Ten Fallacies of the Jobs Market

By Brian G. Long, Ph.D., C.P.M.

Fallacy #1: “We are still losing jobs to China.”

False. Although it is true that we did lose jobs to China in the ‘80s and ‘90s, there has been no aggregate job loss to China since the beginning of the Great Recession. In fact, a few jobs have actually come back. The primary reason for the lack of interest in China: Higher cost of doing business.  Wages are up about 30% over the past five years. Taxes are up. Most importantly, the promised saving were eroded by quality problems and safety concerns.

However, this does not mean that American jobs are no longer going offshore. Other countries such as India and Indonesia are getting into the act. In fact, because of the new government in India, there is speculation that some jobs will actually go from China to India over the next few years.

Fallacy #2: “Jobs are lost to overseas locations because of cheap labor.”

True and False. It is true that jobs requiring a large amount of hand labor have been lost to foreign competition. But the lower total cost of doing business is still the primary driver. For instance, foreign locations almost always offer lower taxes. Even the socialist countries in Europe have lower business tax rates as a means of attracting and KEEPING jobs in the country. Sometimes local material sources are cheaper. You may despise it, but environmental regulations may be slack in some third world countries. Again, the total cost of business is lower.

However, worldwide locations that do not offer the right kinds of local services to support a manufacturing operation will lose out to those that do. Assume a location in, say, the Philippines that offered a firm free land, no taxes, a free building, and an ample supply of low-paid, unskilled labor. Upon inspection, you find that there are no sources of good water, no steel suppliers, no service enterprises, and no viable shipping methods. Steel and other components would have to be purchased in the States, crated up, and shipped to the designated location. The total cost of doing business would probably be much higher.

Fallacy #3: “Jobs are lost to overseas locations are lost forever.”

False. About three years ago, the term “reshoring” was coined to reflect the movement by some firms to bring production back to the United States. One fact that is often ignored is that ON THE AVERAGE only about 20% of the cost of any product is direct labor. Most of the production that has gone oversees in recent years has been for products where the labor component is very high, such as clothing manufacture.

Modern sophistication of the manufacturing process can also “reshore” jobs back to domestic manufacturing. In the case of an Indiana firm that makes a simple product—ironing boards—an automated production and assembly system requires only minimal labor. A stamping press stamps out new steel ironing tables at the rate of two per second. From stamping, the boards go to electro coating for a high grade power coat finish. An automated system attaches legs, and the finished units are slid into boxes for shipping all over the world.

As the sophistication of the manufacturing process progresses, even clothing manufacturing will soon begin returning to the States. Within about 15 years, clothing manufacturers should expect to put a large bolt of cloth in one end of a machine and see a finished shirt (already wrapped) come out the other.

So in the age of automation, where will the jobs be? Two places. One place is still in the supply chain. In the case of cotton shirts, some farmer must still must grow the cotton. But the more important and high paying jobs will be those of building and maintaining the necessary sophisticated equipment. Assembly jobs will give way to technology jobs, and a more educated workforce will be necessary. Unfortunately, this day and age is already arriving, and we still have about 80,000 technology jobs in Michigan alone that we cannot fill.

Fallacy #4: “Overseas quality is just as good or better than domestic quality.”

In the case of one U.S. plastics firm that lost an automotive contract for making radio knobs to a Chinese competitor, the auto assembler came face-to-face with the lowest TOTAL cost of doing business. First, the component was very inexpensive, and the 50% savings amounted to only about six cents per car. Second, despite plenty of free trade legislation in recent years, the product was still subject to a small import tariff. Communication with a supplier that was always twelve hours different in time became more difficult. And of course, there was the added expense of shipping. But the straw that broke the proverbial camel’s back was that it took several weeks between when the product was built and the arrival at the plant, even though the actual deliveries arrived in the fashion of traditional JIT. It seems that the manufacturer elected to make a small adjustment to the production process that resulted in all of the knobs arriving at the point of assembly to be defective. The suppliers’ inspection process had dropped the ball, and the relatively low value of the component did not warrant an on-site inspector. For two weeks, there was a mad scramble to send engineers to China to help remanufacturer the knobs and get them air shipped to several assembly plants. The few dollars saved resulted in millions of dollars lost.

West Michigan boasts numerous firms that are world competitive as far as quality is concerned. This is one reason that our unemployment rate continues to fall.

Fallacy #5: “When retail sales go up, so do jobs.”

True and false. The problem is trying to figure out where the jobs really are. In the traditional case of our mass merchandisers, at least half the products are made overseas. Hence, an increase in retail sales may boost employment in China.

Keynesian economists are still enamored with retail sales because we are still relying on an arcane and outmoded measure for assessing the health of the economy called GDP. The problem with GDP is that it relies almost exclusively on FINAL sales of goods and ignores the ups and downs in the supply chain. Hence, about two thirds of GDP calculation ends up be consumer sales, and only about a third industrial. A study at MSU some years ago proved that the numbers should be reversed, and that two thirds of the economy is really driven by the industrial sector–  and only about a third by consumers.

Fallacy #6: “Putting more money in the hands of low-income people will stimulate growth quickly and create jobs.”

This is one of the reasons the $900 billion “stimulus” package didn’t work like it was supposed to. Of course, the money was spent almost immediately, which conventional wisdom would say should boost the economy. Granted, the money that was used to augment the stipends from the SNAP program was spent almost immediately, but this thinking from the Keynesian theories of the 1950s assumes that all spending is equal. It didn’t work. What it did do, however, is stimulates sales at Walmart. It was also a “full-employment” stimulus for the suppliers in China, who had high praise for the American stimulus package. Sales at Walmart soared in 2009. Today, with the stimulus money gone, sales are now lagging at Walmart, so they are now lobbing for another government stimulus package.

Another unintended consequence of the temporary augmentation to the SNAP program relates to what the economists refer to the “ratchet effect.” When the low income people ratcheted up spending at a higher level, they were left with an income gap when the money ran out. The readjustment for some of these people turned out to be difficult.

Fallacy  #7: “All new jobs in industry stimulate the economy.”

True and false. The problem is that some jobs simulate the economy FAR more than others. One new job in some industries can result in the creation of as many as ten ADDITIONAL jobs. The primary difference depends on the size, length, and nature of the supply chain associated with that job.

In general, the more sophisticated and complex the product, more jobs in the manufacturing supply chain the system will create. Assume, say, a firm comes to town to manufacture water coolers. Let’s assume that the new design is super energy efficient, and that there is plenty of demand for new units. Of course, we see the initial employment of 300 new employees to assemble the units, along with the necessary HR, accounting, shipping and receiving, and warehousing to operate a modern factory. But these are just the jobs in the plant. The supply chain jobs begin with, say, the purchase of the compressor units which will result in the creation of several dozen more jobs, even though these jobs may not be local. Second, the water tanks, valves, and other components must be built to hold the chilled water. Again, more new jobs are created. Now we add the switches, thermostats, wire, and all of the other components that are necessary to build the final product, and we see dozens more jobs being created. Will some of these components be made in, say, Mexico? Of course. But even then, someone must drive the truck from Mexico to the assembly plant. Even a simple component like copper wire will indirectly result in more jobs for a copper mine in some far-off place like Arizona. Again, the more complex the assembled product, the more jobs that are created. Finished products like automobiles and aircraft have huge supply chains that generate thousands (or even millions) of jobs beyond the assembly plants themselves.

Locally, more jobs are created as well. First, there are industrial suppliers that service the firm’s equipment. This incudes, say, the local safety equipment supplier as well as the local equipment repair companies. The firms will probably even hire an outside firm to mow the lawn. All of these outside contractors have employees, and when added to the 300 direct employees of the plant, these employees require more grocery stores, barbershops, new homes, etc. just like the other residents. The aggregate employment grows.

Fallacy #8: “Jobs are jobs, and jobs created in retail are just as good as jobs in industrial production.”

Some years ago, there was a big flurry in Grand Rapids when an out-of-town developer announced a new retail complex that would reportedly create 10,000 new jobs. To make a long story short, the new complex was never built. But the fact was ignored at the time that retail sales in any given market are pretty much a zero sum game. In other words, unless you are the Mall of America and can attract customers from out of town, one retail outlet’s gain is another’s loss.

Again, the nature of the supply chain is also a major consideration. Retail sales mean that almost the entire supply chain lies outside of the immediate geographical area. Jobs are created, but they are usually not local jobs.

Fallacy #9: “High demand jobs will result in higher wages.”

Partially false. This is another one of those Keynesian theories left over from when we enjoyed a simpler economy. In the 1960s, just a few years after a devastating world war, the U.S. still pretty much owned the world markets.  There was very little serious “foreign competition.”

One of the biggest problems of these outdated theories is that the assumption is made that economic responses are almost immediate, totally rational, and that every situation in every industry has the same reaction. A few years ago, I was contacted by a local firm seeking help in filling a vacated position. I was already aware of the vacancy. What I didn’t tell the firms is that the person who left the firm for a $20,000 pay increase was a former student from my days teaching at WMU. Needless to say, they wanted a person just as qualified and willing to take the position for the old salary. Since the person leaving the position had been with the company for 13 years, I asked why they did not try harder to keep her from leaving. I was told that the firm had “no money” for retaining workers other than the usual cost of living increases. In the current phase of recovery from the Great Recession, this is the norm.

The Keynesian economists have a hard time understanding this concept. Even though a position desperately needs to be filled, the amount of salary is often fixed.  Because the salary is fixed these positions are often filled with less qualified candidates. However, as the unemployment rate drops, even the less qualified candidates become harder to find, and the firms may be forced to change policy overnight.

If firms no longer have budgets for retaining people, the conventional wisdom says that the only way to get a raise is to change jobs. The catch is, of course, that there has to be a job to move to. For many jobs requiring higher level skills, we should now be entering that phase in 2015 where salaries will rise for SKILLED WORKERS. The problem, of course, is that the unskilled workforce will not benefit, and overall or aggregate wage growth will continue to grow at a very slow rate—until we can raise the skill levels of the workers. This will take years.

Fallacy #10: “Women are paid about 25% less than men.”

This is a classical example of comparing apples to oranges. Although there are always isolated examples of exceptions to be found, the women in today’s workforce are paid exactly the same as men when employed in exactly the same job. However, women as a group DO tend to take different jobs than men, sometimes for family reasons, and sometimes just for personal preferences. Every year, that gap closes. It is also interesting that the critics failed to note that women fared FAR better as far as layoffs in the Great Recession.

Fifty years ago, gender discrimination was rampant. It was typical for women to be paid about half the salary of their male counterparts. I can remember a female classmate from college that studied accounting, and was hired to clean up a small accounting operation that her male predecessor had messed up. Because she was a woman, the firm insisted that she should be paid half the man’s salary, even though she was four times as competent and expected to work just as hard. In today’s world, such a practice by a firm of any size would probably “make national news.”