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Archive for September 4th, 2007

Manufacturing Productivity Growth… Numbers Are Inflated By… Offshore Outsourcing

Posted by ecoshift on September 4, 2007

Manufacturing Productivity Growth… Numbers Are Inflated By Cost Reductions From Offshore Outsourcing

BY RICHARD McCORMACK
richard@manufacturingnews.com

The federal government’s measure of productivity growth of the U.S. manufacturing sector during the past 15 years may be widely overstated due to outsourcing and the shift to offshore production of goods, according to a study from the Upjohn Institute for Employment Research. Productivity measures do not account for outsourcing and offshoring and are, therefore, “misleading,” writes Susan Houseman in a study entitled “Outsourcing, Offshoring and Productivity Measurement in U.S. Manufacturing.”

“Productivity growth is the basis for improvements in workers’ standard of living,” Houseman writes. “Yet, widespread improvement in American workers’ wages has not accompanied the rapid growth in measured U.S. productivity. Outsourcing and offshoring may help explain some of this puzzle.”…

“While economic theory holds that improvement in a population’s standard of living is directly tied to its productivity growth, one of the great puzzles of the American economy in recent years has been the fact that large productivity gains have not broadly benefited workers in the form of higher wages. A better understanding of what our productivity statistics actually measure potentially provides some answers to this puzzle.” Houseman says that her findings provide “a direct link between productivity measurement, offshoring and inequality.”

Productivity improvements from offshoring “may largely measure cost savings, not improvements to output per hour worked by American labor,” she writes. “Productivity trends may be an indicator not of how productive American workers are compared to foreign workers, but rather of how cost uncompetitive they are vis-à-vis foreign labor. Although the productivity numbers may capture some net gains to the American economy from trade, there is no reason to believe that these gains will be broadly shared among workers. The very process of offshoring to cheap foreign labor places downward pressure on many domestic workers’ wages and simultaneously increases measured productivity through cost savings.”…

“If Cisco outsourced the R&D development to China and actual work hours were measured as labor input, labor and multifactor productivity would fall. However, because the Chinese contract labor is treated as a separate input and weighted by its cost share, multifactor productivity measures would increase.”

— Susan Houseman, Upjohn Institute for Employment Research, “Outsourcing, Offshoring and Productivity Measurement in U.S. Manufacturing,” Revised Edition Feb. 2007″

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