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Cheap foreign labour and its effects on domestic employment

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John Robertson

Companies investing overseas might not be damaging home country job prospects as much as popular opinion suggests.

U.S. 1992 presidential candidate H. Ross Perot famously referred to the "giant sucking sound" of U.S. jobs being drawn into Mexico because of the North American Free Trade Agreement. Since then, the phrase has been used widely to describe the loss of jobs from companies transplanting their operations to other countries in pursuit of cheaper labour.

The intuitive appeal of this argument rests on the assumption that the production potential of all companies is strictly limited. It supposes that companies have a choice between producing at home or producing the same output somewhere else. To the extent that they choose to produce elsewhere, the corresponding quantity of production at home and its associated employment is forever gone.

An article by Mihir A. Desai, C. Fritz Foley and James R. Hines entitled "Domestic Effects of the Foreign Activities of US Multinationals" was published in the February issue of American Economic Journal: Economic Policy. It suggests that the popular interpretation of the consequences of companies investing overseas may be wrong.

The paper analyses the relationship between the domestic and foreign operations of U.S. manufacturing firms between 1982 and 2004. The authors concluded, contrary to popular opinion, that corporate foreign investment activity brought benefits to the U.S. They inferred from their statistical analysis that:

According to this analysis, companies become generally more prosperous when they invest offshore bringing direct benefits to both the home labour market as well as the offshore labour market.

While this analysis has been based on U.S. data, it must also cast some doubt on sentiments echoed frequently in Australia about a loss of jobs here as a result of companies relocating their production activities to Asia.

The recent decision by clothing manufacturer Pacific Brands to transfer a substantial part of its manufacturing operations to China led to a media fuelled frenzy about shipping Australian jobs offshore based on a similar view to Ross Perot's that any gain to Chinese employment must come with a net loss of jobs here.

The immediate effect on the welfare of those people who lose a specific job when local factories are shut cannot be ignored. There are financial, emotional and social costs to be confronted.

Companies should be encouraged to implement policies which take account of the impact on individual lives of decisions to move factories whether offshore, interstate or to another suburb in the same city. They can be criticized legitimately for failing to fulfil such a basic obligation.

Against these immediate and obvious costs, however, are the benefits from companies successfully implementing a strategy which helps secure the long-term strength of the Australian economy.

There are implications for corporate tax and other policies from this line of research. If there are more benefits from cross-border corporate investment than we had previously anticipated, governments might need to rebalance their rhetoric and refrain from stoking the hostility which is accompanying companies taking commercial decisions that may be increasing the welfare of Australians.


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