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Monday, October 20, 2003

IS the US Importing Productivity?

Stephen Roach raises some time honoured measurement problems about the current US productivity 'spurt'. The statistics in question are labour productivity statistics. The growth of oursourcing may be having the consequence of distorting the labour productivity statistics upwards. By how much we do not know. The labour component of the outsourced work may not be being adequately accounted for in the total labour hours part of the denominator. If this is happening systematically this may bias the numbers upwards. Even if this is the case, it is unlikely to be the whole picture, since Robert Gordon's argument about ongoing gains from the IT-internet symbiosis (which is of course what makes possible the outsourcing in the first place ) also is part of the explanation. As I indicated last week, the relatively advanced pace of this process in the US may also provide some explanation for the US-Europe differential, but this is a gap which may well close as Europe itself begins to extract the same benefits. I buy the "US unemployment is in-part structural" argument, and am convinced that a return to strong employment growth hinges on the question of the emergence of new employment sectors, sectors which lie further up the value chain, and which can guarantee the US 'lifestyle differential'. Absent this, a question mark has to hang - Stephen Roach style - over the sustainability of the recovery.

America’s fabled productivity miracle continues to be a key underpinning for much that is special about the US economy. With productivity in the nonfarm business sector up an astonishing 6.8% sequentially (annual rate) in 2Q03 and 4.1% on a year-over-year basis, it’s hard to deny that something quite extraordinary is going on. As I see it, what’s special is an increasingly powerful global labor arbitrage between domestic and foreign labor input that has given rise to a surge in offshore outsourcing. The result is a jobless recovery built on an increasingly tenuous foundation of “imported productivity.” The real issue is whether this new strain of productivity enhancement is sustainable. I have my doubts.

as much as a third of the so-called productivity bonanza of this recovery can be attributed to a shortfall in domestic hiring. Absent that windfall, productivity growth over the first six quarters of this expansion actually would have fallen well short of its typical recovery profile. Obviously, that has not been the case in this jobless recovery. But that doesn’t mean aggregate demand is necessarily being sourced by more efficient modes of global production that require reduced labor content. Instead, courtesy of a cross-border labor arbitrage, it may simply mean that there has been a substitution of foreign labor input for domestic labor input. For America, that has the effect of biasing domestic productivity growth to the upside. That’s because conventional measures undercount the total labor input -- foreign as well as domestic -- required to generate a given product flow. Conversely, for foreign outsourcers, productivity growth may well be biased to the downside, as low-wage employment encourages more labor-intensive production schemes.

Sourcing demand through low-cost, offshore labor input has become an increasingly important tactic to enhance the operating efficiency of US businesses. The IT-enabled global labor arbitrage has become central to this process, giving rise to the imported-productivity paradigm. While this has resulted in a significant improvement in corporate earnings, the American workforce is not sharing the benefits. The resulting clash between the owners of capital and the providers of labor has resulted in profound tensions in the US body politic. Imported productivity, together with the jobless recovery and income leakage it implies, is the stuff of heightened trade frictions, mounting protectionist risks, and a populist assault on Corporate America (see my September 29 dispatch, “Rebalancing Backlash”). The US Congress has already thrown down the gauntlet in this regard, unleashing a bipartisan barrage of China bashing. Absent a political counterweight, there is no telling how treacherous the endgame becomes -- especially as America now enters its presidential election season.

Which takes us to the bottom line: In my view, the income leakages of imported productivity raise serious questions about the sustainability of this recovery from an economic point of view. At the same time, the political reaction to the resulting jobless recovery raises equally profound questions about sustainability from a political standpoint.
Source: Morgan Stanley Global Economic Forum

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