Explode the Myths of Global Competition

In today's global economy, any job can be performed anywhere. In order to compete in a global labour market, all students in advanced industrial countries need to be highly trained in science and mathematics. In order to compete in the global economy, the advanced industrial nations must downsize generous welfare states.

The above represents something like the conventional wisdom about the global economy, the future job market and the welfare state. There is only one problem: every assertion in the preceding paragraph is wrong.

Let us start with the first assertion: "In today's global economy, any job can be performed anywhere." This is false or, at best, only a half-truth. All economies, even very open ones, have both a traded sector that is exposed to foreign competition and a non-traded sector that is insulated from it. Manufacturing and agriculture tend to be in the traded sector. A growing number of services, from accounting to telephone operations, have been outsourced as well. But according to a recent study by the McKinsey Global Institute, only about 11 per cent of the world's service sector jobs can be performed remotely. Most services, such as home construction and hospital care, must by their very nature be provided by workers in the same location as their customers.

In advanced industrial economies, the number of workers in the traded sector exposed to foreign competition tends to diminish over time. When an industry in the traded sector outsources, unemployed workers tend to get new jobs in the non-traded domestic service sector. Workers in the non-traded service sector, such as nurses, may face competition from immigrants for jobs in the national labour market but they are not competing with foreign workers in a global labour market.

This brings us to the second misconception: "In order to compete in a global labour market, all students in advanced industrial countries need to be highly trained in science and mathematics." This, too, is false.

According to the US labour department, the 10 fastest-growing occupations in the US in 2002-2012 are the following: "medical assistants; networks systems and data communications analysts; physician assistants; social and human service assistants; home health aides; medical records and health information technicians; physical therapist aides; computer software engineers, applications; computer software engineers, systems software; physical therapist assistants." The future job outlook in other industrial democracies with service economies and ageing populations is similar.

It is true that four out of 10 of the fastest-growing occupations require proficiency with computers. But many of these jobs are vulnerable either to outsourcing or advances in automation. By contrast, the work of medical assistants, home health aides and physical therapists cannot be outsourced or performed by machines, barring radical advances in robotics. In the foreseeable future, nurses will outnumber computer technicians in the US and similar countries. It is absurd to tell the nurses of tomorrow that, in addition to being literate and numerate, they need to study trigonometry in order to compete with Indian and Chinese rivals.

If particular nations can benefit disproportionately from technological progress, then it may be wise for governments to promote education and employment in scientific and technical fields. But scientists and engineers will never be more than a minority of the workforce in any country, and it is highly misleading to suggest otherwise.

The third misconception about global competitiveness is this: "In order to compete in the global economy, the advanced industrial nations must downsize generous welfare states." The premise is that generous welfare states prevent high-wage countries from competing with low-wage countries such as China and India in traded-sector industries. But scaling back or abolishing the welfare state would do nothing to make the workers in a rich nation's traded sector better able to compete with labour costs in the developing world, unless workers were willing to work for Indian or Chinese wages.

Far from being handicapped by big government, the countries with the world's biggest welfare states are flourishing in the global economy. According to the World Economic Forum's Global Competitiveness Report, the most competitive economies in the world are, in order, Finland, the US, Sweden, Taiwan, Denmark and Norway. Government consumes around half of gross domestic product in all of these countries, apart from Taiwan and the US, where the combined federal-state share of GDP is slightly more than 30 per cent. (The US government share of GDP is much higher when tax deductions and exemptions for public purposes are counted.) What is more, on a per capita basis from 1990 to 2002, Sweden and Finland had the same 2 per cent growth rate as the US.

The truth is that the scale and scope of national welfare states is far less constrained by the global economy than many believe. Whether a country has a generous or stingy welfare state depends chiefly on its internal politics and traditions.

It is time, then, to replace the conventional wisdom. In the 21st century, most workers in advanced industrial nations will work in the non-traded domestic service sector. Most will not compete with workers in other countries. And a generous welfare state need not be a hindrance to competitiveness. These statements are not as familiar as the platitudes that make up the conventional wisdom. But they happen to be true.