Puzzling through the Jobless Recovery - Or Is It a Fundamental Shift? (page 2 of 2)

In the fourth quarter of 2003, we rose above that level."

A few days ago, he notes, Rohm & Haas, a Philadelphia-based chemical maker, said that it may cut workers this year due to a new $300 million software system that links its worldwide operations. In 2003, the company cut 550 positions after deploying software to coordinate orders and shipping. Economic indicators suggest that announcements such as the one from Rohm & Haas will keep coming, says Zandi. "Labor costs are falling, but capital costs are falling faster, and that makes it more advantageous to invest rather than to hire."

Offshoring has contributed to increased productivity, too, he adds. "Before, it was just manufacturing that got sent abroad, but now it's call centers, customer-service operations and computer programming." Radiology, financial analysis and architectural and engineering design jobs have moved offshore as well.

Still, offshoring can only take U.S. companies so far. Aron says his research shows that it has risks and thus limits. And that means U.S. employers can't just keep moving operations abroad. Eventually, they will have to start hiring, assuming the economy continues to grow. "If American Express outsources 3,000 jobs, you might think, 'Where will it stop?' But AmEx can't outsource 300,000 jobs because of the risks."

According to Aron, "There is operational risk - the likelihood that a process will break down when you move it abroad. There is strategic risk - when you transfer a process to a third party, it can behave in ways that are opportunistic. It might cut costs at your expense, for example. And then there is what I call composite risk - if you outsource too many jobs, you erode the capabilities within your firm." For these reasons, Aron has found that companies typically will limit their outsourcing to about 8% to 10% of their total positions.

Even so, Wharton management professor Steffanie Wilk wonders about the long-term implications of the trend. Initially, low-skill jobs were the ones sent to foreign firms. "But now we are seeing better jobs, even high-tech jobs, going overseas." That creates an obstacle for less-skilled American workers. Before, they could take call-center jobs, for example, prove themselves, acquire more skills and advance to better-paying positions. But with call-center jobs leaving the country, "there's not the ladder that you can climb up," she says. "We lose the chain of jobs that allowed less-skilled workers to get better skills."

In other words, the U.S. economy may be undergoing some sort of deeper change - the tectonic plates of the economy may be shifting, permanently altering the employment landscape. These sorts of shifts, often hastened by technology, happen in economies, and when they do, they can cause dislocation.

"Maybe what we are seeing is fundamental transformation, but so what?" asks Paul Tiffany, a business historian and Wharton adjunct professor. "In the late 19th century, we saw the same kind of change when the U.S. textile industry migrated from the Northeast to the South. Southern workers got lower wages and were non-union and that was perceived as more conducive to business." Former textile centers such as Lowell, Mass., were hollowed out, as textile makers moved their operations to places such as Greensboro and Burlington, N.C. Over time, though, other industries developed in the Northeast to fill the void.

The difference today is that the job shifts are across national, rather than state borders, Tiffany says. But the underlying process of capital finding the lowest costs is the same and in the long run, he suggests, benefits everyone.