Strong dollar, not offshoring and imports, behind US job losses

Interesting report on the causes of US job losses by Martin Neil Baily and Robert Z. Lawrence for McKinsey Quarterly (free registration required): Strong dollar and weak domestic demand is behind the disappearing US jobs, not primarily offshoring and imports from China. The remedies lie in weakening the dollar against, primarily, the Chinese Yuan, and in reducing the budget deficit. (These goals would appear to me to be somewhat in conflict, given that China is propping up the dollar by buying US treasury bonds).

The analysis of the IT job market is especially interesting and gives some reason for reflection: 

 

Adding software and business-process jobs together, about 274,000 jobs,6 at most, moved to India from 2000 to 2003—equivalent to an annual average change of about 91,500 positions. Although the costs were substantial for the displaced employees, a job shift of this size is small compared with the 2.1 million service jobs created every year during the 1990s and minor compared even with the net annual job increase of about 327,000 from 2000 to 2003.

Employment in IT and IT-enabled occupations has actually been surprisingly strong in the past few years. A look at employment patterns in the IT occupations that offshoring might have affected (Exhibit 3) reveals that total employment in computer-related service occupations dropped only modestly from 1999 to 2003.7 Moreover, the job decline after 2000 followed a huge technology boom in the late 1990s, culminating in the surge of employment and investment needed to resolve the Y2K problem. The employment levels reached in 2000 were unsustainable regardless of what happened to US trade in services with India (My emphasis)

[….] While the overall change was small, important shifts did take place in the mix of employment within computer occupations. The biggest losers were computer programmers and computer support personnel. For the latter group, employment surged from 1999 to 2000, strongly suggesting a Y2K effect; employment in 2003 was still above the 1999 level.

For computer programmers, however, the decline of 99,090 jobs probably was the result of offshoring to India. We estimate that as many as 134,000 software-related jobs were created in India to serve the United States—roughly equivalent to the number of US software sector jobs lost. As trade in services with India became cheaper and easier, the computer-programming sector followed the laws of comparative advantage, with basic programming jobs moving to low-wage countries. At the higher end of the spectrum, though, jobs continued to proliferate in the United States. From 2000 to 2003, the number of US computer software engineers and computer and network systems analysts, who work on higher-end applications and systems, actually increased, thereby offsetting the loss of computer-programming and computer support jobs over the same period..

What this tells me is that the new jobs are at a "higher level" not in the sense of level of technical sophistication, but in that they are closer to the customer, facilitating the use and development of the technology rather than doing it. Competitiveness in applied IT is less a question of how to make things than what to do: Once you have figured out a new process or a new way to satisfy a customer, the technical implementation can be outsourced. Which is what I think is happening. 

In a sense (and, of course, with considerable exaggeration) the US (or Western) IT industry is becoming like an old-time stockbroker, schmoozing the customer and taking the order, which is then effected by lower-paid minions in the back office. That model was disrupted, at least for the mass market, by the Schwabs and the Etrades of the world, giving the customers direct access to a simple-to-use DYI financial infrastructure. At some point, this is bound to happen with IT services – rather than dealing with local intermediaries, more and more of the higher-end, less structured services will be done directly on a global basis.

Skype is located in Estland, for instance. Welcome to the neighborhood. For US IT people: Shine your shoes and get yourself a better suit.

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