hiring foreign workers for an offshore facility.

In a developing country, companies don't have to contend with things like OSHA regulations, collective bargaining agreements, reporting requirements, and the like - and the taxes imposed are likely to be the taxes of the host country rather than America.  (More on that when we talk about tax uncertainty.)

And then of course there is the wage gap.  A low-wage, low-standard-of-living country almost certainly doesn't have minimum wage laws or politically-powerful unions.  Companies can lure in factory workers by promising them wages that are a pittance compared to the $150+ a day a unionized American factory worker would command, but which are higher than subsistence farming.

Globalization, however, is not as irreversible a trend as automation.  Essentially, offshoring is a marginal cost:  It depends on the cost of labor (including all hidden costs) in the host country plus the cost of shipping the finished product shoreside, Firstly, it depends on a sufficient supply of cheap labor overseas.  If wages rise sufficiently in, say, China, or oil becomes expensive enough that overseas shipping is prohibitive, alternative arrangements would have to be made.

Globalization also carries with it inherent geopolitical risks.  If you offshore production to Cheapland, you run the risk of losing that production at the behest of Cheapland's government; this becomes an ever greater risk the more totalitarian or isolationist Cheapland's government becomes.  (Also, if your own government turns isolationist, you run the risk of incurring punitive tariffs.)

The next installment of this series will discuss the role of demographic shifts - shifts that are apparent at birth but which take decades to fully manifest in the labor force - in the job market challenge.