A Good Dose of Drucker.

A common theme in the business press in the US and to a lesser degree here in Canada has been the persistent trend of large companies outsourcing jobs to India and other cheaper locales. As recruiters we don't like to hear about jobs disappearing. In the '80's we were fed a great deal of hysteria in the media about manufacturing jobs disappearing and the irreparable harm it was doing to our economy. 20 years later and our economy has suffered no ill effects but is it different this time.

Some pundits have suggested things are different this time and these are white collar jobs that we are losing. Are they right?

Whenever the media begins to make economic predictions a safe bet is to consult with someone who is clear headed, knowledgable and who has been right more often than wrong.

Such a man is Peter Drucker. At 94 Drucker is still going strong and as sharp as he has ever been. Fortune Magazine published an interview with him recently and Drucker had this to say:

The structure of the U.S. economy is remarkably different from what everybody thinks. Nobody seems to realize that we import twice or three times as many jobs as we export. I'm talking about the jobs created by foreign companies coming into the U.S. The most obvious are the foreign automobile companies. Siemens alone has 60,000 employees in the U.S. We are exporting low-skill, low-paying jobs but are importing high-skill, high-paying jobs

Wage cost is of primary importance today for very few industries, namely ones where labor costs account for more than 20% of the total cost of the product—like textiles. I don't know what proportion of the cost of a typical American product is attributable to labor, but it's a small and shrinking one. Take automobile parts. Because of my consulting, I happen to know the internal cost structure for one of the world's biggest auto parts makers. They tell me that it is still very much cheaper to produce in this country—or maybe in conjunction with a maquilladora plant along the Texas-Mexico border—than to import, because the parts, while labor-intensive, are also very skill-intensive to design and make. When that's the case, you're still better off producing in this country. So the belief that labor costs are a main reason for producing outside the U.S. is justified for only a very small segment of industry.

Consequently, the industries that are moving jobs out of the U.S. are the more backward industries. The U.S. remains the cheapest place in the world to produce for many of the more advanced industries. I say that not because our wages and salaries are so low. They aren't. But employee benefits are much cheaper than in Europe, and American workers are more flexible. I don't just mean you can move people out of accounting and into engineering here; I mean physically moving people from Chicago to Los Angeles. Don't you dare try that in Germany. They won't go. That's one of the absurd byproducts of their huge and restrictive employee benefits: It's cheaper to allow someone to remain unemployed in the Ruhr than to move him to Stuttgart for a real job. The same thing is true in Japan.

So what I call "invisible" costs are quickly beginning to be more significant than direct labor costs. These are pension costs, benefits and health-care costs, and especially something nobody has yet assessed, which I call "reporting" costs, which are basically associated with complying with regulations, taxation, labor relations requirements, and the like.

Rather than reproduce the whole article here (I have no wish for Fortune's Lawyers to contact me). I would encourage you to pick up a copy of the issue; it's the one with the "100 Best Companies to Work For" cover story. It is available online but only if you have a subscription. But hey there are worse things to do with your money. Trust me.

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