10-06-2006, 04:15 AM
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Rutgers University
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Join Date: Feb 2004
Location: North Jersey
Posts: 1,310
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http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B984BDADB%2D4BC6%2D4B0F%2DBAAE%2D2CC966C369E1%7D&dist=WSJfeed&siteid=WSJ
Quote:
Going in for labor
Outsourcing not so lucrative when productivity factored in
MarketWatch
Last Update: 12:03 AM ET Oct 6, 2006
SANTA MONICA, Calif. (MarketWatch) -- The world is still round after all.
Despite New York Times columnist Thomas Friedman's widely embraced thesis that the world is flat because technology makes outsourcing and therefore globalization a breeze, a new Conference Board study shows otherwise.
The report released this week by the well-respected research organization best known for its consumer confidence index and the index of leading economic indicators, says the competitive advantages of outsourcing are in some cases completely wiped out due to low productivity.
"One critical lesson for businesses that benefit from one-time labor-cost benefits when investing in 'low wage' countries is that productivity gains from new technology and innovation have to keep pace with often fast-rising wages of skilled and semi-skilled workers or the 'cost advantage' begins to erode," says Bart van Ark, Director of the Conference Board international economic research program.
In other words, the comparative cost advantage of taking a business to low-wage countries such as China or India, where manufacturing costs are lower than in the U.S., are often not the giant bargain they seem when wages are adjusted for low productivity, according to the report.
It says this is also true of decisions to locate in Mexico, Central and Eastern Europe rather than in North America and Western Europe.
There are still some countries where it pays to work cheap. China and India are the best places to make goods, and "by far, the most competitive manufacturing nations in our sample," the study says.
Turkey, Hungary, the Czech Republic, Poland and Mexico rank from most to least competitive. In fact, after accounting for low productivity measures, Mexican workers cost almost as much as U.S. workers.
This should be a big issue for companies looking to exploit cheap labor in emerging markets: It doesn't pay.
The problem isn't so much manual efficiency as technology, the Conference Board says. "Companies can benefit from better use of technologies due to their exposure to international competition," it reports.
The test is for emerging economies to increase their productivity while at the same time keeping their wage costs low. The Conference Board gauges this by "unit labor cost."
Unit labor cost is defined as the average labor compensation per unit of output and is measured as the ratio of labor compensation per employed person (or per hour worked) relative to output per employed person (or per hour worked)
The U.S. has done a great job in managing its unit labor costs over the past 12 years, according to the Conference Board, widening its advantage over Europe and Japan "thanks not to lower wages but to continued higher productivity gains."
Still, it isn't an easy feat.
Japan, for example, has succeeded in restoring its competitiveness by bringing down its manufacturing wage costs below certain 2004 levels, which helps boost international competitiveness but has done little to spur domestic markets.
The report shows that the balance between wage and productivity gains is not just a challenge for emerging economies, but for all countries.
Ireland and Finland have better unit labor costs than the U.S. In 2002, 10 European countries were better advantaged than the U.S.
The Conference Board says the increase in Europe's unit labor costs between 2002 and 2005 is, in part, related to the rapid appreciation of the euro relative to the U.S. dollar and a drop-off in labor productivity in Western Europe.
Just when you think you have it figured out, the world reminds you that it's full of curves.
Take this: On average, the manufacturing sector in Central and Eastern Europe and Mexico pays between 10% and 15% of compensation paid in the U.S. In Turkey, the level is around 5%. The manufacturing sector in India and China only pays between 2% and 3% of the U.S. compensation level on average. But productivity levels offset this gap, bringing costs closer in line to what they would otherwise be if manufactured in the U.S.
For example, even with the huge disparity between the U.S. and Chinese and Indian manufacturing, the unit labor cost difference is only 20%.
That's certainly a lot, but not what you'd call a world apart. End of Story
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