September 03, 2003

Econ 101b: Fall 2003: The Erosion of Okun's Law

We used to have considerable confidence in Okun's law: that an extra one percentage point rise (or fall) in the unemployment rate over a year would reduce (or boost) that real GDP growth by an extra 2.5 percent over that year because a rising (or falling) unemployment rate would also be accompanied by a falling (rising) share of the population in the labor force and by falling (rapidly rising) productivity. Productivity would fall when the unemployment rate rose for two reasons: first, even when factories are not running at full capacity they still incur substantial setup and maintenance costs; second, even when there isn't enough work for them to do firms would rather hold onto skilled workers than watch them drift away and have to pay to train their replacements the next time the wheel of the business cycle turns.

Things have been different, however, in this recession (and to a lesser extent in the preceding early-1990s recession. The standard relationship between output growth and hours worked has gone substantially awry. See that branch poking out of the scatter diagram on the left side? That's the most recent data. (The smaller twig pointing out below and to the left of the branch is from the early-1990s recession and recovery.)

The fact that falling hours have been accompanied by rapidly-rising productivity is what has given us not a jobless recovery but a massive job-loss recovery. The normal pattern we would expect from the past two years' output growth would be that employment and hours would have been nearly flat. Why the different pattern this time? We think that it is because firms are no longer "hoarding labor" when times are slack because the industries losing jobs no longer expect employment to bounce back.

This means that we no longer have any confidence that we understand the cyclical pattern of productivity growth--which means that we have little ability to translate the (high) productivity growth numbers we see into information about what the underlying long-run trend growth rate of the economy is.

Why is this? Why have firms changed their behavior? Let me turn the mike over to Erica Groshen and Simon Potter of the New York Federal Reserve Bank:

Erica Groshen and Simon Potter (2003), "Has Structural Change Contributed to a Jobless Recovery?" (New York: Federal Reserve Bank of New York):

The sluggishness of payroll growth during the 1991-92 and current recoveries stands in sharp contrast to the vigorous rebound in employment during earlier recoveries (Chart 1). To be sure, these earlier recoveries had rocky moments, with occasional jobless intervals. At the start of any recovery, many employers will delay hires or recalls for a time to be certain that the increase in demand will continue. Nevertheless, although the job market resurgence in the past may often have lagged the output recovery by one quarter, only during the two most recent recoveries has the divergence between job and output growth persisted for a longer period.

The divergent paths of output and employment in 1991-92 and 2002-03 suggest the emergence of a new kind of recovery, one driven mostly by productivity increases rather than payroll gains. The fact that no influx of new workers occurred in the two most recent recoveries means that output grew because workers were producing more. Although one might speculate that output increased because workers were putting in longer days, average hours worked by employees actually changed little during this and the previous jobless recovery.

The parallels between the two most recent recoveries raise hopes that the current recovery will ultimately follow the same course as its predecessor. After about eighteen months, the 1991-92 recovery ushered in very strong employment growth and the longest economic expansion of the postwar period. But while we cannot know when--or how vigorously--job growth will revive during this recovery, we can explore why the recovery is jobless now....

Recessions mix cyclical and structural adjustments. Cyclical adjustments are reversible responses to lulls in demand, while structural adjustments transform a firm or industry by relocating workers and capital. The job losses associated with cyclical shocks are temporary: at the end of the recession, industries rebound and laid-off workers are recalled to their old firms or readily find comparable employment with another firm. Job losses that stem from structural changes, however, are permanent: as industries decline, jobs are eliminated, compelling workers to switch industries, sectors, locations, or skills in order to find a new job.

A preponderance of structural--as opposed to cyclical--adjustments during the most recent recession would help to explain why employment has languished during the re-covery. If job growth now depends on the creation of new positions in different firms and industries, then we would expect a long lag before employment rebounded. Employers incur risks in creating new jobs, and require additional time to establish and fill positions....


In the four recessions before 1990, unemployment from temporary layoffs rose throughout the downturn and fell sharply after the trough, adding substantially to the run-up and then the decline in total unemployment. In the 1990-91 and 2001 recessions, by contrast, temporary layoffs contributed little to the path of unemployment. These layoffs barely increased in the 1990-91 recession and figured even less importantly in the 2001 recession...

1980-1982

we track the direction of job flows during and after the recession. If an industry’s job losses (or gains) during the recession were quickly reversed once the economy began to recover, we classify the job adjustments as cyclical. If, instead, the outflow of jobs from (or the inflow of jobs to) the industry continued during the recovery, we conclude that the jobs have been permanently relocated and we classify the adjustments as structural. We can then aggregate the adjustments made by individual industries to establish whether structural or cyclical changes predominated. We apply our method first to the 1980 and 1981-82 downturns...

The Recent Situation

The difference from the pattern of the early 1980s is quite stark: now, the industries cluster heavily in the two structural quadrants. Most of the industries that lost jobs during the recession—for example, communications, electronic equipment, and securities and commodities brokers—are still losing jobs. Balancing the structural losses of these industries, however, are the structural gains of others. For example, nondepository financial institutions, an industry grouping that includes mortgage brokers, added jobs during both the recession and the recovery. The trend revealed in Chart 4 is one in which jobs are relocated from some industries to others, not reclaimed by the same industries that had lost them earlier. The chart provides persuasive evidence that structural change predominated in the most recent recession...

Posted by DeLong at September 3, 2003 04:22 PM | TrackBack

Comments

So China, India and much of the developing world are agressively pursuing exports which is putting structural pressure on the tradeable goods (and now services) side of our economy? When combined with rapid technological change structural changes will be extremely high over the foreseeable future. Recessions are now caused by economic shocks which compound the ongoing structural changes instead of the inventory overhang led recessions of yesteryear. Huh? Who'd a thunk it?

Posted by: Stan on September 4, 2003 06:35 AM

What are "nondepository institutions"? I think I want to join the party!

Posted by: Russell L. Carter on September 4, 2003 08:03 AM

Ah, I see. Mortgage brokers. I guess structural deficits from here to eternity guarantee that the cops are on the way to shut that party down.

Posted by: Russell L. Carter on September 4, 2003 08:10 AM

and don't forget "business process outsourcing" as another source of structural shift. These forces have really changed start-ups in the Bay Area. Ten years ago the idea was to build a company and move the manufacturing overseas. Now much of the semi-conductor design work has moved as well, along with tech support and call centers. A lot of the start-ups I see know have a few chief engineers and a bunch of marketing folk (see linksys). Inventory overhang has been greatly reduced due to just-in-time manufacturing and a much tighter sales reporting cycle from IT advances.

On the flip side, if you happen to have a job, everything but housing and gas seems to get cheaper or better (for the same price) year by year.

So what's next? I wouldn't wait for shifts in currency rates and investments to drive up the cost of off-shore call centers. I don't think that letting the yuan go free will bring manufacturing jobs back to the states either. Companies like Wal-Mart and Dell have had a lot of practice opening plants in new developing countries and I'm sure they already have a few new targets picked out.

Your guess is as good as mine.

Posted by: jjj on September 4, 2003 08:40 AM

Really bad news. This means that one of the main feedback looops for strengthening recoveries is now broken. Before, once GDP growth began to pick up, employment would strengthen as well, reinforceing GDP growth. Now, thanks to perhaps some late return on IT investment, and vast offshoring of jobs, GDP growth can occur with falling employment. For now the whole system is baling-wired together by the US consumer's seemingly boundless willingness to take on more debt. Probably not a long-term stable state of affairs.

Are we headed (or are we already there) to a class system where you have a group who is lucky enough not to be affected by offshoring, has slowly rising incomes, but with prices falling for everything but housing and medical care has a pretty good increase in life style?

And the other group is the growing class of the permanently un/underemployed.

-steve

Posted by: ssoar on September 4, 2003 10:49 AM

Really bad news. This means that one of the main feedback looops for strengthening recoveries is now broken. Before, once GDP growth began to pick up, employment would strengthen as well, reinforceing GDP growth. Now, thanks to perhaps some late return on IT investment, and vast offshoring of jobs, GDP growth can occur with falling employment. For now the whole system is baling-wired together by the US consumer's seemingly boundless willingness to take on more debt. Probably not a long-term stable state of affairs.

Are we headed (or are we already there) to a class system where you have a group who is lucky enough not to be affected by offshoring, has slowly rising incomes, but with prices falling for everything but housing and medical care has a pretty good increase in life style?

And the other group is the growing class of the permanently un/underemployed.

-steve

Posted by: ssoar on September 4, 2003 10:52 AM

I didn't hit the button twice. Honest.

-steve

Posted by: ssoar on September 4, 2003 10:58 AM

I didn't hit the button twice. Honest.

-steve

Posted by: ssoar on September 4, 2003 11:01 AM

Brad, your writing is like a beautiful Hubblian view of America looking backward a very long way.
Wonder if anyone factored in the spiked cost of living and backward sliding in wage rates? Also, my gut (and bums on freeway on-ramps) tells me current unemployment rate is way-skewed from the froth of '95-'01, (many would claim is cooked to keep Republicans in the majority so they can run US even deeper into a deficit we must repay).

Here's my personal take on your illustrations:

'71-'73 On the road summers and living in communal old house winters, food stamps easy, cheap gas (25˘/gal!), plenty odd jobs hitch-hiking, but no real work, unless you paid some alderman to get you one. Good money standing in gas lines, then came the end of 'easy living', thanks to Watergate, Nasser closing the Suez, Israel taking Sinai, the '67 war, Israel taking Gaza, then the UAE's choking off the world's oil, right when all the boys were coming back unemployed from Nam. First level of hell;

'75-'78 Living in sidelined boxcars summers and abandoned warehouse winters, no food stamps but food easy to find, farm work and truck driving, but no real work unless you had a rich relative. A time of really cold winters and cold hearts. Second level of hell;

'81-'84 Living in abandoned car summers and tent city winters, learned to dumpster dive, work in food processing and poaching fish & game, but no real work unless you were *right there*. Reagan dumps mentally ill out on streets, deregulates and opens the flood gates to immigrant labor. Unspeakable times. Third level of hell;

'91-'94 Caught break, learned computers, owned first house and programming business, but work stopped coming in, cold, thanks to Bush Sr. '94 made just $5K, went back to school in Internet. Perfect timing, skipped back up one level;

'01-'03 Locked in IT consulting job for county agency and totally out of the market. Dodged both bullets, back up to first level of hell. Friends lost entire 401(k)'s in bubble, massive layoffs of service and trades buddies, most people hanging on to refi and old car with one week's paycheck in savings. Bush dumps economy out on world markets letting jobs slip away overseas, millions of them, then drags US into his personal war reality. Second level of hell;

Maybe third, we might've skipped one 9/11. That doesn't show on your charts, though. Sometime put a face on it, OK? Even inside the beltway there are people starving to death, every day.

Posted by: Walken Buy on September 9, 2003 11:11 PM

Brad, your writing is like a beautiful Hubblian view of America looking backward a very long way.
Wonder if anyone factored in the spiked cost of living and backward sliding in wage rates? Also, my gut (and bums on freeway on-ramps) tells me current unemployment rate is way-skewed from the froth of '95-'01, (many would claim is cooked to keep Republicans in the majority so they can run US even deeper into a deficit we must repay).

Here's my personal take on your illustrations:

'71-'73 On the road summers and living in communal old house winters, food stamps easy, cheap gas (25˘/gal!), plenty odd jobs hitch-hiking, but no real work, unless you paid some alderman to get you one. Good money standing in gas lines, then came the end of 'easy living', thanks to Watergate, Nasser closing the Suez, Israel taking Sinai, the '67 war, Israel taking Gaza, then the UAE's choking off the world's oil, right when all the boys were coming back unemployed from Nam. First level of hell;

'75-'78 Living in sidelined boxcars summers and abandoned warehouse winters, no food stamps but food easy to find, farm work and truck driving, but no real work unless you had a rich relative. A time of really cold winters and cold hearts. Second level of hell;

'81-'84 Living in abandoned car summers and tent city winters, learned to dumpster dive, work in food processing and poaching fish & game, but no real work unless you were *right there*. Reagan dumps mentally ill out on streets, deregulates and opens the flood gates to immigrant labor. Unspeakable times. Third level of hell;

'91-'94 Caught break, learned computers, owned first house and programming business, but work stopped coming in, cold, thanks to Bush Sr. '94 made just $5K, went back to school in Internet. Perfect timing, skipped back up one level;

'01-'03 Locked in IT consulting job for county agency and totally out of the market. Dodged both bullets, back up to first level of hell. Friends lost entire 401(k)'s in bubble, massive layoffs of service and trades buddies, most people hanging on to refi and old car with one week's paycheck in savings. Bush dumps economy out on world markets letting jobs slip away overseas, millions of them, then drags US into his personal war reality. Second level of hell;

Maybe third, we might've skipped one 9/11. That doesn't show on your charts, though. Sometime put a face on it, OK? Even inside the beltway there are people starving to death, every day.

Posted by: Walken Buy on September 9, 2003 11:12 PM

Brad, your writing is like a beautiful Hubblian view of America looking backward a very long way.
Wonder if anyone factored in the spiked cost of living and backward sliding in wage rates? Also, my gut (and bums on freeway on-ramps) tells me current unemployment rate is way-skewed from the froth of '95-'01, (many would claim is cooked to keep Republicans in the majority so they can run US even deeper into a deficit we must repay).

Here's my personal take on your illustrations:

'71-'73 On the road summers and living in communal old house winters, food stamps easy, cheap gas (25˘/gal!), plenty odd jobs hitch-hiking, but no real work, unless you paid some alderman to get you one. Good money standing in gas lines, then came the end of 'easy living', thanks to Watergate, Nasser closing the Suez, Israel taking Sinai, the '67 war, Israel taking Gaza, then the UAE's choking off the world's oil, right when all the boys were coming back unemployed from Nam. First level of hell;

'75-'78 Living in sidelined boxcars summers and abandoned warehouse winters, no food stamps but food easy to find, farm work and truck driving, but no real work unless you had a rich relative. A time of really cold winters and cold hearts. Second level of hell;

'81-'84 Living in abandoned car summers and tent city winters, learned to dumpster dive, work in food processing and poaching fish & game, but no real work unless you were *right there*. Reagan dumps mentally ill out on streets, deregulates and opens the flood gates to immigrant labor. Unspeakable times. Third level of hell;

'91-'94 Caught break, learned computers, owned first house and programming business, but work stopped coming in, cold, thanks to Bush Sr. '94 made just $5K, went back to school in Internet. Perfect timing, skipped back up one level;

'01-'03 Locked in IT consulting job for county agency and totally out of the market. Dodged both bullets, back up to first level of hell. Friends lost entire 401(k)'s in bubble, massive layoffs of service and trades buddies, most people hanging on to refi and old car with one week's paycheck in savings. Bush dumps economy out on world markets letting jobs slip away overseas, millions of them, then drags US into his personal war reality. Second level of hell;

Maybe third, we might've skipped one 9/11. That doesn't show on your charts, though. Sometime put a face on it, OK? Even inside the beltway there are people starving to death, every day.

Posted by: Walken Buy on September 9, 2003 11:22 PM

Is it possible that unprecedent success of the Fed has contributed to this new cyclical pattern? Could it be that the Volcker disinflation with its consequences for the reputation of the central bank and the subsequent well anticipated Fed policy led to a decline of the importance of monetary factors for the business cycle. Irony could strike back: what if the Lucas "Monetary- misconceptions"-hypothesis would fit pre 1981-82 and RBC-Modells with structural features post 1981-82 (because of the lower degree of suprise in central bank behavior)?

Very interested regards,

Posted by: Mu-Jeung Yang on September 26, 2003 02:07 PM

Is it possible that unprecedent success of the Fed has contributed to this new cyclical pattern? Could it be that the Volcker disinflation with its consequences for the reputation of the central bank and the subsequent well anticipated Fed policy led to a decline of the importance of monetary factors for the business cycle. Irony could strike back: what if the Lucas "Monetary- misconceptions"-hypothesis would fit pre 1981-82 and RBC-Modells with structural features post 1981-82 (because of the lower degree of suprise in central bank behavior)?

Very interested regards,

Posted by: Mu-Jeung Yang on September 26, 2003 02:07 PM

Is it possible that unprecedent success of the Fed has contributed to this new cyclical pattern? Could it be that the Volcker disinflation with its consequences for the reputation of the central bank and the subsequent well anticipated Fed policy led to a decline of the importance of monetary factors for the business cycle. Irony could strike back: what if the Lucas "Monetary- misconceptions"-hypothesis would fit pre 1981-82 and RBC-Modells with structural features post 1981-82 (because of the lower degree of suprise in central bank behavior)?

Very interested regards,

Posted by: Mu-Jeung Yang on September 26, 2003 02:09 PM

IS FACTORY LABOR NO LONGER THE PARADIGM?

Three characteristics of the present economic circumstances seem to perplex newspaper columnist economists.
- Labor productivity increases during recession.
- Long lag between end of recession and labor recovery.
- No labor hoarding by companies

In my experience over the past 5 years hiring (and firing and laying-off and hiring and subcontracting) several hundred personnel in corporate software services in the US, Europe and India, these three characteristics are quite predictable at least in my small slice of the economy.

Labor Productivity Increase during the recession

For nearly 10 years leading up to the most recent recession, growth in demand for labor in corporate software services attracted lots of new entrants and kept unproductive workers in the labor pool. Published studies show labor productivity in software development varies widely. The most productive quartile is 10 to 20 times as productive as the 3rd quartile. The bottom quartile was actually negatively productive; for every hour they worked, there was more than an hour spent by someone else to fix their code.

The bottom quartile was knocked out of the labor pool during the most recent recession. Not surprisingly, productivity went up immediately. Furthermore, some of the most productive quartile also lost their jobs (and their $125,000 salaries and full benefits). They found work again within 3 to 6 months though often at lower salaries or on independent contracts at $35 to $50 per hour.

You might wonder why such unproductive labor stayed employed. If you have ever been a corporate manager you need no explanation about how difficult it can be to have an employee dismissed for low (even negative) productivity.

Consequently, the US software services labor pool is exhibiting rising productivity and falling cost per unit of productivity (very different than per unit of labor in this little slice of the economy) in the US. Interestingly, the same slice of the labor market in India is showing just the opposite; a quickly falling productivity rate and soaring labor rates (well, compared to their own previous labor rates) as new entrants join that labor pool.


Jobless recovery.

Speaking with the “factory worker” paradigm of labor in mind, the story economists told about recoveries went something like: “On the upswing in the economic cycle, manufacturers overshoot production and build up excess inventory. Orders fall, production falls, employment falls. When inventories are nearly 100% utilized, orders rebound and people are recalled to work.”

Today, direct labor to refill inventory stocks is a smaller and smaller part of the US labor pool. (Just as economists now speak of ‘non-farm’ labor when expounding on the employment rate in the US economy, perhaps in future, economists will speak of ‘non-direct’ labor.) Perhaps information technology has suppressed the old inventory volatility problems (which I learned about in my Operations Research 101 class at UCBerkeley) which drove tall peaks and low valleys in the manufacturing activity cycle.

But software services are not direct labor and do not produce inventory. Customers for corporate software services are not interested in spending on labor for software development until either direct labor utilization or direct capital utilization approaches 100% at which time companies become interested in implementing ‘labor-saving’ automation or capital enhancing automation. Company managers do not yet perceive that we are near 100% labor utilization or 100% capital utilization in any of the usual software intensive industries.

Furthermore, corporate decision-makers are much more likely to perceive relocating jobs to lower-cost labor markets as both more beneficial and less risky than corporate IT projects. (Just try suggesting some ‘eCommerce’ initiative to your Senior Manager today and see how long you keep your middle management job.) The ‘off-shore’ labor market is perceived as infinitely large, growing, highly qualified and eager for jobs.

Consequently, there has been no job recovery in the software services business in the US to-date. There are however, some massive programs in India and China to modernize their banking infrastructure and bring manufacturing planning and management practices in-line with the wider world. Consequently, lots of indigenous software services jobs are springing up in those labor markets.

My personal belief is, “Offshore” is the new dot.com. Relocating jobs to lower cost labor markets has become a ‘fad-ish’ frenzy, which, the countervailing forces mentioned above will rapidly overwhelm. Though, it shouldn’t be ruled out as a long lived fashion for reasons given below.

No Labor hoarding by companies

In the corporate software services business, companies do not hoard labor for three major reasons. First, services companies have very thin capitalization as a percentage of labor expense and revenue. So, there is a great threat to a thinly capitalized company of simply turning up broke.

Second, specific skills required by software services companies change with greater rapidity (every 9 to 24 months) than for companies with a large stock of fixed capital which renews every 3 to 10 years.

Third, and most interesting, it is quite possible for an experienced programmer to get copies of the latest software and learn to use it without an employment affiliation. In short, you can become a JAVA programmer at home. You are less likely to become a metal stamp press operator at home. This does not hold in the case of every skill, but it holds for quite a few technical computer skills. I wonder, in what other services skills this learn-it-from-home phenomenon (or at least "learn it from your local Oracle certification kolej") holds?

The opportunity to learn services skills without an employment affiliation breaks the chicken-and-egg problem that kept so many populations out of specific labor pools. I believe this is the aspect of knowledge-based services jobs that will keep pushing them to lower-cost labor markets (as long as the population speaks English). ‘Offshore’ may be a fad today, but, it seems to me it will have staying power as a fashion for some time.

Since the ‘Output Growth’ and ‘Hours Growth’ chart so neatly fits observations of the corporate software services labor sector, I wonder if the entire US labor market has come to more closely resemble software programming than factory labor. If so, it’s time to revise the stories economists tell to illustrate their mathematics.


Posted by: bob boyd on October 9, 2003 11:22 AM

IS FACTORY LABOR NO LONGER THE PARADIGM?

Three characteristics of the present economic circumstances seem to perplex newspaper columnist economists.
- Labor productivity increases during recession.
- Long lag between end of recession and labor recovery.
- No labor hoarding by companies

In my experience over the past 5 years hiring (and firing and laying-off and hiring and subcontracting) several hundred personnel in corporate software services in the US, Europe and India, these three characteristics are quite predictable at least in my small slice of the economy.

Labor Productivity Increase during the recession

For nearly 10 years leading up to the most recent recession, growth in demand for labor in corporate software services attracted lots of new entrants and kept unproductive workers in the labor pool. Published studies show labor productivity in software development varies widely. The most productive quartile is 10 to 20 times as productive as the 3rd quartile. The bottom quartile was actually negatively productive; for every hour they worked, there was more than an hour spent by someone else to fix their code.

The bottom quartile was knocked out of the labor pool during the most recent recession. Not surprisingly, productivity went up immediately. Furthermore, some of the most productive quartile also lost their jobs (and their $125,000 salaries and full benefits). They found work again within 3 to 6 months though often at lower salaries or on independent contracts at $35 to $50 per hour.

You might wonder why such unproductive labor stayed employed. If you have ever been a corporate manager you need no explanation about how difficult it can be to have an employee dismissed for low (even negative) productivity.

Consequently, the US software services labor pool is exhibiting rising productivity and falling cost per unit of productivity (very different than per unit of labor in this little slice of the economy) in the US. Interestingly, the same slice of the labor market in India is showing just the opposite; a quickly falling productivity rate and soaring labor rates (well, compared to their own previous labor rates) as new entrants join that labor pool.


Jobless recovery.

Speaking with the “factory worker” paradigm of labor in mind, the story economists told about recoveries went something like: “On the upswing in the economic cycle, manufacturers overshoot production and build up excess inventory. Orders fall, production falls, employment falls. When inventories are nearly 100% utilized, orders rebound and people are recalled to work.”

Today, direct labor to refill inventory stocks is a smaller and smaller part of the US labor pool. (Just as economists now speak of ‘non-farm’ labor when expounding on the employment rate in the US economy, perhaps in future, economists will speak of ‘non-direct’ labor.) Perhaps information technology has suppressed the old inventory volatility problems (which I learned about in my Operations Research 101 class at UCBerkeley) which drove tall peaks and low valleys in the manufacturing activity cycle.

But software services are not direct labor and do not produce inventory. Customers for corporate software services are not interested in spending on labor for software development until either direct labor utilization or direct capital utilization approaches 100% at which time companies become interested in implementing ‘labor-saving’ automation or capital enhancing automation. Company managers do not yet perceive that we are near 100% labor utilization or 100% capital utilization in any of the usual software intensive industries.

Furthermore, corporate decision-makers are much more likely to perceive relocating jobs to lower-cost labor markets as both more beneficial and less risky than corporate IT projects. (Just try suggesting some ‘eCommerce’ initiative to your Senior Manager today and see how long you keep your middle management job.) The ‘off-shore’ labor market is perceived as infinitely large, growing, highly qualified and eager for jobs.

Consequently, there has been no job recovery in the software services business in the US to-date. There are however, some massive programs in India and China to modernize their banking infrastructure and bring manufacturing planning and management practices in-line with the wider world. Consequently, lots of indigenous software services jobs are springing up in those labor markets.

My personal belief is, “Offshore” is the new dot.com. Relocating jobs to lower cost labor markets has become a ‘fad-ish’ frenzy, which, the countervailing forces mentioned above will rapidly overwhelm. Though, it shouldn’t be ruled out as a long lived fashion for reasons given below.

No Labor hoarding by companies

In the corporate software services business, companies do not hoard labor for three major reasons. First, services companies have very thin capitalization as a percentage of labor expense and revenue. So, there is a great threat to a thinly capitalized company of simply turning up broke.

Second, specific skills required by software services companies change with greater rapidity (every 9 to 24 months) than for companies with a large stock of fixed capital which renews every 3 to 10 years.

Third, and most interesting, it is quite possible for an experienced programmer to get copies of the latest software and learn to use it without an employment affiliation. In short, you can become a JAVA programmer at home. You are less likely to become a metal stamp press operator at home. This does not hold in the case of every skill, but it holds for quite a few technical computer skills. I wonder, in what other services skills this learn-it-from-home phenomenon (or at least "learn it from your local Oracle certification kolej") holds?

The opportunity to learn services skills without an employment affiliation breaks the chicken-and-egg problem that kept so many populations out of specific labor pools. I believe this is the aspect of knowledge-based services jobs that will keep pushing them to lower-cost labor markets (as long as the population speaks English). ‘Offshore’ may be a fad today, but, it seems to me it will have staying power as a fashion for some time.

Since the ‘Output Growth’ and ‘Hours Growth’ chart so neatly fits observations of the corporate software services labor sector, I wonder if the entire US labor market has come to more closely resemble software programming than factory labor. If so, it’s time to revise the stories economists tell to illustrate their mathematics.


Posted by: bob boyd on October 9, 2003 11:43 AM
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