Can Rich Countries Stem the Outflow of Jobs?

THE CNBC channel has this clever way of announcing what's coming up before it breaks for commercials. Last week, I was kept tuned in while waiting for news that more companies in the United States are planning to hire in the fourth quarter. Any improvement in the US labour market is good news for America, and for Singapore.

As it turned out, I was left baffled. The number of companies surveyed by staffing company Manpower Inc planning to increase their workforce had crept up from 20 per cent in the previous quarter to 22 per cent. So yes, there was some improvement. But the majority, 62 per cent, said they had no such plans.

I read the next day, in a more detailed newspaper report of the same survey, that there was also an increase in the percentage of firms planning to cut staff, up from 9 per cent to 11 per cent over the previous quarter. So, on a net basis, there doesn't seem to be any improvement on the third quarter.

And the third quarter was a really bad period for employment in the US, according to its Department of Labour. A total of 93,000 jobs were lost last month. That makes a total of 142,000 jobs lost in two months of the third quarter - and this is during a period when economists are expecting economic growth to accelerate to 4.5 per cent. Particularly glaring was the loss of 67,000 service sector jobs.

Here are some startling details about the loss of service sector jobs. Employment in the information sector fell by 16,000. In fact, since the peak in March 2001, the number of jobs in this sector has fallen by 459,000, or about 12 per cent. At the same time, computer systems design lost 8,000 workers last month and, since peaking in March 2001, employment in this industry has declined by 232,000.

In a jobless recovery, lost manufacturing jobs used to be offset by job growth in the services sector. So now, job-less has become job-loss.

The data highlights a phenomenon we're starting to hear more about - the outsourcing of services. You've heard the stories. Discovery Partners International in the US, for instance, is hiring workers in India where chemists with doctoral degrees and other technology workers make one-fifth of what both it and other US companies pay their domestic high-tech workers.

The trend towards outsourcing was amply demonstrated at the recent New York PC Expo. OutsourceWorld occupied a third of the floor space at the Jacob K. Javits Convention Centre. Its booths were decorated with the flags of many nations. Company and country representatives touted the advantages of moving work abroad; it was said that information technology professionals in Bulgaria are paid just US$300 (S$519) a month.

It's not just the US feeling the heat. Mr Piyush Singh, the Singapore-based managing director of International Data Corp, says Singapore is vulnerable; particularly financial services and call centres, the IT departments of large companies, and Singapore-based IT outsourcing firms.

The threat is real, but let's put things in perspective first. In principle, outsourcing does not lead to the loss of jobs in an economy. Here's the economic argument: When, say, computer programming and claims processing are outsourced from Singapore to India, Indians earn Singapore dollars but really want rupees. Singaporeans can pay in rupees only by selling things to the Indians. In other words, Singapore's demand for Indian services must be recycled back into Indian demand for Singapore goods, services or capital. Jobs lost are replaced by new jobs created.

The concept is similar to double-entry booking. Every international transaction has two sides: When Singaporeans buy something from foreigners, foreigners must be paid. Foreigners must then spend or store the payment. International trade reallocates jobs.

The problem comes when foreigners' payments are stored, say, in a Singapore bank, but there is little demand for loans, either because domestic consumer or business sentiment is weak. So the money isn't recycled.

This problem can be aggravated, as in the case of the US, by an extraordinary improvement in productivity.

Productivity improvements are today not limited to manufacturing. They are also occurring in the services sector. The Hilton group is about to test self-service check-in kiosks at its Chicago and New York hotels. Such kiosks are already proving popular at airport check-ins. IBM says five million airline passengers a month use its self-service check-in systems now. But it also means fewer staff are needed. For job numbers to grow, the US needs to raise demand even further to match productivity improvements.

Under these circumstances, the loss of service sector jobs in the US represents a new leakage from the US economy, because US demand leads not to domestic but foreign growth. US central bank chief Alan Greenspan needs to ensure that US demand for foreign services is recycled back into the US economy.

Speed is essential. The magazine Australian IT reported that when computer maker Hewlett-Packard closed its Sydney office and shifted its call centre to Bangalore, India, the move was described in a leaked internal memo as the 'final solution' to cut costs. In short, a weak economic environment accelerates the rate at which companies shift work overseas.

And the clock keeps ticking. A characteristic of the information age is the narrowing knowledge gap between the advanced and the less-advanced economies.

Unless the pressure to cut costs eases, it will move up the value chain, as even research and development work can be sent overseas. Mr Marcus Courtney, president of the Washington Alliance of Technology Workers, told technology tabloid Silicon Valley Biz Ink last month: 'I have people with master's degrees in engineering calling me up, worried about their jobs.'

In the long run, it is surely better to have a rich than a poor India. But in the meantime, rich economies will have to find a way of preserving their higher wages in the face of a narrowing of the knowledge gap.