Despairing… progressively (II)

“Do not imagine, gentlemen, that in criticizing freedom of trade we have the least intention of defending the system of protection.

“One may declare oneself an enemy of the constitutional regime without declaring oneself a friend of the ancient regime.”

Karl Marx, “On the question of free trade”, speech to the Democratic Association of Brussels at its public meeting of 09/01/1848.

According to Linden, Dedrick and Kraemer (LDK henceforth), authors of the report “Innovation and Job Creation in a Global Economy: The Case of Apple’s iPod” higher profits and higher wages are the likely result of two factors acting simultaneously, namely innovation and free trade:

“To summarize, the iPod supports nearly twice as many jobs offshore as in the US, yet wages paid in the US are over twice as much as those paid overseas. (…) So it appears that innovation by a US company can benefit both the company and US workers, even if production is offshore and foreign suppliers provide most of the inputs.”

NOTE: The reader is advised to download that report.

That conclusion follows from these two tables, from the Executive Summary:

For instance, in LDK Table ES2, total compensation for US staff (US$ 783,803,828 million) more than doubles compensation for non-US staff (US$ 318,486,050 million).

Where do the data come from?
 
The question arises: where do that data, expressed with such precision, come from? After all, the authors themselves express in the methodological appendix: “The firms directly involved will not provide data, and we have found no systematic third-party source of data on employment by firm or by industry”.

This limitation is even more pressing for LDK who are dealing with data at an even greater level of disaggregation: a single product line.

Furthermore, as the figure below shows (taken from Wikipedia), Apple produces an extremely diversified line of goods, ranging from personal computers, computer peripherals, expansion cards, software, accessories and consumer electronics, directly and through contractors, all which  requiring a hard to precise workforce.

 

What’s more, LDK list 8 countries where iPod is produced (US, China, Philippines, Japan, Singapore, Korea, Thailand, and Taiwan), not necessarily in a single plant, performing different functions and being paid their own local wages.

Considering that Apple Inc. also needs to perform a series of corporate functions (R&D, marketing, software, and management) besides production, the problem of quantifying workforce and workforce compensation is formidable.

LDK approached the problem in the only manner that seems possible, given the circumstances: the data were generated by estimation, based on the number of iPod produced/revenue generated during 2006, regardless of their origin, on interviews and international production worker wages data compiled by the US Bureau of Labor Statistics.

Estimation, is easy to understand, involves a considerable amount of guess work. LDK are upfront about this: they report their methodology with considerable detail in the appendix.

Some estimates

It does not make sense to repeat their text here, and for the details, the interested reader is referred to the LDK report itself.

However, to give a flavor of the problems involved in producing their estimates, a brief outline follows, including comments on some of the assumptions used.

LDK estimated separately the number of jobs generated and wages paid.

As an example of the job generation procedure: 240 million flash memory chips were required for 30 million Nano iPods actually sold during 2006. A medium-sized factory, employing 1,200 staff, could produce that many flash memory chips (see the flash memory item, in LDK Table 1). Presumably in the US, around half a chip factory’s workforce is higher-paid staff, in management and engineering; the remaining are lower-paid production workers.

The same proportion is assumed for factories overseas: see the Korea item in LDK Table 2. This assumption seems somewhat questionable, it must be remarked, as R&D is performed entirely in the US. To put a concrete example, why would Foxconn, an iPod assembler located at Shenzhen require such a high proportion of engineering and managerial staff, if they only assemble components imported?

Regardless, the half/half distribution observed in US factories occurs under American workplace regulation for working conditions such as hours of work. Overseas, more “flexible”, labour legislation could result in different distributions.

The method described above (called “Factory Fraction Method”) is complemented by a second job generation method (“Revenue Fraction Method”), to estimate non-factory staff: in 2006, Amazon (one among other iPod retailers) sold US$ 1 billion worth of iPod, out of US$ 10,7 billion total revenue, employing 13,900 staff. Thus, LDK suggested, 1,300 Amazon equivalent-jobs were due to iPod sales.

This seems dubious and probably greatly overestimates the number of jobs created by iPod sales: to sell an iPod priced US$ 299, arguably, uses the same manpower as a much cheaper item, like a book costing US$ 10, but generates 30 times more revenue.

From LDK Table 2, one can see that up to 31% of the iPod generated jobs are classified as “retail and other non-professionals” and, thus, are quite sensitive to this assumption. Further: over 38% of those jobs are based overseas and do not benefit the American workers potentially displaced by outsourcing.

A number of assumptions are also made when estimating wages. For brevity, only one remark will be made here: “the 2006 hourly rates [used to estimate annual production worker income overseas] were annualized by assuming 2,000 paid hours per year” could be missing the mark by an order of magnitude.

At least in the case of Foxconn, The New York Times reported on 18/06/2010 that production line workers earn US$ 0.75 an hour, working up to 13-hour-long shifts, six days a week, for US$ 235 a month or US$ 2,820 a year. The yearly wage estimated by LDK is US$ 1,540.

In fact, the employee category where wage and employment numbers appear more reliable is engineering and other professionals.

Closing remarks

Researchers performing studies of this nature will inevitably make all sorts of assumptions. This is natural, unavoidable and understandable, although a great deal of prudence is required.

It is also natural, unavoidable and understandable that some of their assumptions will be questioned, as readers with different insights go through their work.

In this sense, Linden, Dedrick and Kraemer are to be praised for their effort in making their assumptions explicit.

However, if prudence is required when making assumptions, at least every bit as much is required when drawing conclusions from studies of this kind. Sadly, the conclusions drawn by Linden, Dedrick and Kraemer appear to make little allowance for these assumptions.

An example from LDK Conclusions:

“The relationship between innovation by US companies and employment in the US is more complex than phrases such as the ‘vanishing middle class’ suggest. When innovative products are designed and marketed by U.S. companies, they can create valuable jobs for American workers even if the products are manufactured offshore.”

From LDK Table ES1 is evident that little if any replacement jobs were created by iPod for production line workers left redundant by outsourcing: their very category all but disappeared and the next category where they could be readily employed (retail and other non professional), not only employs a minuscule number, at a much lower wage, but that number probably overestimates the actual number of jobs created.

It is certainly possible for younger ex production line workers to obtain qualifications that would allow them to climb up the corporate ladder. However, this requires an investment of time, effort and money, imposed upon them without their consent, which, even if they were able to undertake, would not guarantee them a better job.

But what happens to older workers, or those with personal attachments, who will not be able to start further training and qualification? And what about those workers who due to the colour of their skins, or their religion, or their place of birth cannot realistically aspire to anything better than that job and find now that it’s gone?

In sum: to the extent that those workers were once middle class, LDK own figures (however estimated) refute their conclusion.

Because of this, readers of that report should exercise caution and common sense, virtues which often seem beyond neoclassical economists or the general media.

Thus, it would not surprise that this particular Linden, Dedrick and Kraemer report (as opposed to other research carried out by these researchers) were uncritically endorsed by the openly pro-business media: after all, they cater for their readers and the corporations that advertise through them.

Against expectations, however, mainstream and business media made very little reference to this report, the only exceptions I could find were The New York Times (and its international edition, The International Herald Tribune), BusinessWeek and a few other minor publications.

In what follows, the reader will forgive me for using a more candid, personal, non-academic language; a language more suited to me, anyway, as I am not an academic.

I would have also expected a keen support, for ideological reasons, from well-known neoclassical economists. Surprisingly, only Hal Varian (who authored the The New York Times article) has mentioned this particular report, perhaps because it was not published in any academic journal, either.

A query on Google Scholar with the string “Innovation and Job Creation in a Global Economy” returned two results: a working paper housed at SSM and a French language paper, both of which seem critical to LDK conclusion.

Well known mainstream economists like Paul Krugman, who once proclaimed that globalization had no negative effect on lower income Americans, have recanted since and now not only admit they were wrong, but also explain why.

What’s really surprising and disappointing is that a self described progressive like Prof. Mitchell has embraced this myth, not taking even the time to evaluate the report. And let’s be crystal clear on this: it doesn’t take a rocket scientist to find those warts.

It’s this readiness to accept reforms affecting other people’s lives, without question, that troubles me.

A few days ago, I saw a quote attributed to Keynes that seems appropriate here. Talking about the reasons of the triumph of economic orthodoxy, Keynes is reported to have said:

“That it [economic orthodoxy] could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, [with] the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist,  attracted to it the support of the dominant social force behind authority.”

As a working class Australian, the reader will forgive me if I’m less than enthusiastic about Apple shareholders making big bucks on the misery of American or Chinese workers, because I can see myself, and the likes of me, following in their steps.

Neither am I excited about Apple’s management team doing well: for all I care, they could all go to hell. And they might yet go there, if you believe anything the report says.

But something positive came out of this: as a working class Australian, I’ve learned a lesson. We, the working class, the only we that includes me, are really alone. The Australian progressive intelligentsia is a myth, not too different from the Yowie and the Tassie tiger.

PS: The text appears to contain some typos. An example is the US Total compensation in LDK Table ES2, where the value shown does not correspond to the sum of the staff categories (see yellow cell in the Table presented at the beginning of this post and compare it to their version). Likewise, the figures cited in the text (under LDK Table 4) do not correspond to those shown in LDK Table ES2.