Offshoring Work is Taking a Toll on the U.S. Economy

Offshoring is the relocation of a business process from one country to another, typically a business that deals with operational and supporting processes.

This article focuses on offshoring of the U.S. economy in 2014.  The practice of moving production to foreign areas while selling goods to the U.S. market is a pervasive feature of the economy today.  The manufacturing industry when offshored for example, imports for capital-intensive industries such as machinery made U.S. companies who were labor-intensive manufacturing industries less likely to engage in production relocation.  This indicated that the global businesses see the U.S. market more as a place for sales rather than a place to invest in production.

A federal reserve bank of New York stated the more a U.S. industry is exposed to offshoring pressures, the more wages would be decreased within each share made.  How to fix this was to increase economic competition by moving production to offshore locales, then selling the goods back to the U.S. market.

https://www.americanprogress.org/issues/economy/news/2014/07/30/94864/offshoring-work-is-taking-a-toll-on-the-u-s-economy/

The Harms of Repeating History

The US has always had an internal struggle with immigration and as we spoke about in class, especially in the 1920’s; the quotas imposed on immigration in the 1920’s, simply for the reason of ethnic purity, ended up being very harmful to our economy.

Today we find ourselves in a similar situation in which our current president has made restrictions on immigration. These restrictions harm us is multiple ways:

The first being that immigration increases the population, which increases the productivity of all factors, subsequently raising the rental rate and benefits the home country as high- and low-skilled workers’ wages decrease slightly in the short-run.

The second is that with these immigration barriers and an unsteady flow of immigrants, economic growth will be slower. As more and more Baby Boomers exit the workforce and Americans have slower birthrates, we need people to enter the workforce; that is where immigration comes in. Pew Research states that within the next 15 years or so, the number of working age adults will be up 13.5 million from 11.1m to 24.6m. If we did not see this influx of immigrants, we would see a contraction of the bucket diagram where the wage would rise due to employers’ demand of workers increasing; the rental on capital/land would decrease and so would the marginal productivity of these factors. This wage hike is only in the short-run, however in the long-run, you can see how devastating this effect would be; if immigration is restricted, this is exactly what will happen: the bucket diagram will contract, and we will feel these effects.

The third is how these restrictions deter some brilliant minds, as well as needed workers. With immigration having the greatest effect on low-skilled and high-skilled labor, we find that these restrictions end up deterring those with college level or above education, and lower than high school education. This practically means that we could be deterring some of the most brilliant doctors (or whomever) and that could have major affects on our labor-force regarding R&D and even discourage future generations of brilliant minds from entering those fields. However, as we looked at iso-cost lines in class we can see that this might not necessarily be a bad thing, as the US could focus on producing components and offshoring or outsourcing R&D; although with this the US might be paying a little extra because they wouldn’t be benefiting from the wage decrease and wouldn’t get the claim on any patents for work that they outsourced.

If the US continues to produce immigration restrictions, they might want to look at the disadvantages, before they repeat history. Personally, I don’t think that they should put up more trade restrictions or even maintain those that they have, because I think it harms the economy in three ways: it declines the re-population rate, slows the economic growth of the economy, and deters brilliant minds, as well as, discourages future generations—all while potentially losing out financially.

Potential Benefits of Immigration in UK

Since the beginning of the millennium, the UK has experienced a steady flow of net migrants into their economy. Independent of political views, there is evidence of some positive impacts of these new inhabitants in the UK economy. According to this article, nearly 50% of people asked believe that immigration has had a positive impact on the UK. Although it may not seem like much, that is up nearly 30% from 2011. Of those that are migrating into the UK, roughly 43% of them have university degrees compared to only 21% of British adult population. Professor Rob Ford, who researches immigration trends at the University of Manchester, states several reasons as to why he believes people are favoring immigration: the Brexit vote itself may have led to some people believing that the immigration issue has been dealt with and in the political environment, those who oppose U.S. President Donald Trump.

Now, since I am looking at the long-run model, all factors are mobile between industries, that is, labor and capital. This means that labor will go to labor-intensive industries while capital goes to capital-intensive industries. This ensures that neither industry gets an upper hand on the other because in the long-run model, the capital to labor ratio is equal. The labor skill of those who migrate into a country have the potential to drive down wages. Low-labor migrants can cause a flood of labor which causes wages to go down. However, for the UK, 43% of those migrating in have a university degree. This will cause an increase in competition and therefore neutralize any negative effect on wage. The increased labor pushes a countries PPF out and allows for more demand. In this graph, it is shown that demand is increased which will not have a negative impact on wage. Immigration also has a positive impact on returns to land and capital depending on where it goes to. With more workers, owners of land and capital benefit because of the marginal production these workers add.

In conclusion, independent of politics, immigration in the long run can be very beneficial for a nation. Although at first it may lower wages, the net gain is greater than any loss that occurs. It raises a countries PPF and increases the returns to land and capital.

Immigration Disputes in Canada

Canada’s newest political party, the People’s Party of Canada (PPC), has begun a Trump-like immigration reform amid the upcoming Canadian election. The PPC leader, Maxime Bernier, is spearheading these efforts, claiming that immigration has negative impacts on the economy and on its citizens. This is an interesting take on immigration given that a recent poll suggested that a majority of Canadians actually supported immigration. Bernier backs his proposed policy suggesting that immigrants are putting financial burdens on non-immigrant Canadians. It was shown, however, in the latest 2016 census, that there was no evidence of immigrants receiving more benefits, paying less taxes, or taking jobs from non-immigrants. Immigrants, with a higher level of education than other Canadians, in most cases, are earning less than their non-immigrant counterparts. This is a sad truth that has appeared in Canada’s labor market often.

              With this background, let’s look at how immigration can help the economy in the long-run model. In the long-run, labor and capital are mobile across sectors. Therefore, with an increase in immigration, the labor with go to work in the labor-intensive industry. Since capital is also mobile, some capital will be shifted from the capital-intensive industry to the labor-intensive industry to keep the capital-labor ratio constant, as it is in the long-run. In Canada, the immigrants are more likely to move to spots where labor is most needed, since the industries are often regionally concentrated. With this move it is found that, in Canada, immigrants are doing jobs that are complement to, rather than substitute to, those of non-immigrants. This fact is another suggesting factor that the immigration can increase wages for non-immigrant workers. A graph, presented in the article, even shows evidence that the mobility of immigrants per capita to areas in Canada over the last 10 years has a direct relationship with higher wages for non-immigrant Canadians. Even if we look at this in the short run, though wages may decrease at first due to an increased labor-capital ratio, returns for the owners of capital will be greater because the marginal product of capital is higher.

              In conclusion, it is important for politicians to understand the economic benefits of immigration. Granted, there can be situations in which immigration can hurt our wages when immigrants and non-immigrants are competing for substitute jobs. U.S. President Donald Trump praises the approach being taken by the PPC, as they look to take immigrants on economic class rather than family class. This is already being done in Canada with over half of immigrants coming from higher economic class, which has shown positive economic effects as of now. It is evident that the PPC’s policy reform is not one of economic backing and is a political scheme that will most likely not play out well for Maxime Bernier and his supporters.

The HO theorem post WW2

The Heckscher-Ohlin (H-O) theorem states that a country that is capital abundant will export a capital intensive good and a country that is labor abundant will export a labor-intensive good. This allows for countries to export what they are good at producing and what they are relatively better at producing than other countries.

In problem set one we saw an example of this with Sweden and Norway, one being capital abundant producing automobiles and one being labor abundant and using its resources effectively producing fish. In this blog, I want to take a closer look at an example like this and demonstrate how the H-O model translates from theory to practicality.

As the H-O model assumes that both countries have the same technological production, a good time to look at this theory would be post World War Two, when world technologies were increasing allowing for more capital-output and cheaper production.

An example of a capital abundant country and therefore a country who exported capital intensive goods after World War Two would be Japan. They used the technology and capital abundance left from the World Wars to produce capital intensive good - automobiles. This is interesting as pre-WW2 Japan was a labor-intensive country.

For labor abundant countries, we started to see countries like Thailand and Vietnam producing clothing and more labor-intensive goods. This is where we see most of our clothing from still today, so Vietnam and Thailand moved towards being labor abundant and producing labor-intensive goods such as clothing.

Immigrations Impact on Natives

          Did you know many studies have found that immigration grows the economy and has few if any negative effects in the long run? It is true, one of these studies looked at the Mariel Boatlift in Miami and concluded similar results. The University of Pennsylvaniahas a very interesting article about this that debunks many of the politician’s arguments against immigration. Research has indicated that immigration increases the supply of labor, this leads to firms increasing investments, this ensuring that wages remain constant in the long run. If you look at the Heckscher-olin model for a long run outlook of wage you will see these results. This is because everything is mobile. As more workers are put to work in each industry, capital will be readjusted among the industries to keep the labor-capital ratio the same. Because these ratios are unchanged, the marginal products of labor and capital are unchanged as well. Therefore rental and wage do not change in the long run. In the short run, due to the influx of workers it has been shown that this increase leads to a short term drop in the wage and a higher unemployment rate. This is seen in most economic models discussed in class due to the simple fact that more labor means higher competition for a job and wages then can be dropped until equilibrium is hit. If you look at the specific factors model, with the influx of immigrants, the PPF will shift outward. However, the wage will drop because both industries have more workers but they also have fixed amounts of capital and land, therefore the wage will decline because of diminishing marginal product of labor. This wage drop is especially prevalent in jobs that are already being worked by immigrants as well as low skilled jobs. This is because these new immigrants tend not to take native workers jobs for a few reasons including language barrier and skill required. Instead these immigrants tend to take jobs of the very low skilled as well as jobs worked by other immigrants. The article states that immigration tends to impact those who simply have a high school degree or less as well as those with masters and PHD’s due to those being the groups that tend to immigrate.

          One interesting fact that the article pointed out was the benefit that immigrants bring to companies especially in top management and research related positions. Immigrants produce twice as many patents compared to native workers. Research suggest that a higher level of skilled and innovative workers leads to a faster growing GDP. “It has been found that more than ¾ of U.S. GPD growth over the last 150 years can be explained by improvements in education and research-driven innovation.” This is because as new technology and objects are developed it requires more labor to produce thus increasing the labor force. These items are also demanded throughout the world leading to increased exports to other countries and higher overall welfare. It can be concluded that these immigrants in total are not hurting our work force or economy rather they are boosting it especially when looking at the long-term effects of immigration.

Trade gap widens more than expected to $54.9 billion

The U.S. trade deficit widened more than expected due to high level of imports of consumer goods and tariffs against China and the European Union.  Consumer goods imports hit 57.2 billion dollars, which was a cause of increase on demand that helped keep the U.S. economy afloat from a possible slowdown.  As the overall deficit rose, the gap with China declined 3.1% for that month.  The list goes on of different countries being either in a loss or creating wins with U.S. trade gap. The U.S. has been doing very well with buying and selling to other countries, for example we’re threatening to impose 25% tariffs on European Union agricultural goods such as a popular Cheese company.

https://www.cnbc.com/2019/10/04/us-trade-deficit---august-2019.html

The minimum wage in Britain has only risen a quarter, since 2015 (to £8.21) for those who are older than 25 and is about to rise again. On September 30^th, Sajid Javid, the Chancellor, promised to raise the minimum wage by 2024 to two-thirds median earnings, which would equate to around £9 today. However, in five years’ time, Javid thinks that it’ll work out to around £10.50 and he wishes to extend the range to those over 21.

I think this could have detrimental effects to the British economy for the following reasons: Higher-paying hourly-waged jobs will decrease in value relative to the increase in minimum wage and thus give employees incentives to look for other jobs or not work as hard in their own—as proposed in the Efficiency Wage Theory. This would cause the employers to pay more for their employees to have them stay. This rise in relative wage would increase the products prices, affecting domestic and export sectors.

It will also cost producers and consumers who export or supply domestically, because the price of the products in the sectors which saw a raise in wage will increase, raising the revenue earned, thus the rent on capital. To those who are selling capital (either repossessing or leasing) this is good. However, to those who are purchasing it or using it to produce goods, this is detrimental because they will have to pay more. To those who export goods, they will see a rise in their prices and will pass this along to other countries; Britain, being the 5^th largest economy in the world, will certainly have an impact on world prices and the increase in price for those exported goods would increase Britain’s TOT, worsening the TOT of countries importing these goods. Since the world relative price would increase, there would be a corresponding decrease in demand. This then, would reduce consumer welfare in both Britain and countries importing these goods because they would have less consumption and thus less utility.

I believe that though there might be some winners in this scenario, the majority will be losers: the world economy will suffer from the rise in wages due to a higher rental rate of capital and cost of labor. These costs will be passed on to all consumers, foreign or domestic, causing the TOT of all importing countries to decrease along with their welfare, for lack of consumption thereof.

Trade Adjustment Assistance - Professor Post!

A recent episode of Russ Roberts' Econtalk podcast featured economist and author of several popular books on globalization including "Straight Talk on Trade" (2017) and "The Globalization Paradox" (2011) Dani Rodrik discussing economic neoliberalism (which Rodrik dubs "market fundamentalism"), trade, welfare, jobs, and dignity. A small slice of the discussion included the topic of Trade Adjustment Assistance (TAA), which Roberts and Rodrik largely agree has failed to varying degrees in the US. Here, I want to propose a couple of thoughts for why TAA hasn't succeeded as much as it might have in the US.
One reason that Rodrik points out is that, in contrast to many countries in Europe, TAA in the US is not "baked in with" the overall social safety net. While this may be true, it begs the question about why this is the case. One reason is that globalization has been a continuing long run phenomenon. While the market value (income) for sector-specific factors like specific capital or specific skills may degrade initially, these eventually become mobile, and to a large extent, workers have been fairly adept at acquiring skills in sectors that have expanded. What it doesn't account for is the long, grinding degradation of wages that the Heckscher-Ohlin model predicts.
Hence, the main reason that TAA fails in the US and succeeds in other countries is because TAA in the US requires petitioners to demonstrate how trade has caused their adjustment problem. Workers affected by a long-run deterioration of wages due to trade or automation may not be able to demonstrate how or why they "deserve" TAA, narrowly defined. A "no-fault" safety net might be a better way to mitigate losses to trade and/or automation without killing the golden goose.