The Case of the Missing U.S. Jobs - Analyst Blog

While businesses are gaining ground and the stock market is picking up, job growth in the U.S remains stagnant. What are the reasons behind this sluggish job growth?

In keeping with the economic cycle, the recovery is definitely powering job creation with a surge in demand for goods and services. However, the U.S. companies are hiring employees out of the domestic periphery to stay competitive. For most of the U.S. companies, international demand for goods and services is growing much faster than the domestic requirement.

According to The Economic Policy Institute, in 2010, U.S. companies have created 1.4 million jobs abroad, while less than 1 million jobs were created within the country. The senior international economist of the institute, Robert Scott believes that the U.S. unemployment rate would have reduced to 8.9% from 9.8% (the current rate of unemployment) had 1.4 million additional jobs been created domestically.

The Coca-Cola Company (KO), DuPont Fabros Technology Inc. (DFT), United Parcel Service Inc. (UPS) and Caterpillar Inc. (CAT) are among the U.S. companies that have created significant jobs out of the country in recent years.

Outsourcing: The Main Culprit

Since 2000, U.S. jobs have been moving overseas. Outsourcing and insourcing have eaten millions of U.S. jobs since then. As part of outsourcing, high-paying jobs have been creeping out to low-wage foreign countries. On the other hand, as part of insourcing, the nation has been importing lower educated foreigners who don't mind working at lower-than-average U.S. wages.

Of late, outsourcing jobs have become more sophisticated than before. Higher-end jobs are now moving abroad as a result of promising growth in emerging countries like India, China and Brazil.

There is definitely a comparative advantage, but at the cost of domestic job improvement. Hence, though the economy is recovering, consumer demand has stayed restrained. Also, as the demand for goods and services in emerging and high population countries has grown radically, many of the products are not coming back to the U.S. As a result, U.S. economy is lacking a thrust.

Winners and Losers

The corporate executives and stockholders of U.S. companies are the primary gainers of this practice, as cheap and efficient labor help their companies stay competitive. The emerging countries also benefit from this as their rising unemployment issues can be addressed by additional U.S. jobs, to some extent.

However, the losers are the U.S. middle class families who are the job seekers. And even if they manage jobs from the few remaining ones; they are hired at effectively lower real wages.

This could be viewed as one of the major drawbacks of free trade. According to Nobel prize-winning economist Paul Samuelson, "There is nothing in the theory that says trade is always a win-win for every group." Unfortunately, the U.S. is currently one of the affected countries.

Is the Government Silent?

The U.S. government has been taking several steps to address the unemployment situation but nothing has been very effective as yet.

The recent steps taken by the government include tax breaks for small businesses and entrepreneurs, as well as job creation from infrastructure projects.

However, lending to small businesses primarily to create jobs is probably not the first-line requirement for the economy. If businesses have fewer customers as a result of lower consumer spending and shrunken demand, they won't take loans to expand in the first place.

Also, in an effort to protect American jobs, the government has decided to provide tax breaks only for companies that will create jobs in the country and not for those that create oversees jobs. No one can say for sure which one is more lucrative for U.S. companies, tax breaks or low-wage skilled foreign employees. Only time will tell.

Recently, the U.S. government has passed the tax-cut extension bill, which will gift Americans with a pay raise in 2011. This will pump money into the economy and is expected to create a significant number of jobs. However, we think tax cuts will not be adequate to keep unemployment on a tight rein.

According to Center for American Progress, the tax-cut deal is expected to create about 3.1 million new jobs in total after adding up different provisions. The projection is based on the Congressional Budget Office's estimate of one million new jobs for each 1% of GDP growth.          

However, based on the same assumption, the Obama administration had previously claimed that the $787 billion American Recovery and Reinvestment Act (ARRA) would create 3.5 million jobs. But the unemployment rate stood at 9.8%. The basic reason for this is that the government is a bit reluctant to create jobs in the private sector directly by implementing rules or laws.

Though the government stimulus packages are able to increase GDP, most of the private sector firms are on the verge of recovering their financial conditions with cost savings via limiting recruitments or hiring low-wage employees in foreign countries.

Also, providing unemployment benefits to jobless people will not help improve the employment rate by any means. Instead, paying people to stay out of work might create a vicious circle in the long term.

Danger Ahead

The fact is that the U.S. companies are just manipulating policies to be wealthier and stay competitive in the free trade marketplace, injuring the livelihood of middle class Americans. It's time U.S. companies began to worry about U.S. workers. Under the existing policies, job movement to foreign countries will continue, pushing the U.S. economy to a danger zone.

International trade is definitely important for the economy, but it should be a fair trade. The government should have additional policy measures to force U.S. companies to think about American job growth while at the same time maintaining a competitive position in the world trade war.

We should not expect the U.S. economy to rebound without utilizing all of its resources. There needs to be a viable alternative for fund and job outflow to be checked. However, considering the enhanced skills of the global work force, a complete prohibition on outsourcing would make U.S. corporations lag behind others.