Information Impacts

September 2000


Globalization and High Tech Wage Lag


"A large and growing percentage of trade-induced job flight and downward wage
pressure has been occurring in high tech industries, including many at the
cutting edge of the New Economy."


Alan Tonelson
ATonelson@aol.com



Alan Tonelson , Research Fellow at the U.S. Business and Industry Council
Educational Foundation, is the author of The Race to the Bottom: How a
Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American
Living Standards, which will be published shortly by Westview Press.



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It's been the largest economic expansion in American history, marked by the
lowest unemployment rate in a generation and a dazzling burst of
technological innovation. So what is the latest centerpiece of Al Gore's
campaign for the White House, a promise that the Vice President evidently
believes will really turn on voters? A plan to create 10 million new high
tech jobs.


If you think that this sounds a lot like the centerpiece of Bill Clinton's
1992 presidential run -- creating "good jobs at good wages" -- proposed as
the economy was inching out of recession, you're right. Clearly, something
has gone haywire in the relationship of economic growth, technological
progress, and rising living standards. And if wages, benefits, and other
forms of compensation have underperformed in this ostensibly best of all
economic times, what will happen when the economy slows?


America's bipartisan political and policy establishment is firmly convinced
that two developments largely explain the failure of the technology tide to
lift so many boats higher. First, American schools are not educating most
Americans well enough to exploit the opportunities created by the plethora of
new technologies. Second, the New Economy's tremendous productivity gains
result from using technology to create much more output with many fewer
workers. Since obviously no one wants to see business become less efficient,
the fate of American workers has come to rest on "fixing the schools."


Without denying serious problems in American schools, however, educational
reform is no panacea for the living standards slump in technology industries.
For example, most of the high tech industries that create the nation's best
jobs are capital intensive. They require relatively fewer workers per unit of
output. In fact, according to economist James Paulsen of Wells Capital
Management, the technology-driven real GDP growth achieved since 1995 has
produced the fewest new jobs of any comparable growth period since the end of
World War II. Largely as a result, technology workers still represent less
than 3 percent of all American jobs. Further productivity growth will reduce
the relative personnel requirements of technology industries even further.


In addition, for the last three decades, not even a college education has
been a guarantee of staying ahead of inflation. According to the Economic
Policy Institute, the less than 20 percent of the workforce that has finished
four years of college but lacks post-graduate schooling saw its real wages
actually fall by 2.7 percent from 1973 to 1997.


Finally, surprising numbers of high tech jobs in America are becoming lower-
and lower-tech jobs -- still good ways to make a living to be sure, but
professions in which very large investments of time, effort and money are
producing steadily diminishing returns.


The last two developments point directly to a source of underperforming
living standards and the devaluing of high tech jobs that most political
leaders would prefer to ignore -- the globalization of the American economy
and the world economy.


Even many of globalization's leading enthusiasts acknowledge that the
outsourcing of production from the United States to facilities around the
world has created downward wage pressures for many American workers. But the
damage done by this defining feature of globalization is widely thought to be
confined to the economy's low-wage, low-skill sectors. The view that losers
from trade and globalization are economic losers generally speaking is heard
most often in connection with U.S. trade with the low-income countries of the
third world. These countries are recognized as major competitors, in
labor-intensive industries such as apparel, textiles, toys, auto parts, and
electronic assembly.


Yet this picture of the low-wage competition facing Americans is more than a
decade out of date. A large and growing percentage of trade-induced job
flight and downward wage pressure has been occurring in high tech industries,
including many at the cutting edge of the New Economy. Moreover, production
jobs have not been the only positions affected. More and more white collar
work -- in research and development, design, and engineering -- is now being
performed in third world countries as well.


Two main transmission belts are bringing this low-wage, high tech competition
to the American workforce. The first is the mushrooming investment in
factories and laboratories by U.S. multinational companies throughout the
developing world. This type of investment is known as direct investment (as
opposed to portfolio investment in financial instruments such as stocks and
bonds). The second is the import into the U.S. of high tech workers from
low-income countries.


Globalization enthusiasts counter the investment arguments by noting that
most U.S. direct investment abroad still takes place in high-income countries
-- thereby refuting the charge that American companies are moving abroad
chiefly in search of cheap labor. But the aggregate foreign investment
statistics mask two critical details. First, much direct investment in
wealthy countries takes the form of mergers and acquisitions. In other words,
U.S. companies often are not transferring production facilities from America
to overseas locations, or building new facilities abroad rather than in the
United States. Most U.S. foreign direct investment in the developing world is
in brand new (often called "greenfield") facilities.


Second, most U.S. investment in the developed world serves foreign markets.
Some of it undoubtedly preempts exports from the United States and therefore
limits the job-creating, wage-hiking effects of globalization. But much U.S.
manufacturing investment in developing countries ultimately serves the
American market. Thus, unlike investment in Western Europe or Japan, this
Third World investment tends to hit U.S. living standards (and the U.S.
balance of payments) with a double whammy by displacing production in the
U.S. market as well as by preempting exports from the United States.


The extent of high tech job flight to low-wage countries and its impact on
American living standards can be gleaned from examining U.S. trade flows in
high tech industries. (In this case, these are defined much as the U.S.
government defines them -- pharmaceuticals, aerospace, computers,
semiconductors, other computer parts, electro-diagnostic equipment, and
telecommunications equipment.)


Worldwide, between 1992 and 1999, the United States ran a trade surplus in
these industries collectively, but the surplus dwindled from just over $25.7
billion to $6.3 billion. For the first half of 2000, the United States ran a
global deficit in these industries of $1.6 billion. These global figures, of
course, include U.S. trade with Western Europe and Japan and their well
developed high tech sectors.


Yet the United States recently has run a wide deficit with the major
developing countries in high tech trade. Between 1992 and 1999, a $2 billion
U.S. surplus with the most important emerging market countries (e.g., China,
Mexico, Brazil, India, Taiwan, South Korea) turned into a $28 billion
deficit. This year, this deficit is set to top $30 billion. The swelling tide
of net imports described by these figures represents considerable foregone
high tech job opportunities in the United States, and has depressed wages by
limiting the numbers of high tech jobs available to American workers.


Moreover, although many of these imports are generated by European and
Asian-owned factories in the developing world, many are also generated by
U.S.-owned facilities. Indeed, the list of U.S. firms not only manufacturing
many of the most advanced software and hardware products in developing
countries but performing research and development, engineering, and design in
these nations reads like a Who's Who of high tech -- Intel, Microsoft, Cisco,
Lucent, Compaq, Texas Instruments, Hewlett Packard and Motorola, to name just
a few.


U.S. high tech companies are also exposing American workers to low-wage, high
tech competition through the rapidly growing practice of importing foreign
technology professionals from developing countries. These workers -- known as
H-1B workers, after the visa regulating their entry into the United States --
are allegedly needed because American high tech industries face a potentially
crippling labor shortage. The numbers of these workers have recently been
increased from 65,000 to 115,000, and industry is on the verge of pushing
through yet another quota hike.


Because H-1Bs need to be sponsored by companies, they lack the freedom to
change jobs enjoyed by other American workers. Moreover, in violation of
federal regulations, employers routinely pay them less than their U.S.-born
counterparts receive, with the pay gap standing at 15-50 percent, according
to independent estimates.


Just as important, wage and salary trends in high tech industries like
software, where H-1Bs have been concentrated, belie the high tech companies'
claims of a labor shortage. They strongly indicate that industry is using the
new influx of low-paid foreign workers to pump up the supply of labor
available to American business and thereby reduce or preempt wage pressures.


Indeed, the unemployment rate for computer programmers over the age of 50 has
been reliably estimated at an astonishing 17 percent, and as of 1997, 6.1
percent of new computer science Ph.D.s could not find stable, full-time
employment. Small wonder that, according to economist Robert Lerman of The
American University, salaries for computer scientists, operations researchers
and computer programmers have been absolutely flat for most of the 1990s.
Moreover, recent volatility in technology stock prices indicates that stock
options are not always adequate substitutes for more conventional forms of
compensation.


Worse, for American workers, American business' resort to third world
technology workers will only accelerate in the foreseeable future. The
reason: Many third world leaders are just as aware as American globalists
that they need to "fix the schools." Throughout the developing world,
governments are working overtime to move their countries' workers up the
education and skill ladders. At the same time, the huge and growing pools of
skilled labor available in these countries will ensure that third world
technology workers will remain very poorly paid by American standards.


As a result, America's high tech wage lag will require global as well as
domestic solutions. Inserting enforceable labor rights provisions in trade
treaties would surely help, but so would measures less frequently discussed.
The conditions routinely placed by foreign governments on U.S. investment
abroad -- which often link market access for American products to pledges of
technology and job transfer -- must be more effectively attacked by
Washington. U.S. trade policymakers should work as hard to open markets in
developed countries as in developing countries. In this way, they could
remove some of the scale economy advantages enjoyed by many European and
Japanese competitors of U.S. firms, by virtue of exporting from sanctuary
markets. U.S. trade laws against foreign dumping, subsidization and other
predatory trade practices should be more aggressively enforced -- even if
this means withdrawing from the World Trade Organization. Quotas for H-1B
workers should be reduced.


Only when fixing the schools and other domestic measures are reenforced by
actions at the international level can Washington help turn high tech wage
lag into a bad memory.


Released: September 22, 2000
iMP Magazine: http://www.cisp.org/imp/september_2000/09_00tonelson.htm


© Copyright 2000. Alan Tonelson. All Rights Reserved.