What Do You (Falsely) Take for Granted Regarding U.S. Outsourcing?

The loss of manufacturing from the U.S. costs American jobs but at least brings big cost savings to American consumers, right?  And anyway, the U.S. is too advanced an economy to do its own manufacturing, right?  Well, not so fast.  That first assumption is false in most cases, and the second is questionable.

What prompted me to devote this evening’s blog post to this topic is an article, “The Human Toll of Offshoring,” that ran in the New York Times on Labor Day.  It in turn was triggered by a new book, Factory Man: How One Furniture Maker Battled Offshoring, Stayed Local, and Helped Save an American Town, by Beth Macy, a longtime reporter for the Roanoke (VA) Times.  An alert reader of this blog called my attention to the NYT article, though I had heard Macy interviewed on NPR a few weeks ago.

Sadly, even the NYT buys into myth that offshoring brings U.S. consumers big cost savings.  Generally, this is not the case.  The typical profit margin for manufactured goods is so small that the savings in labor costs accrued from offshoring make a big difference proportionally to the manufacturer, but the difference in consumer price is small, as the labor costs are a small portion of the overall cost.  More generally, labor cost savings don’t bring big reductions in retail price.  For instance, my UC Davis colleague Phil Martin, an agricultural economist, once calculated that consumers save about a nickel per head of lettuce grown with unauthorized-immigrant labor.  Negligible savings for the consumer, but the growers win big.  Labor is a small part of retail price even in some service industries; Card and Krueger, writing in support of raising the minimum wage, found that a 19% increase in labor costs led to only a 2% rise in fast-food prices.

Of course, the politicians’ and unions’ favorite boogey man in such discussions is China.  Yet an investment analyst estimated that Chinese labor forms only 2-5% of the retail price of an iPhone.  I’ve seen other similar analyses.  A 2011 analysis by the Boston Consulting Group (BCG) stated that “…labor accounts for a small portion of a product’s manufacturing costs.”  Since the NYT article is about the furniture industry, note that the profit margin in that industry is said to be 2%.  If one combines this fact with the BCG statement, one sees that the savings to consumers is very small.  Again, remember that it is the manufacturer who wins from offshoring, not the consumer.

Significantly, a BCG survey found that Americans are willing to pay considerable premiums for products made in the U.S.  In fact, the amount they are willing to pay extra actually exceeds the small savings they actually get from offshoring.  Apple is moving some of its Mac production back onshore, presumably at least in part from this consideration.  BCG claims that this is a coming trend, as does The Economist.

So, the economics professor cited in the NYT article (requoted from the Macy book, and endorsed by the NYT reporter) seems to be rather off base in his statement:  “In reality, we shouldn’t be making bedroom furniture anymore in the United States. Shouldn’t we instead be trying to educate these workers’ kids to get them into high-skilled jobs and away from what’s basically an archaic industry?”  Moreover, his apparent attitude that all Americans should get an education and pursue one of the professions is of course absurd on its face, and  frankly, is amazingly naive.  Should more Americans go into the science research field, for example?  No, they can’t get jobs as it is, as a National Institutes of Health study found a couple of years ago.

Moreover, the NIH stated that foreign-worker programs were part of the problem.  Importation of foreign labor is just like offshoring, really; whether cheap labor is used abroad or brought to the U.S., the losers are U.S. citizen and permanent resident workers.  UC Berkeley economics professor Clair Brown and her coauthors have found that the H-1B work visa program negatively impacts American engineers, and the congressionally commissioned NRC report found that H-1B was adversely impacting IT wages.  (See references on NIH, Brown and the NRC in my Migration Letters paper.)

Apologists for offshoring, such as the NYT’s Tom Friedman, try to excuse all this not only by the old “the labor costs savings are passed on to the consumer” canard, but also by saying that the workers abroad will be enabled to afford American products, thus creating U.S. jobs.  That is true to some extent, but the benefit is probably not as great as the loss.  Friedman, for instance, has noted that software development work offshored to India is compensated by the fact that the Indian software “factories” use Carrier brand air conditioners.  But the extra Carrier sales arising from this are probably not going to result in Carrier hiring more engineers; the engineering is largely a fixed cost.  So, we are losing engineering jobs in this scenario but MAYBE gaining some manufacturing jobs (assuming those are not in India, which would be counter to Carrier’s best interests)–not a very good trade, is it?

Is the solution to place restrictions on globalization, in the form of imposing tariffs on goods and tightening policy on importing foreign labor?  As I’ve emphasized before, those questions should be for the American people to decide–based on full information, not on misleading NYT articles.

 

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