Offshoring jobs makes less sense when technology can help speed products to local markets
Rana Foroohar
Much of the news of the past few days has come to us from the global level — climate change battles at the G20; doubts about the future of the World Trade Organization; Russian president Vladimir Putin’s assertion that liberalism has “become obsolete”. But to really understand why the world is so fractured today, you have to go local and look closely at why labour’s share of the economic pie has been squeezed so much in recent years, particularly in the US and western Europe.
Globalisation usually gets the blame for the declining labour share and the subsequent discontent among working-class and, more recently, middle-class voters. But a recent report into the US labour market conducted by the McKinsey Global Institute found that globalisation was actually bottom of the list of the top five reasons that labour’s share of national income has declined since the turn of the 21st century.
In fact, the biggest reason for the declining labour share, according to the study, is that supercycles in areas such as commodities and real estate have made those sectors, which favour capital over labour, a larger part of the overall economy. But reason number two — a rise in the importance of intangible assets in our economy — tells us much more about worker (and voter) discontent.
Intangible assets including computers and software depreciate much faster than tangible ones such as machinery and factories. The shorter lifecycle and continually falling price of new technologies — as well as their productivity enhancing effects — mean more money goes towards investing in them, leaving less for labour. That, combined with the fact that automation has damped incomes, represents 38 per cent of the total decline in labour share since 1999, according to MGI’s calculations.
This is where the local picture within countries starts to matter quite a lot. As most of us know, automation and the speeding up of capital substitution because of technological shifts have hurt traditional industrial areas disproportionately — that is one of the reasons the US ended up with a president like Donald Trump.
But in the future it will also radically favour a few regions: according to a second McKinsey report to be released on July 11, a mere 25 cities and regions could account for 60 per cent of US job growth by 2030. They will not all be the ones you would think. Tech hubs will benefit, of course, as will commodity-rich areas and tourism centres catering to the wealthy. But so will any number of other cities and regions with economic development plans designed to capitalise on a silver lining to the declining labour share story. When labour makes up less of the overall cost of producing goods and services, then offshoring jobs starts to make less sense.
What does make sense is being closer to customer demand, a trend that was growing for a decade before today’s trade wars led companies to start reconsidering supply chains for political reasons. For a good 10 years, says MGI chairman James Manyika, “the importance of cheap labour has been declining relative to the importance of demand signals”. MGI’s own figures show that less than 20 per cent of goods trade today is from a low-wage country to high-wage one. This is in part due to the fact that China and other emerging markets consume more of what they make themselves and are developing their own domestic supply chains, a process increasing speed because of trade tension.
Western companies are also eager to locate production closer to their customers, a trend enabled by a “just-in-time” culture and enabled by technologies including 3D printing and artificial intelligence. As social media drives trends, consumers do not want to wait weeks for a product their favourite Instagram influencer is pushing today.
That dynamic favours speed to market above all else, which in turn favours localisation. Consider how companies such as Nike and Adidas have built highly automated “speed-factories” in the US, Mexico and Germany to roll out the latest styles faster and more cheaply.
Such trends could help turn back the declining labour share trend in the US, as well as in European countries including the UK, France, Germany and Italy. Yet unless the EU can maintain its single market unity over the long haul, it could lose out on the reshoring trend, since no single nation has enough demand or production capacity to support an entire regional supply chain on its own.
In the US, the risk is that the shifting labour market dynamics will sharpen the political divides that already exist. Many “left behind” cities are home to more Hispanics and African Americans. Job categories that will be automated fastest are entry-level positions typically done by the young. Meanwhile, the over-50s are at the highest risk of job loss from declining skills. One can easily imagine these shifting trends exacerbating the culture wars, age wars and political populism that already loom.
The solution: shift policy to support human capital investment, just as we do other types of capital investment. The US must change its tax code to allow companies to write off investments in workers in the same way they do those in machinery. If we continue to subsidise software without supporting people, the future looks grim.
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