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Expensive foreign labor

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One thing I've been hearing more and more recently is that the U.S. is losing jobs to "cheap foreign labor".

But is that really true? Our family's latest purchase is a nice, albeit expensive, high chair - made with, not cheap, but expensive foreign labor from Norway. It's just a few pieces of wood and metal put together very cleverly to make something usable by a growing child for years:


I rarely see things like this made in the U.S. Why not? It isn't "cheap foreign labor", since the foreign labor involved is expensive - about as expensive as U.S. labor. There's something else at work here - some other reason that the U.S. doesn't do this kind of high margin manufacturing.
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On October 30th, 2011 09:08 am (UTC), izmirian commented:
In the last issue of the Economist, they put cheap foreign labor as number two, behind technology, as the cause of declining US manufacturing. I believe that treptoplax was listing cheap foreign labor as the number one cause in one of my LiveJournal threads from many months ago.

But anecdotally I can see what you are getting at. It seems like there are plenty of niches that could be filled by entrepreneurial people manufacturing products in the US. But, and once again this is just anecdotal, it seems that the accepted wisdom has become that you can't compete by manufacturing items in the US so people just don't try.

But plenty of large manufacturing industries in the US were clobbered by cheap foreign labor. That doesn't mean that the US can't start up new types of manufacturing, but cheap foreign labor has definitely hurt US manufacturing in the past.
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On October 31st, 2011 03:59 am (UTC), psychohist replied:
How would technology cause manufacturing declines specifically in the U.S.? Unless the issue were that technology opened up new industries that were more worthwhile to pursue than old economy things like manufacturing - which might have some truth to it, but might be a good thing rather than a bad thing.

Some manufacturing industries, like steel and automobiles, were clobbered by foreign competition that had lower labor costs. However, a correlation does not necessarily imply a causation. I wonder if it's so clear that it was low labor costs that were the causative agent.

In the case of steel, I doubt that it was. The Japanese basically took over the steel industry by specializing in recycling steel in minimills rather than refining from ore. I think a U.S. company could have done the same thing. Possibly even U.S.Steel could have, though they might have been constrained by union agreements.

There's a better case for automobiles, but there are also a lot of people that thought the problem was U.S. automakers' refusal to adapt to demand for more efficient cars, rather than Japanese cars being cheaper. I'm not even sure Japanese cars were initially cheaper, despite lower labor costs, and today they're generally more expensive, and usually built in the U.S. anyway, but the Japanese manufacturers are still doing much better than the big three.

Then there are areas where U.S. manufacturing is still dominant, like microprocessors, or at least highly competitive, like aircraft. Those need to be explained too.
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On November 1st, 2011 03:15 am (UTC), izmirian replied:
How would technology cause manufacturing declines specifically in the U.S.?

The economist article was about the decline of US manufacturing jobs. As kirisutogomen points out that's different from an actual decline in manufacturing.

But it's a common conclusion that cheap foreign labor has impacted many industries. It sounds like you probably agree that in a number of cases that is true. In other cases there may be different causes.

There was an interesting radio program on furniture making in the Carolinas recently. Although competition from China and other countries has been significant, the productivity of the factories in the US has gone up by something like 50x in the past few decades. So even without foreign competition the number of US furniture manufacturing jobs would have gone way down.

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On November 1st, 2011 04:53 am (UTC), psychohist replied:
Ah, okay. Technology improving productivity results in a decline in certain job categories in the U.S., not because they're shipped elsewhere, but because those jobs are declining everywhere. That's true, though I don't really see it as a problem that we use backhoes these days instead of teams of men with shovels.

I suspect part of the U.S. decline in manufacturing, as opposed to manufacturing jobs, is due to failure to embrace such productivity improvements, as in my steel and automobile examples above. That of course just pushes back the question to why we fail to adopt technologies that Japan and Germany do adopt. Perhaps their labor unions are less effective at preventing productivity improvements, or less focused on it.

With respect to cheap foreign labor, I used to think that was a cause in some cases, but I no longer believe that to be true in any significant sense. The labor intensive things that are made with foreign labor I think would simply not be made at all if we prohibited foreign labor from being used. And that's the risk I see today: there'll be a push for trade barriers, and the result will just be that things that are currently made overseas will become so expensive no one will be able to afford them any more.

I note with respect to furniture that our preferred style for furniture is one that requires a lot of labor input due to curved lines and such. The style is no longer produced in the U.S. in any quantity, but foreign labor, cheap or not, has not stepped in to pick up the slack. That's yet another case where the "cheap foreign labor" dynamic does not work as expected.
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On November 1st, 2011 09:10 am (UTC), izmirian replied:
And that's the risk I see today: there'll be a push for trade barriers

Yup, that's a good concern. And although I think that cheap foreign labor has hurt a number of US manufacturing sectors, I don't think that trade barriers are a particularly good solution.

On a somewhat related note, I listened to a talk recently where the speaker was describing ways in which the world would change if the cost of crude oil was $200 per barrel. One of the changes is to partially roll back the globalization of trade in physical products because transportation is no longer a negligible cost. So you could end up with a similar effect to trade barriers due to petroleum extraction limits. Of course it's tricky to predict what the future will be for oil prices so that may just be theoretical.
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On November 1st, 2011 04:31 pm (UTC), psychohist replied:
International trade in air freight products would certainly be cut back; we wouldn't be able to have year round fruit and vegetables any more. Again, of course, it wouldn't be replaced by local production, as winter hothouse produce is also energy intensive.

I don't think it's as simple as brakes on globalization, however. Shipment by sea is at least an order of magnitude cheaper than shipment by land, let alone air. There would be less transcontinental trade, but transoceanic trade might even go up. For the U.S., that might result in increased international trade, as the midwest and east coast became much less attractive trading partners for the west coast than the far east is, for example. eBay would be hurt and Craigslist helped.

It would be problematic for the E.U., where the protests against globalization seem to be directed mostly against trade and labor movement within the E.U. We might see the E.U. more amenable to shedding noncore states.
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On October 31st, 2011 02:56 am (UTC), kirisutogomen commented:
Actually, we do plenty of high margin manufacturing.

The only measure of manufacturing that's declined has been number of jobs. Actual output has been growing; it's just that manufacturing productivity has been growing even faster, so we need less labor.

Usually, when a sector experiences productivity growth above that of the economy as a whole, its output grows relative to the rest of the economy too. But every demand curve has an inelastic region -- effectively, we just don't want any more of that, regardless of how nice it is.

The classic example is agriculture -- our agricultural productivity is outrageously high, but there are hardly any actual people working in agriculture, because it only takes a handful of people to produce all the food we're interested in eating.

So how many highchairs are you likely to buy? No matter how nice they are or how cheap they can get, we're pretty much already buying all the highchairs we have the ability to want. (Perhaps fewer, given that we're buying really high quality highchairs that are likely to last an entire childhood and maybe even get passed along to the next generation).
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On October 31st, 2011 04:03 am (UTC), psychohist replied:
Actually, the fact that this high chair could last an entire childhood makes it more likely that we'll buy another for the other child, rather than giving him this one as a hand me down sooner rather than later.

Your point is taken, however. It's likely that manufacturing is simply the wrong place to look for job generation.
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On October 31st, 2011 04:45 am (UTC), kirisutogomen replied:
Oh, sure, I assumed each of your children would get their own chair; I meant "next generation" literally, as in Margaret's children and Duncan's children.
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On October 31st, 2011 08:25 pm (UTC), redlop commented:
Super-Duper site! I am loving it!! Will come back again – taking your RSS feeds also, Thanks.

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On January 3rd, 2015 09:00 am (UTC), matrixmann commented:
And in Europe they work differently?
Europe's strategy for very long time also has been "replace the domestic workers with foreign ones", preferably from Eastern Europe. And the Eastern workers they give a few bugs less because they can - and so you also force the domestic workers to accept less payment to be employed.
This has been so in 2011, and it still is by the beginning of 2015.
European Union makes it possible.
At the very least by the enforced austerity mandates. Just ask Greece what it is like. "Sell all your state-owned and official goods which are there for everyone to private enterprises because you are broke! And open up your markets for privately-owned economy and shut the fuck up when they play Disneyland because you're FUCKING BROKE!"

May just be the same high quality work isn't done in the US anymore - hence the fact that they externalized everything.
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On January 3rd, 2015 09:39 am (UTC), psychohist replied:
I don't think the EU is relevant; this high chair is made by a Norwegian company, and Norway isn't in the EU. Your point about high quality work and the U.S. may be valid - but then there's still the question of why.
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On January 3rd, 2015 10:41 am (UTC), matrixmann replied:
Norway may not be in the EU, but the EU is a large market that lies at its doorsteps. Countries like these which don't join a greater association always also have their contracts with these and adjust to their conditions.
Also, globalization does not stop at any border in this world. Businessmen everywhere in the world have the same distorted ideas of how business should work and how they are supposed to maximize their profits - leave aside that businessmen from the outside of one country also can come up to them.
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