Overheated Global Competition Drives Job Growth Down

Estimated Job Shortage 2012-13
Estimated Job Shortage 2012-13

Table presented in World of Work Report 2011, International Labor Organization, October 31, 2011, Pg. 9.

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“Non-financial firms have increasingly invested in financial assets at the expense of physical assets. … This is particularly the case with firms in advanced economies, but in recent years, developing and emerging economies have started to exhibit similar trends. …   Empirical evidence shows that rising profitability in the financial sector has played an important role in drawing in investment from the non-financial sector towards the financial sector.”

World of Work Report 2011, ILO, October 31, 2011, pg. 41.

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“The great thing about the new I.T. revolution, says Jeff Weiner, the C.E.O. of LinkedIn, is that ‘it makes it easier and cheaper than ever for anyone anywhere to be an entrepreneur’ and to have access to all the best infrastructure of innovation.”

Thomas Friedman, One Country, Two Revolutions, New York Times, October 22, 2011.

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“… technology investments are playing an increasingly larger role in mid-market companies’ bottom line. Business process automation and technology improvements are the two top contributing factors to the jump in mid-market productivity; new hiring ranked fifth overall. …

“’Technology is on the mind of most mid-market executives,’ said McGee [Tom McGee, national managing partner, Deloitte Growth Enterprise Services, Deloitte LLP].  ‘ … 74 percent of respondents believe globalization is forcing U.S. companies to become more productive to stay competitive … and set themselves apart from the pack ‘”

Deloitte: Mid-Market Executives Increase Long-Term Investments Despite Economic Uncertainty, Deloitte Press Release, Oct. 10, 2011.

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“Despite representing only … 19 percent of employment [in 2007], multinational companies contributed 41 percent to overall productivity growth from 1990 to 2007.”

James Manyika et al, Growth and renewal in the United States: Retooling America’s economic engine, McKinsey Global Institute, February 2011.

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“His solution is to offer a new and altogether different kind of TV set, although in typical CEO fashion, he refuses to elaborate on what that might involve. He simply offers the assurance that a great deal of R&D investment is going into designing a new TV that could reverse Sony’s fortunes.”

Vlad Savov, Sony CEO Howard Stringer: Every TV set we make loses money, Washington Post (originally published in The Verge), Friday, November 11.

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“First, in a global economy, we need to be thinking more about the sources of apparent productivity growth. It matters greatly for wages and employment whether rising value-added per worker is being driven by domestic production improvements, supply chain efficiencies, or by productivity gains abroad. …

Second, government policies designed to increase incentives for business investment, such as accelerated expensing, may have the effect of increasing supply chain efficiency rather than domestic productivity. …

Third, we are effectively flying blind in terms of the effect of the global economy on US workers.”

Michael Mandel and Susan Houseman, Not all productivity gains are the same. Here’s why, What Matters, McKinsey & Company,  June 1, 2011.

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The transformations in communications, transportation, transnational trade and investment flows, geopolitics, and access to advanced technologies that we summarize with the term globalization have greatly multiplied the number of businesses in every sector of the world economy competing for customers.

Moreover, companies are competing for a stagnant number of consumers and consumer dollars.   Although the buying power of working families is growing in the countries experiencing rapid economic growth (called the emerging economies), it is declining or barely growing in many of the advanced economies and in many other parts of the world.  This is greatly intensifying the competition among the worlds much larger number of competing business enterprises.

This environment of overheated competition puts enormous downward pressure on global job growth.  It drives the owners and managers of almost every business enterprise to pursue strategies that are good for the business but destructive to the world’s labor force much more aggressively than would be the case in an environment of moderated competitive pressures.  These strategies include:

  • Investments in financial assets as a way to park money that can’t be profitably invested in production of goods and services
  • Large investments in technologies that reduce work hours without reducing the capacity to meet existing customer demand
  • Large investments in product innovations designed to displace similar products rather than to create new products that meet new needs
  • Large investments in ad campaigns designed to lure current consumers to change consumption activities (e.g., switch from watching TV to playing video games)

The impact of these strategies on employment is fairly straight forward:

  • Profitable investment opportunities are in short supply, so money parked in financial assets is more likely to help generate financial bubbles than to generate new jobs
  • Productivity gains eliminate jobs when demand for products and services is not growing
  • Investments that only lure consumers to replace one product for another, to replace one consumer activity with another, and/or to buy the same product from a different company only move consumers around in the market place; the net effect on the labor force is job churning not job growth.

Overheated global competition will continue to do harm to global job growth until a global policy response creates a mechanism for market sharing and puts boundaries on the use of competitive strategies.  Without that response,  global rates of unemployment, underemployment, poverty, and political upheaval will continue to increase.  And the U.S. will not avoid sharing in these miseries.

Fragmented and Weakened Global Governance Perpetuates the World’s Employment Crisis

“A second conclusion is that the multilateral system lacks coherence; that is, comparable and consistent disciplines in closely connected areas of international economic interaction. This is particularly notable between trade and finance. The existing system of global economic governance lacks effective multilateral disciplines over exchange rate, macroeconomic and financial policies, or for redress and dispute settlement regarding the negative impulses generated by such policies. In this respect, governance in money and finance lags behind that for international trade. This is a main source of strains in the trading system.”

 Yilmaz Akyüz, Global Rules and Markets: Constraints over Policy Autonomy in Developing Countries, Working Paper No. 87, Policy Integration and Statistics Department, International Labour Office, June 2008

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“Economic integration and interdependence in the world today have reached an unprecedented level. As a result, the globalized economy cannot function for the benefit of all without international solidarity and cooperation. This was highlighted by the global financial and economic crisis that followed the collapse of big financial institutions, and it has underlined the need for developing approaches to new forms of global collaboration.”

Trade and Development Report, 2011: Post-crisis policy challenges in the world economy, United Nations Conference on Trade and Development

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“Global investors increasingly view risk in binary terms: When things are looking calmer on the global economic front, stock markets rise across the world; when things look scarier, they fall. Instead of differentiating among the economies in the United States, Europe and Japan, market measures are moving closely in tandem.

Moreover, because major U.S. companies have operations around the globe, executives are more likely to try to offset weakness in their overseas operations by pulling back on hiring and capital investment domestically, even if the U.S. economy is proceeding apace.”

Neil Irwin, U.S. fortunes increasingly determined in Brussels, Frankfurt, Political Economy Blog,  Washington Post 09/06/2011

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“Concurrent with the shift in power among nation-states, the relative power of various nonstate actors—including businesses, tribes, religious organizations, and criminal networks—is increasing. The players are changing, but so too are the scope and breadth of transnational issues important for continued global prosperity.

The diversity in type of actor raises the likelihood of fragmentation occurring over the next two decades, particularly given the wide array of transnational challenges facing the international community.”

By 2025, the international community will be composed of many actors in addition to nation-states and will lack an overarching approach to global governance.

Global Trends 2025: A Transformed World, National Intelligence Council, PDF version, November 2008

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“Today, some 50,000 multinational enterprises and their 450,000 affiliates employ over 200 million people throughout the world. Their impact is felt in virtually every facet of industry, trade, services and business activities.”

Multinational Enterprises web page, International Labor Organization

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Over the last several decades, the world’s distribution of economic power has shifted along several dimensions.

  • The distribution of power among nations has become more decentralized (the number of nation-states in the world has doubled since 1950, a number of weaker nations – notably the BRIC countries – Brazil, Russia, India, and China – have substantially increased their positions of power in the world economy, and with the cold war over, the most powerful nations have less ability to dictate foreign and domestic policies to weaker nations).
  • The number of economically competing geopolitical units in the world economy has increased dramatically (increasing numbers of bilateral and multilateral free trade agreements have exposed more and more of the world’s local businesses to global competitors; advances in transportation and communications technologies have brought more and more of the world’s state, provincial, and urban governments into virtual face-to-face competition for investments and jobs)
  • The distribution of economic power between the world of national and multinational governing institutions and the world of global business enterprises has shifted in favor of the business enterprises (.the expansion of the number of competing geopolitical actors in the world economy has increase the number and diversity of investment opportunities available to corporations and investors, increasing their power to play off one geopolitical entity against another and thus limit the willingness of governments at all levels to manipulate flows of capital and goods to favor their own citizens).

These shifts in power have wrought a destructive change in the global environment for job creation.

Business enterprises operate under very different mandates than do governments.  The core mandate for every business is to gain market share, not share market gains; to maximize profits for owners and shareholders, not to maximize general welfare.  In the pursuit of that core mandate business enterprises cannot increase employment, pay higher wages, create safer working conditions, pay taxes, or invest in parts of the world where the greatest need for jobs exist, if doing so will alter the balance of competitive advantages in favor of competitors.    Incurring avoidable costs seldom enhances competitiveness; cutting costs often does.

In a world in which governing institutions lack the power to organize and moderate competition so that it serves the general interest and in which the growth of markets is stagnant, fiercely combative and norm-breaking waves of competition among the world’s 50,000 global corporations and among the world’s millions of globally exposed local businesses and governments are inevitable.  Unrestrained job slashing frenzies in pursuit of lower costs are inevitable.  Waves of hiring that manage to materialize cannot be sustained.  High levels of unemployment and underemployment become the permanent state of affairs.

No Real U.S. Job Growth Until the World’s Middle and Lower Income Families See Real Income Growth

The distance between the richest and poorest countries has widened to a gulf. The richest country today (Liechtenstein) is three times richer than the richest country in 1970. The poorest country today (Zimbabwe) is about 25 percent poorer than the poorest country in 1970 (also Zimbabwe). It is sobering to see, amid enormous material prosperity in developed countries, that the real average income of people in 13 countries in the bottom quarter of today’s world income distribution is lower than in 1970.”

Human Development Report 2010 – 20th Anniversary Edition, The Real Wealth of Nations: Pathways to Human Development, p. 42.

Even with the economy in a funk and many Americans pulling back on spending, the rich are again buying designer clothing, luxury cars and about anything that catches their fancy. … Many high-end businesses are even able to mark up, rather than discount, items to attract customers who equate quality with price.

Stephanie Clifford, Even Marked Up, Luxury Goods Fly Off Shelves, New York Times, August 3, 2011.

Trends U.S. Blue Collar Earnings in Manufacturing

Chart source: Richard Wallick, Auto Industry Labor Costs in Perspective,  Bureau of Labor Statistics, Originally Posted: April 22, 2011.

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Increased global spending on yachts, private planes, high end sports cars, multi-million dollar homes, $200 per person meals, and other luxury items does produce a number of new jobs in the world economy – but not many.

Income growth for the world’s middle and lower income working people does the heavy lifting for global job creation.  Increases in spending by middle and lower income families send huge numbers of the world’s global corporations, neighborhood businesses, and governments looking for new employees.

No real income growth for the world’s middle and lower income families translates into insufficient growth in demand for the increasing volumes of goods and services that can be produced by the world economy, and from there almost directly into no progress in the U.S. on reducing unemployment and underemployment.

The U.S. is deeply enmeshed in a demand starved world economy and U.S. economic policy does not directly address that aspect of our situation.