Thursday, April 21, 2011

The Trains Don’t Run on Time: The Hidden Costs of Failing to Invest in Infrastructure

04/21/2011—It was 9.30 pm and I had been standing on the platform at Dupont Circle for 25 minutes with my blood pressure rising. I was beginning to give up hope that the subway train, which the electronic message board had been promising for the last 15 minutes, would arrive in time for me to catch the last Amtrak train back to New Jersey. I made it with a couple of minutes to spare. As I headed back North, I reflected on what the decaying transportation infrastructure said about the dysfunctions of the government responsible for it.
The DC Metro was once a jewel in the rather small crown of mass transit in the US. Clean, quiet, efficient, and cheap, it made it easy to get around our nation’s capital. However, the last several times I’ve gone to DC, each time on an Amtrak train that was also inexplicably delayed, I’ve noticed that a growing number of the Metro’s escalators are under repair. It appears that years of deferred maintenance are finally taking their toll. Similar problems exist across the country – from the nation’s bridges to our universities.

The contrast with our competitors is quite stark. It doesn’t seem right that, riding on a South Korean bullet train at over 200 mph, I’m able to have a clearer Skype conversation with my family half a world away than I can manage from just a few miles away on my cell phone on Amtrak. (Without wireless, Skype isn’t an option).

Transportation infrastructure investments, when done right, can be a win-win-win-win. They create desperately needed high-quality jobs in the short term, boost productivity for millions of people in the long term, while improving the environment and enhancing community by providing a system where individuals from all social classes and ethnic groups mix on equal terms.

My favorite example of doing such investments correctly came when we were living in LA in 1994. The Northridge earthquake had collapsed an entire section of the 10 Freeway connecting Santa Monica to downtown LA, the most heavily traveled morning commute in the country. Experts estimated it would take a year or more to fix. Contractor CC Myers bid to do it in just 140 days, with an incentive-filled contract that imposed a penalty of $200,000 for every day he was late and a $200,000 bonus for each day he finished ahead of the deadline. He finished 74 days ahead of schedule, earning a bonus of $14.8 M, but saving LA commuters and businesses billions of dollars in lost productivity in the process. View 6.9 on the Richter Scale.

It is the public good nature of such infrastructure investments that makes them a natural role for government. With the current spike in oil prices we have an opportunity for a similar win-win public policy: state and federal governments should set a floor under US gasoline prices, indicating that they will not be allowed to fall again under today’s average price (about $3.80/gallon last week); when the situation stabilizes in the Middle East and global oil prices fall, the difference between the market price and the floor prize could be captured in additional tax revenue that would be earmarked for investments in mass transit – in turn, reducing congestion and our dependence on fossil fuels.

Such a policy would still leave Americans paying far less at the pump than consumers in any of the other advanced industrial countries. And like 2008 when we last saw high gas prices, we’d start to see real changes in consumer behavior. Not convinced? Check out the changes in prices for used cars that are already under way: Gas prices starting to change cars' value.

Unfortunately, given the current aversion to anything resembling tax increases, there appears to be little likelihood such a policy will be adopted, even if would create jobs, improve the environment, and enhance US competitiveness. I can’t help wondering if the outcome might be different if most of our elected representatives were walking up those broken escalators each day on their way to work.

Tuesday, April 19, 2011

Mixed Messages on Employment

4/19/2011–The Sunday New York Times “Education Life”, supplement had an interesting article, Top 10 List: Where the Jobs Are detailing the 10 US careers projected to grow the fastest between now and 2018.

The data highlight the phenomenon known as the barbell economy—namely the growth in inequality and hollowing out of the middle class as new job creation is concentrated at the high and low end of the skill spectrum.

The encouraging news is that 7 of the top 10 growth occupations, including the top two—Biomedical Engineer (72%) and Network Systems & Data Communication Analyst (53%)—are high-paying and require at least a college degree.

The discouraging reality is that the number of new jobs projected in #3 and #4 on the list—Home Health Aide (461,000) and Personal & Home Care Aide (376,000)—is each greater than all of the other 8 occupations combined. And the average annual salary of these low-skilled workers is under $22,000, far too little to support a family.

While such labor market projections are notoriously difficult, particularly when dealing with major discontinuities such as the global financial crises and uncertainties about healthcare reform, some irreversible demographic trends, namely the retirement of the baby boomers, suggest this growth is inevitable. These projections also highlight the importance of distinguishing between percentage growth and absolute numbers of jobs when analyzing occupations. Even some slow-growing occupations, such as retail and fast food, are likely to account for far more net new job opportunities to replace existing workers than the high-growth, high-skill occupations.

This same gap between skills in high demand and employment opportunities for the majority is being played out throughout the economy. The ranks of unemployed and discouraged workers still outnumber available job vacancies by 5:1 and most Americans with jobs continue to struggle with little if any wage growth, while costs for essentials like gasoline are rising rapidly; and yet in Silicon Valley and other high-tech clusters, the competition for top young graduates fluent in the hottest programming languages resembles the peak of the dot.com era, complete with perks such as bring your pet to work, concierges to take care of all the needs outside the office, and even offers of venture capital so workers can start their own company on the side.

* * *

The same Education Life supplement also contains an article, The Price of Perception, by my old boss and mentor Hank Riggs, explaining why tuition at the top private colleges continues to go up much faster than inflation or the earnings of most Americans, a key factor affecting access to educational opportunities for our most able students and a subject close to my heart as our son Sam tries to decide where he’ll be going to study next year.

Income Inequality, Employment, and Injustice

02/07/2011—As the world’s attention is focused on the popular uprisings in the Middle East, many are speculating on the underlying sources of this civil unrest. Most agree that major contributing factors to destabilizing these authoritarian governments are the combination of high levels of rising prices, youth unemployment and income inequality.

It was thus striking to see how the US compares with different Middle Eastern regimes in Charles Blow’s column, “The Kindling of Change,” in Saturday’s New York Times.  Income inequality in the US, as measured by economists’ most common indicator, the Gini coefficient, is not only higher than Egypt and Tunisia, but also greater than any country in the Middle East (where data is available), and over ten times as great as in Kuwait.

As for employment, the latest US data is both depressing and puzzling. Job growth continues to be anemic, with only 36,000 new jobs in January, far below experts’ projections. And yet the unemployment rate fell dramatically (from 9.4 to 9.0 percent). This suggests that many of the long-term unemployed have either exhausted their benefits or become so discouraged from seeking work that they are no longer considered in the labor force.

The US response to the current economic crisis and the federal and state budget deficits it has produced is going to be sharp cuts in the number of public sector employees and the benefits for those who keep their jobs, while reducing taxes on the most wealthy 1% of the population, who have captured a majority of all growth in income over the last 15 years.

The US approach is particularly discouraging at a time when our main competitors are focused on the opposite problem. In China, the government is raising interest rates to try to avoid over-heating the economy, which continues to grow at double digit rates. And in Germany, where unemployment actually fell during the recession, thanks to wage subsidies for employers, the focus is now on impending worker and skill shortages, due to a combination of low birth rates and a rapidly aging population. See: "As Germany Booms, It Faces a Shortage of Workers".

As I’ve suggested in earlier posts, a long-term driver of increased inequality and the loss of middle-class jobs in the US is the combination of technological change (the internet and IT revolution) combined with globalization that has dramatically increased wealth for the highly educated and those at the very top of their occupations—whether star chefs and athletes or investment bankers and CEOs—while placing huge pressure on earnings for the average college grad or worker.

An unexpected source of insight into the link between technological innovation, employment and inequality came from my current bedside reading: Bill Bryson’s At Home: A Short History of Private Life. Inspired by his Victorian rectory home in Norfolk, England, he moves from room to room, writing about anything and everything that pertains to it. In his chapter devoted to the dressing room, he discusses some of the inventions that underpinned the creation of textiles that were the main product of the first industrial revolution and their unintended effects. He shows how Eli Whitney’s cotton gin, which enabled huge labor savings in separating seeds from cotton bolls, made US cotton economically viable and fed English mills. As a consequence, slavery, which had been in decline in the US, exploded, with a growth in the number of slave states from 6 to 15 and 800,000 slaves in the North being shipped south to harvest the cotton. The other key invention was the power loom, developed by the Rev. Edmund Cartwright, which solidified Britain’s place as the world’s first industrial power, but in the process drove an increase in child labor in the factories, as was already occurring in the mines, on the farms, and up the chimneys. As Bryson notes, “Children were malleable, worked cheap, and were generally quicker at darting about among machinery and dealing with snags, breakages, and the like. Even the most enlightened mill owners used children freely. They couldn’t afford not to.”

It took several generations before the UK and US put in place laws that ended slavery and regulated child labor. We can’t afford a similar gap in dealing with our current employment challenges.
 

Financialization, Ownership and Jobs

1/24/2011—I’ve just returned from the annual meeting of the Labor and Employment Relations Association (LERA) in Denver, where a main topic for the Conference was “financialization” of the economy – a term that was barely discussed even a few years ago, and one neither Microsoft Word not Dictionary.com yet recognizes. The research presented focused on enhancing our understanding of the impact that the growth of the financial sector and the concentration of power among Wall St. firms is having on how US companies are run, and the implications of this for US workers.

While this power waned briefly as a result of the global financial crisis that these institutions caused through excessive risk-taking, it has come back quickly with the government bailout and subsequent economic recovery. The recovery is generating large profits and bonuses for financial institutions, but few jobs for average Americans. This exacerbates a disturbing long-term trend toward greater inequality – the latest data indicates that over the last three decades the top 1% of Americans received 58% of all of the growth in national income, garnering nearly two-thirds (65%) of the growth during George W. Bush’s presidency. And it is this group that just got the greatest benefit from the tax cut compromise that President Obama reached with the Republicans in Congress.

One key factor that has been contributing to growing inequality is the explosion in top executive pay. Prof. Bill Lazonick of U Mass, Lowell shared disturbing findings from his book, Sustainable Prosperity in the New Economy?, describing how CEOs have been maximizing the value of their stock options and insuring they meet bonus targets linked to stock price through the use of stock buybacks. He showed (see Figure 1), that many of the largest U.S. public corporations are disinvesting from the U.S. economy, moving investment offshore and spending more money buying back their stock than they are on R&D and new capital investment to fuel new innovation and job creation.

Figure 1 
The debate on the impact of private equity on US workers was more balanced. Professors Rose Batt and Eileen Appelbaum revealed the dark side of private equity. Their preliminary analysis of department store chain buyouts in the US and Europe, found private equity firms pursued similar strategies: buying firms with large amounts of debt, selling off the real estate for quick profit and then leasing the stores back to the chains, which then led to unsustainable losses. Figure 2 shows the depressing results.

Figure 2

Steve Sleigh, a partner at Yucaipa, a private equity firm, and former senior leader at the machinists union, made the case that private equity is itself neutral: it can be used, as appears to have often been the case, in ways that harm workers – cutting employees, raiding pension plans, and incurring high debt levels that threaten the viability of firms during deep recessions. Yucaipa, however, adopts a very different strategy: it seeks firms that are under-valued because of bad management, removes them and then strikes a deal with the union to introduce high-performance working practices, offering in return to share a percentage of any gains that this produces with the employees. This strategy, while rare among private equity firms, has produced consistently high returns for the last several decades.

Steve made the case that the most effective way to shift more private equity companies to behave like Yucaipa would be for the fund managers who invest the more than a trillion dollars in worker pension funds to place their money only in private equity firms that commit to following such worker friendly policies. This could broaden the definition of what it means to do socially responsible investing, that has proved influential in encouraging corporations to adopt more environmentally friendly policies, to avoid child labor, to adopt more transparent corporate governance, and to divest from South Africa under Apartheid.

There was one area, however, where convincing evidence was presented of financial governance arrangements that can benefit workers: broad-based employee ownership. I pinch hit for Doug Kruse, Joseph Blasi and Richard Freeman, sharing the results of their book, Shared Capitalism at Work, which synthesizes results from more than 100 studies, along with their own original research from a nationally representative sample of workers, to show that when companies combine employee empowerment and skill development with broad-based ownership and/or profit-sharing that it produces superior long-term financial returns and substantially increases the wealth of workers. And Ed Carberry and his colleagues shared the results from the forthcoming LERA 2011 Research Volume, which features the work a number of Rutgers fellows, providing further evidence from many different disciplines of the benefits when employees retain substantial ownership of the enterprise.

A new research project by another Rutgers fellow, Erik Olsen, however, suggests that while giving workers some stake in their enterprise’s success is common, there are still relatively few majority-owned worker enterprises in the US. Worker cooperatives, like the highly successful Mondragon that is expanding globally from its Basque roots, are rare in the US, with under 250 enterprises identified accounting for only 2,380 employees in 2009. Olsen thus far has been able to identify another roughly 1250 majority employee-owned companies, through ESOPs or other means, accounting for just under a million employees.

Combining the conclusions of some of these different studies suggests a possible policy approach for going forward that might help to address the long-term growth in US income inequality: creating tax penalties on companies that do stock buy backs unless the shares that are repurchased are shared broadly with employees.

Sputnik II or A Nation at Risk Again: China’s Rapid Educational Progress and the Implications for the U.S.

12/14/10—At this busy time of year, some may have missed the startling findings of the latest international comparison of 15-year-olds’ examination results that appeared on the front page of Tuesday’s New York Times. The results released by the OECD’s PISA (Program for International Student Achievement) showed that 15-year-olds in Shanghai, which was taking part in PISA for the first time, finished first relative to their peers in 65 countries in every subject – reading, science, and math. The US was respectively 17th, 23rd and 31st (see Table below).

This may not seem like news. We have become used to the articles after each new round of PISA results that bemoan the weaknesses of the US education system and call for school reform. But to someone like myself, who has spent the last quarter century comparing different countries’ education and training systems and how the skills they produce are related to economic performance, the results were a real shock. The shock wasn’t that Shanghai finished ahead of the US, which again was about average in all categories. Nor was it that Shanghai surpassed the perennially top-scoring nations, such as Singapore, Finland, and South Korea, though this was a bit of a surprise. The real eye-opener was the magnitude of the Shanghai advantage. On a test where a few points’ difference in average results can move a country up 10 places in the rankings, Shanghai students finished 38 points ahead of second-ranked Singapore in the math exam, the same gap that separated Macao in 12th place from the US in distant 31st. The Shanghai lead in science and reading scores was a bit narrower, though still very impressive.

These dramatic results in China’s first time in the study conjure images of Bob Beamon’s shattering of the long jump record at the Mexico City Olympics or Flo Jo’s (Florence Griffith Joyner’s) memorable Olympics double 20 years later in the 100- and 200-meter dashes where her winning margin longer than her fingernails. Yet the Shanghai students’ results were achieved without the aid of altitude or the suspicion of steroid use.

As with any achievement that seems to fall well outside the norm, they will no doubt attract a lot of skepticism and scrutiny. The Chinese chose to take part with 3 major cities–Hong Kong and Macao, along with Shanghai–since the task of drawing a random sample of 15-year-olds from a nation of 1.4 billion people seemed too daunting. But the Shanghai sample alone contained 5,100 students, the same as all of the US. Some may question whether there was cheating or coaching on the exam, which has been a problem in the past in China with high-stakes standardized tests. Others like Mark Schneider, a commissioner of the Department of Education’s research arm in the George W. Bush Administration, may contend that the Shanghai students were more motivated to do well because they were told the test was important for China’s global image. “Can you imagine the reaction if we told the students of Chicago that the PISA was an important international test and that America’s reputation depended on them performing well?” Mr. Schneider told the New York Times. I am not sure of his tone when he said this, but my hunch is that such admonitions would not make a whole lot of difference.

Perhaps the most serious challenge regarding the PISA results is whether these 5,100 students are really representative of Shanghai’s population, since omitting even a small number of low-performing students can have a big impact on the average results. For example, the children of migrant workers are often unable to enroll in public schools in the large cities because their parents do not have official residency status. Thus, as with the failure of PISA to reach early drop-outs from US inner city high-schools, it may be that the Shanghai results reflect the school population, but not the full population of 15 year-olds.

My guess is that, with the possible exception of the migrant worker issue, the results will stand up well to scrutiny. The PISA exams were administered in 2009; the international research team responsible for the study would have been well aware of how much attention these results would draw and no doubt spent much of the last year checking all aspects of the data from Shanghai in painstaking detail.

When I asked my colleague Prof. Mingwei Liu, who is one of the top experts on China labor issues what he thought of the results, his response was very telling:

“I'm not surprised at all. Chinese students learn far more academic stuff in primary and secondary education than students in most countries. In addition, Chinese students are good at getting high scores in all kinds of exams. They are good not only at memorizing, but also how to resolve test problems, answer questions, and various skills on taking exams per se (e.g. getting the right answers without even understanding the questions). The huge amount of homework and extra tutoring pay off in exams.”

Raising additional alarm bells for those concerned about US competitiveness, he noted:

“Students in Beijing and Shanghai are often not the ones who get the highest scores, because generally they don't work as hard as many in other provinces, since they have more opportunities and exams there are easier.”

He predicted that “if students in some provinces such as Jiangsu, Shangdong, Hubei, Zhejiang, and Fujian take the PISA test in the future, they will outperform Shanghai students.” He added a very important qualifier on the practical implications of these results, pointing to the difference between exam results and real-world skills. “Some students with high test scores are also capable of resolving practical problems, but others not. In China, people, especially employers, often describe these students as "high scores, low capability". Indeed, a core issue in our current skills project comparing the skill development systems of India and China is China’s efforts to transform its education system from one that excels at rote learning to one that develops a new generation of innovators.

Even with this caveat, these international comparisons are likely to intensify calls for education reform in the US. President Obama already has drawn an analogy to Sputnik in the late 1950s, when fears of losing the space race to the other superpower, the Soviet Union, spurred a focus on upgrading US science and math education. Today’s debates also echo concerns from the 1980s, when an influential report, A Nation at Risk, argued that the US was losing ground to its main economic rivals–Japan and Germany–by committing an act of “unthinking, unilateral educational disarmament.”

The US emerged stronger from each of these eras, and retained its place as the world’s dominant global economy. Can we do the same in this latest phase of global competition, where success depends more than ever on the skills and knowledge of our workforce? To do so we must summon the political will across parties to address the problem, not a very likely prospect at the moment, and then undertake significant reforms of all stages of our education and training system.

The key focus for these reforms will be our major cities, where our population and our greatest educational challenges are concentrated. In contrast, based on the PISA results, China appears to have solved the riddle of urban education, at least in its national context. This will be a vital advantage for it going forward, as Shanghai and Beijing continue to expand beyond 25 million people each, and China’s second and third-tier cities of 5-15 million people continue to grow in the decades ahead.

The Power of Zee

11/12/2010—Zee Yoong Kang, or “Zee” as he’s known to his friends and colleagues, is the dynamic young CEO of NTUC LearningHub, the training and development subsidiary of Singapore’s National Trade Union Congress. We met last week in Singapore (where I was giving a keynote speech at the 3rd Annual Adult Learning Symposium) to discuss the vital role that skill development can play in helping to build the strength of unions in today’s knowledge economy.

Zee Yoong KangSingapore has made amazing overall progress in rapidly upgrading the capabilities of its population. Its students consistently score at the top of international rankings of science, math and reading. And over 90% of young people continue into post-secondary education and training: nearly two-thirds get a degree or diploma from a university or polytechnic; another 25% receive well-recognized technical qualifications.

And the strategy seems to be working. Singapore is dealing with problems the US can only envy: fears of inflation (the economy grew at over 18% in the 2nd quarter of 2010) and of labor shortages (unemployment is hovering close to 2%).

One area to which Singapore is not normally looked for innovation is labor unions. Historically Singapore’s unions, like their Chinese counterparts, have been seen as more captive to, rather than independent of, employers and the state. Zee described why Singapore followed this path: “Early on, after our initial crisis when we separated from Malaysia, there was a battle between the pro-communist and the pragmatic sides of the union movement. The pragmatists won. The key was the recognition by all actors of Singapore’s extreme dependence on foreign corporations. This limited the potential bargaining power of a more traditional collective bargaining approach.”

Instead, unions focused on working with the ruling party to shape policies that would benefit workers, in particular the upgrading of jobs and provision of a strong social safety net to protect workers who were displaced. A clear indicator of the strength of this partnership was that the NTUC’s Secretary General is a member of the Cabinet.

Said Zee: “The first crisis for this partnership came in 1986, when Singapore was plunged into a deep recession by the government’s own miscalculation. It pushed salaries up 8 to 10% year in an effort to force employers to move up the value chain and remove low-wage jobs. This worked fine for a couple of years, but then fell apart when multinationals began to leave. What we learned from this is that we can’t dictate wage levels through the tripartite arrangements, but instead can only raise salaries by boosting the productivity of workers through enhanced skills. This is one major reason why skills are now a national priority for the government and labor movement.”

Initially, the unions worked with the government to put in place policies that would enhance workers’ skills. Most notable was the levy on employers that ensured all firms would spend a portion of payroll on employee training and development. In addition, the government introduced the Lifelong Learning Endowment Fund in 2001: this set aside resources that would produce annual earnings to cover up to 90% of course costs for individuals wishing to upgrade their skills, in particular, existing workers who had left the education system with limited or no recognized qualifications.

The unions recognized the benefits of these government initiatives, but also that relying on these alone would be insufficient to demonstrate to their members the relevance of the union in matters relating to skill issues. “We had to create our own internal capability to push skills initiatives in our union base. So we set up the Skills Development Division within the NTUC headquarters. This became the most important operating unit in NTUC, together with our industrial relations department.” In 2003-4, the NTUC went one step further: it spun off its computer-based training operations and converted them into a new social enterprise, LearningHub. Zee was hired from Bain & Co in 2003 to lead this unit.

“Our goal in LearningHub is to do well financially by doing good for workers,” said Zee. “My objective was to use new technologies and create an organization that could deliver standardized, low-cost, high-quality training to large numbers of workers.” LearningHub started with IT and basic skills training, and has now expanded to include health and safety, basic manufacturing, soft skills training, and some craft and technical training, although not formal apprenticeships. They now have a menu of over 550 course offerings and have served over 700,000 workers and managers since 2004.

The balance of customers changes dramatically depending on the health of the economy. “Typically, 60% of our business was coming from employers, paying for their workers to be trained,” said Zee. “Then when the global financial crisis hit, we shifted rapidly and 80-90% of our funding was coming from government to upgrade the skills of existing workers who might otherwise have been made redundant.” This type of policy helped ensure that unemployment remained very low even during the depths of the crisis.

For the future, LearningHub is looking to move upmarket into higher-level skills, as the economy of Singapore shifts rapidly toward more knowledge work. And it is expanding across Asia, setting up training operations in India and China. “We chose to focus on retail in India, because IT training was already saturated,” observed Zee. “We saw an unfilled niche as India shifts from small shops to larger retail chains.”

This strategy was a “hard sell” at first, according to Zee, as the union’s training arm was upskilling workers who might compete with its Singapore members. But LearningHub was already the largest trainer of migrant workers in Singapore, and NTUC had an official policy to look after all workers in Singapore, not just Singaporeans. “It was going to happen anyway. If we do not train the Indians and Chinese, others will: it is just a matter of time. So it seemed better for us to be an early mover, and build up a strong brand with this workforce. We see it as a potential win-win, expanding our resources, and helping to upgrade the skills of workers and ensuring they won’t be exploited if they immigrate to Singapore.”

China Part III: Labor Supply and Demand

10/18/2010 - On my recent visit to China I had the chance to conduct fieldwork for a large new research project on Developing the Skills of the 21st Century Workforce with Prof. Mingwei Liu.  Mingwei was my first assistant professor hire at SMLR, and we are delighted to have attracted him to Rutgers, as he isalready establishing himself as one of the leading scholars studying labor issues in China.

Central to our project is a comparison of China and India’s skill development systems, which between them, will account for over one-third of the world’s workforce this century.  We in the West are very familiar with the graduates of India and China’s elite universities, who often come to the US for graduate school, but we know very little about the education and training that the vast majority of the population receives, and the major investments and reforms now underway to transform and upgrade these skill systems. In addition, we believe that there is much to learn through a comparison of these two systems: one the world’s largest and messiest democracies, which has become a global leader in knowledge services; the other a very strong one-party state which has become the global leader in low-cost manufacturing.

During our two and a half weeks in Beijing and Shanghai, we spoke with company executives, government policymakers, education and training providers, heads of industry associations, union officials, and academic experts to get many perspectives on how China is tackling its skills challenges.  Of all these interviews, the one that has stuck with me the most is a story from is an American woman serving as part of the leadership team for a rapidly growing Chinese IT company.  She has been working in Beijing’s rapidly expanding IT services industry since 2004 while raising three children.  She told the story of her 18-year old daughter who had just graduated from the Western Academy of Beijing with the international baccalaureate, and was looking for a job before applying to vet schools.  She found one teaching English and dance in a private elementary school.  For this job, she is paid four times what Sara’s firm pays its entry-level graduate engineers.

I believe there are at least three important lessons to draw from this story:
  1. The laws of supply and demand are still very powerful– With the advent of the internet, the fall of the USSR, and the expansion of the WTO, the global labor supply available to multinational corporations has effectively grown by over one billion people in the last two decades.  Those with high-level, but very common, skills whose work is easy to move across borders – such as software engineers – are going to come under severe wage pressure.  Meanwhile, as the proud mother noted: “Personable Western young women who have a working knowledge of Mandarin are relatively rare in Beijing.”
  2. Build a differentiated set of capabilities– Our son is applying for college, making me even more conscious of the question I’m often asked by our students or parents: “What careers advice would you give young people today given the difficult job market and growing global competition?”  There are no easy answers, but I believe the best prescription for success is to encourage each person to seek the intersection of some area or areas for which she has passion and strong natural talent, and to pursue it to develop distinctive if not unique capabilities.  Some strong enablers to add to this skill set would be: cross-functional and interpersonal skills that help one effectively lead teams, entrepreneurial skills that allow one to turn a passion into a business, and having a global perspective and speaking multiple languages (Note to self: remind our daughter, who has a great ear for languages, to consider Mandarin).
  3. English will remain the global business language for decades to come – There has been speculation that, as China’s global economic influence expands and the number of internet users whose first language is Mandarin approaches the number of English speakers, Chinese will replace English. But I believe there are several reasons this won’t happen in my lifetime: the fact that English is so firmly established as the global business language and the strong path-dependency of such standards once they are widely adopted (e.g., the QWERTY keyboard); the much greater difficulty of learning to speak and write Chinese; and the power of demographics, as the long-term effects of China’s one-child policy have led to a dramatic slowing in population growth.  It seems that Chinese parents have made this judgment too: they are investing heavily in English lessons, even for pre-school children, to try to ensure that their “little emperors” (as this generation is often referred to in China) are best prepared to succeed in tomorrow’s global labor markets.

China Part II: Building the Future

09/28/2010 - If you’d like to see the future looking at you, take an evening walk down the wide, riverside boulevard known as the Bund in Shanghai.    On your side of the Huangpu River you’ll walk by the past – the beautiful, remarkably well-preserved and still functioning set of skyscrapers that date from the late 19thand early 20thCentury, when the Bund emerged as the leading financial district in Asia.  When the Communists came to power in the 1930s, however, the Bund’s star waned, eclipsed by Hong Kong and Singapore.



Across the river,  in Pudong, a new financial district is emerging, under the leadership of the same, yet very different, Communist Party that has embraced many aspects of capitalism and is determined to have Shanghai reĆ«merge as the world’s leading financial center for the 21stCentury.  


As my eyes adjusted to the amazing array of neon lights, I was struck by both the height and the ambition of Shanghai, with a skyline featuring dozens of skyscrapers, any one of which might be the tourist attraction in most US cities. 



And Shanghai is far from done.  Just blocks from the World Financial Center, which was among the contenders to be the world’s tallest building when it was completed in 2007, plans are underway  for a new skyscraper that will compete with the Burj Khalifa in Dubai for the title of ‘world’s tallest.’ 


Visit the Shanghai Urban Planning Museum to get a complete picture of the scope of development underway for a city that, at one point, had nearly cornered the market for steel futures for the next decade.
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Just a couple of bends down the Huangpu is another equally impressive example of the scale of China’s vision for the future: the Shanghai World Expo.

I was fortunate to be able to go twice during my stay: once during the day, when I went with a conference delegation that included Chris Tilly and other workplace scholars from around the world.  Unfortunately, we’d picked a day that coincided with a Chinese national holiday, which meant that half a million people from around China joined us.  Picture a car park the size of Disneyland’s, totally full with not with cars, but with tour buses.  The line to enter the Chinese Pavilion was 8 hours long.


The China Pavilion
But I still had a great time watching Chinese families enjoy this spectacle and pursuing the latest craze – filling their World Expo passports with stamps from the more than 100 country pavilions across the sprawling park.  I escaped the crowds by heading to the far less populated City pavilions devoted to the Expo’s theme of sustainable cities.  There you get another glimpse of the future, with exhibits featuring zero-emission buildings and whole villages now underway in China and transport provided by fuel cell cars. If you have the chance to go to Shanghai before the Expo closes this Fall, I suggest going at night, as I did on an unplanned 2ndvisit with a German friend, Michael Nippa, and his graduate students.  The crowds are thin and the Expo is lit up in brilliant neon that pierces through the perpetual smog.


The Expo at Night
Exhibition Center and Auditorium (not Giant UFO)

At Least One Sector Where US Exports Remain Strong
Taiwan’s Pavilion, just below and much smaller than China’s

Perhaps even more impressive than the Expo itself is the planning and infrastructure that went in to making it possible:  moving Shanghai’s port from the site of the Expo to a huge new offshore terminal capable of handling the world’s largest cargo ships, constructing the world’s most advanced Maglev train line to speed passengers in from the airport, and a dedicated, brand-new, 3-stop subway line.  All infrastructure investments will pay dividends long after most of the Expo has been dismantled.  The success of the Expo and the Beijing Olympics just two years earlier stands in stark contrast to the current Commonwealth Games debacle in Delhi that is a source of national embarrassment to India, and the crumbling US infrastructure in which hundreds of billions of dollars in stimulus spending barely made a dent.Of course, like most elements of the Chinese economic miracle, there is also a dark side to this construction boom:  the growing pollution and traffic gridlock that shroud Shanghai in permanent smog, and the very real threat of a property speculation bubble that could rival the collapse of Japan’s in the early 1990s.

But the main conclusion I draw from my brief time in China is that, just as France carved out a niche in the latter half of the 20thCentury as the world leader in industries such as nuclear power, water, high-speed rail, and civil aviation, which required close cooperation and co-investment from the public and private sector,  China is likely to dominate the emerging new sectors that share these success factors in the 21stCentury.  My favorite example of this, announced during our stay, is the development of an ingenious bus-train capable of carrying 1200 to 1400 passengers right over city traffic.


The Global Battle for Good Jobs: Is the US Even Fighting?

09/15/2010 -  One of the most pressing challenges now facing the US and other advanced industrial countries is creating a sufficient supply of high-quality jobs to sustain or continue to improve the living standards of the average citizen.  The last decade represents the first time in modern US history when there was a net loss of jobs, contributing to the long-term decline in the prospects of the American middle class.

                This societal challenge has been greatly magnified by the deepest recession since the Great Depression.  Projections by my Rutgers colleagues James Hughes and Joe Seneca suggest that even if the US is able to begin creating new jobs at the robust rate of the 1990s – which is still far from the case in the current tepid recovery – it will be 2018 at the earliest before the unemployment rate comes back down to the level at the start of the global financial crisis (http://economix.blogs.nytimes.com/tag/joseph-j-seneca/).

                Many explanations have been offered for the slow rate of new job creation in the current recovery: weak aggregate demand; deep uncertainty about whether growth will continue/risk of a double-dip recession; an insufficient stimulus package; imports replacing domestic jobs; and skills mismatches slowing the filling of some specialized job vacancies.  While all of these factors appear to have contributed to anemic US job growth, I believe there is a deeper, structural problem that has been magnified by the current recession: the combination of the realization by many US companies that they are better off not employing US workers at a time when the Chinese government and Chinese firms are working closely together to grow both the number and quality of jobs in China.

The gap between the fortunes of US firms and workers is widening: as demand has begun to recover, productivity is soaring because firms have discovered ways to expand output without hiring more workers in the US.  Through a combination of optimized supply chains, automation, and heavy reliance on temporary workers and consultants, firms are finding ways to expand the products and/or services they offer while reducing their payroll costs.  The recent healthcare reforms have added to the incentive to avoid hiring by requiring companies with more than 25 employees to provide healthcare coverage to their workers.   And as SMLR alum Linda Stamato notes in her latest Blog post http://blog.nj.com/njv_linda_stamato/2010/09/is_there_reason_to_celebrate_o.html),firms are using the leverage created by the presence of more than 5 unemployed workers for every vacancy to avoid wage increases, and in some cases, like Dr. Pepper subsidiary Motts, even pushing for concessions on wages and benefits because they have the power to do so, despite recording large profits.

Even those firms that are hiring are increasingly doing so in China, India or other parts of the world in which their growth is greatest, and where labor costs are significantly lower. IBM, for example, has reduced its US workforce by over 20,000 employees while rapidly expanding its Indian employee base, which will soon total 100,000 workers.  This combination of strategies, combined with low credit costs, has kept profits high.  But rather than reinvest the bulk of this surplus in R&D to generate new innovation or to hire new employees, Prof. Bill Lazonick’s research has shown that companies are buying back their own stock at unprecedented levels, in large part because this is the most certain way to ensure they meet the targets that will trigger large executive bonuses (Sustainable Prosperity in the New Economy: Business Organization and High-Tech Employment in the United States).   It is particularly disturbing when companies like Amgen, one of the pioneers in the research-driven biotechnology sector, are spending more on stock buy-backs than R&D.

The global shift in labor sourcing applies not just to multinationals, but also to new high-tech start-up companies that remain one of the US’s main sources of competitive advantage, as the New York Times reported last week (Once a Dynamo, the Tech Sector Is Slow to Hire ).  It is now difficult to get an IT start-up funded in Silicon Valley without a plan in place from the outset for what programming and other work will be performed in India and/or China, because venture capitalists recognize their investment will go farther if they can keep costs down in this way.  And our own research on early-stage bioscience start-ups in New Jersey shows that, well before these drug development firms have a product on the market, many are employing graduate-level chemists and biologists in India and China on R&D projects at one quarter of the US labor costs (https://www.novapublishers.com/catalog/product_info.php?cPath=23_29&products_id=7760&osCsid=33ffe76a005424dfe534e1b607e27a9f).

                It is not just employment, however, that is shifting within the key sectors for a 21st-century economy.  Increasingly, US firms are competing with companies from these emerging economies for industry leadership, and they are playing according to different rules.  I’m referring here not just to the differences in government policy – e.g. maintaining a low currency, providing cheap land and other subsidies – that have persisted despite China’s entry into the WTO, and helped it rapidly become a global leader in clean energy sectors like solar panels and electric vehicles (Union Accuses China of Illegal Clean Energy Subsidies ).  Rather, I draw attention to the less discussed factor that firms themselves are pursuing different objectives.  While US executives are focused on maximizing short-term profitability and “shareholder value,” Chinese firms are seeking to grow long-term market share and expand the amount of high-end work being performed in China.  This is particularly true of the approximately 130 large state-owned enterprises (SOEs) that dominate strategic sectors of the economy.  These are not the old SOEs that existed to provide employment, with little concern for product quality or global competitiveness.   Instead, these SOEs have been reinvented to work in tandem with China’s foreign policy of economic nationalism to win share in global markets.  As Financial Timesreporter Richard McGregor describes in a fascinating new book, The Party, while these firms operate predominantly according to market principles, the Communist Party retains ultimate control over key decisions through selection of key executives. See: http://www.harpercollins.com/books/The-Party-Richard-Mcgregor/?isbn=9780061998089.

                My comments are not intended to be critical of China; on the contrary, I greatly admire the rapid progress they have made in upgrading their economy and creating better opportunities for their citizens, in particular the huge investments that the government and families are making in education that will generate long-term returns.

In sum, it is difficult to see how the crisis facing current and future US workers will be reversed so long as both US and Chinese companies can optimize their own measures of success by moving jobs to China.

The next blogs in this series will share other observations from my visit to China and other key issues facing the US workforce.

Misperceptions that Matter

04/03/2011—Individuals often have misperceptions. For example, when I persuaded my family to move from Southern California to New Jersey five years ago so I could accept the deanship at SMLR, I knew we’d have less sunshine, but assumed it wouldn’t still be snowing in April.

Sometimes, though, the consequences of misperceptions are serious. For example, the average American – to the extent it is possible to talk about him or her in today’s diverse and polarized society – has an understanding of what constitutes a “safe and effective drug” that is radically different from the standard that the FDA applies when approving or rejecting a new drug application -- for the FDA “effectiveness” is judged by statistical probabilities, and “safety” recognizes that almost all drugs can have serious side effects.

Likewise, a majority of Americans (60-80%) oppose inheritance or estate taxes in spite of these facts: almost none of them will ever have to pay it; it is one of the most straightforward ways to address the sharp growth in inequalities in wealth in the US; the money it raises for the US Treasury is ten times what the Government is spending on retraining all US workers to provide them with new skills to cope with the challenges they face in a rapidly changing global economy. (For a good article that uses the estate tax as an example to show how US public opinion can be shaped by how an issue is framed, go to  The Political Uses of Public Opinion: Lessons from the Estate Tax Repeal).

This week I took part in the inaugural workshop of a new “Getting to Know Europe Business Forum” hosted by the Rutgers’ Center for European Studies (www. europe.rutgers.edu). The keynote speaker, Dr. Dan Hamilton, Executive Director of the Center for Transatlantic Relations at Johns Hopkins University, shared the latest data from his Center’s research that shed light on two important misconceptions about the US’s global economic relationships: (The Transatlantic Economy 2011
Executive Summary
).

First was that, while we tend to focus on the size of the US trade deficit, a far larger and more significant part of today’s global economy is foreign direct investment and sales of foreign affiliates. And second, that while a lot of media attention is focused on rapidly growing US trade and investment with China and India, the scale of our current economic relationship with Europe dwarfs that of our relationships with these emerging economic powers. A few data points help illustrate this:

  • US investment in the Netherlands is 9 times greater than its investment in China;
  • The value of US investment in Belgium is greater than its investment in India and China combined;
  • The EU invests more in New Jersey alone than the US invests in the whole of China, and this investment is responsible for the direct creation of 145,000 jobs and, indirectly, many more. 
At least two key lessons can be drawn from understanding these realities:
  • The US public has a vital economic interest in doing all we can afford to help avoid the collapse of the EU as it struggles with the sovereign debt crises of nations like Greece and Portugal, and, more worryingly their much larger neighbors, Italy and Spain.
  • When the US and EU can work together on an issue – whether it is military intervention in Libya or avoiding the collapse of the global financial system – then things tend to happen; where they don’t (like the failed talks on climate change in Copenhagen), then there is usually no progress.
Source: Center for Transatlantic Relations, The Transatlantic Economy 2011; Executive Summary

So it is vital that the US and EU, along with Japan as it recovers from the earthquake and tsunami, recognize their collective power, and come together to cooperate in ways that support their joint interests. To name just three good places to start:
  • restart the stalled Doha round of discussions on reform of the WTO and rules governing trade, investment, and labor standards;
  • reach a global accord on reducing greenhouse emissions;
  • introduce real reforms to avoid a repeat of the recent global financial crisis.