Global Crisis/Innovation Blog

Those High-Paying Manufacturing Jobs? 

No, Get Real, They Aren’t Coming Home from Asia

By Shlomo Maital

 London School of Economics economic historian Tim Leunig, writing in the Oct. 30 Financial Times issue, has bad news.  Those high-paying manufacturing jobs that migrated to Asia?  The ones politicians like to dream about bringing back home to the West? (“Reshoring”, or reverse offshoring).  They’re not coming back.

   Here is why.

*   The reason China is eating the West’s lunch, the reason its exports are so highly competitive, is NOT primarily because of its undervalued renminbi, as America loves to claim almost daily.  It is because its labor productivity has risen by an average of 10 per cent a year for two decades!  That means that labor productivity in China has doubled three times, and is now 8 times higher than it was twenty years ago!  It is not that China’s wages are so low ($2/day in many cases), but that its productivity is so high relative to those wages.   Labor productivity in the West has risen very slowly in the same period.

* Suppose that China’s wages DO rise.  They will then lose competitive advantage, and lose some of the manufacturing jobs, right?  But to whom will they lose them?  UK?  USA?  No. They will lose them to the new tigers, to Vietnam, for instance, eager to move in to the manufacturing value chain in places where China is moving out of, moving up from.   

* And suppose manufacturing DOES come home to the West, in part.  Manufacturing has become extremely productive in its process technology and modern plants employ relatively few workers.  Leunig says that even if America got ALL of China’s manufacturing, it would still only reduce unemployment by about 2.75 per cent.  And that, of course, is an utter pipe dream.

   No, reshoring won’t happen.  So what we need to do, is marshall our creativity and innovation to become better in doing what we do now in the West, which is services – an area where productivity has lagged badly, because, for some reason, nobody thinks it is important.  This, despite the fact that process innovation is proven to be far more profitable, and far less risky, than product innovation.