the sweatshop reputation brought by allegations of forced overtime, child labor, and minimum wage violations in manufacturing plants in Vietnam, Mexico, and China, among others. But they were not the only ones adopting these practices. Even today, the majority of offshore manufacturing practices still leaves to be desired, despite the public’s attention and countless whistle-blowers, Maybe you’ve heard on the news or read in the papers about the suicides at Chinese electronic assembly facilities in Shenzhen,” he said, waiting to see if they knew anything about that.
“I think I remember seeing something,” Steve said. “They installed netting, right? To catch the jumpers? I remember struggling with the idea. That’s not how you prevent suicide, how you heal people. It can seem helpful at first, but it can’t be the only thing you do for the long term.”
Alex shuddered. How awful it must be to want to kill yourself rather than go to work another day.
“Correct. So the question is why would such corporations risk bad PR over this? The answer is very simple: for money. Let’s use a random example. Let’s say Company A used to make TVs in New Hampshire. The cost to make a TV in the United States with US parts and US labor was, say, $80. I’m just making these numbers up, you know. The company then sells the TVs at $100, with a 20% margin. The competition is fierce, and the consumers’ purchasing decisions are, unfortunately yet predominantly, price-driven. Now Company A has no choice but to take labor offshore, because the competition, an Asian brand, can afford to bring the TVs in at $90 per unit. They take their manufacturing offshore, fire their American workers, and suddenly, their cost is only $45 to make one TV. Two things happen at this point. One: they will sell the TV for $89, just barely coming under their competitor’s price, and by doing so, they drive their margins from the 20% in the initial phase, to almost 100% after offshoring. By doing so, they accumulate a lot of money that, in many cases, will end up invested offshore as well, in additional manufacturing facilities, instead of injected back into the local economy. The pricing wars will continue though, and the margins will erode somewhat over time. The second aspect is that they lost a few customers, because the employees who lost their jobs and their families won’t be able to afford new TVs anymore. Those employees won’t be able to afford many other things, such as cars, furniture, clothing, appliances, and so on. One by one, all these companies, the furniture store and manufacturers, clothing companies, everyone in the community will suffer because those TV manufacturing employees got laid off, and their jobs were sent to China. The local economy is shrinking. Then what happens?”
“More pressure on cost to compete in price-driven purchasing?” Alex ventured.
“Precisely. Soon enough, even if they wouldn’t have originally considered it, other manufacturers will be forced to drop their prices further, and the only way to do this will be to outsource some more.”
“But wouldn’t that ruin the local economy even more?” Alex asked. “It’s counter-intuitive, and somehow it’s the only way they can compete.”
“That is exactly what happens. The companies’ immediate survivals dictate that more and more of the labor is to be moved offshore, yet this labor export spirals the standard of living further into the ground, taking employment opportunities away from the American labor market. But here’s where it gets really interesting. You’ll hear reports every quarter stating that the economy had grown one, maybe two percent. The economy is not shrinking. The standard of living is dropping, while the economy still grows, albeit at a very moderate pace.”
“Why? How is this possible?” Alex asked.
“Do you remember Pascal’s Principle of Communicating Vessels? Early school science class?”
“Yeah, I do,” she answered. “What’s it got to do with the labor market?”
“Well, you can think of all these countries, including ours, as vessels filled with fluid. The fluid levels in them represent the standard of living, or the purchasing power, if you’d like to call it that. It’s the ability to purchase goods and services for the average individual working an average job. Obviously, before the age of outsourcing started, the United States had one of the highest fluid levels in all the world’s vessels. Do you agree?”
“Yes, absolutely.”
“Then we put our vessel in direct communication with other countries’ vessels, like China, India, the Philippines, and now our fluid levels are dropping, and