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In Every Nation for Itself: Winners and Losers in a G-Zero World, World Policy Institute Senior Fellow Ian Bremmer illustrates a historic shift in the international system and the world economy—and an unprecedented moment of global uncertainty.
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From the Summer Issue "Unchaining Labor"
By Phillip Brown and Hugh Lauder
The 2008 financial crisis wiped trillions of dollars off the value of the world’s financial markets, but it did little to halt the explosion in college education. Families from all walks of life and governments of all political persuasions embrace the idea that investing in a college education offers students a route to middle-class prosperity. Difficult economic times in much of the world only reinforce the myth that education triggers economic growth and resolves problems of inequality.
Meanwhile, China’s new leadership has prioritized expanding the rising middle class. The country is committed to becoming an innovation economy by 2020, driven by an expansion of higher education. In 2009, there were about 98 million college graduates in China’s workforce. By 2020, this figure is expected to rise to an astonishing 195 million. Every year, China is graduating almost three times the record number of college students graduating in the United States. Similar trends are evident in other countries as university enrollments around the world have more than doubled over the last decade. This vast mobilization of human learning is based on an educated guess—that past trends are a good guide to the future prospects for educated labor.
In emerging economies, it’s assumed that investing in what economists call human capital offers a chance to break into the global competition for jobs as companies look to reduce production costs in mature economies, along with the hope of moving up the value chain. In already affluent countries, it is seen as part of a decades—if not centuries—old process of technological upgrading captured in the idea of a knowledge economy. What matters is being able to meet the growing demand for knowledge workers and creating a thriving middle class.
Unfortunately, research findings challenge such optimistic accounts of the future of work. Since the late 1990s, we’ve been investigating the changing contours of the global economy, talking to corporate managers and executives, along with national policy advisers, in several countries including the United States, Germany, China, and India. The compelling conclusion to emerge from over 250 face-to-face interviews with these leaders, public and private, is that the relationship between education, jobs, and incomes is being transformed in ways that cast doubt on the traditional rhetoric that “learning equals earning” and the crucial role education plays in creating middle-class jobs. The assumption that the past will be a guide to the future is likely to be an error. The world has fundamentally changed, and the challenges now are how we can understand it and what we can do about it.
Our concern is not only explained by the rapid expansion of people qualified for jobs previously out of reach of those in emerging countries such as China, India, and Malaysia. It is explained by three further trends contributing to a global auction for jobs, which will create an unanticipated cut-price competition for brainpower that leaves many Western university graduates without the jobs or stability they’d been promised.
THE QUALITY-COST REVOLUTION
The low-road route and the high-road route to economic development have converged. A quality-cost revolution has driven this convergence that is under-cutting the value of a college education at the same time high-skilled workers in low-cost locations succeed in meeting global quality standards. This revolution now spans the length of the value chain, including jobs in marketing, design, management, and research. It’s a trend driven by the relentless search for lower cost workers.
We first became aware of the quality-cost revolution on a return visit to the engineering heartland of Baden-Württemberg in Germany. We had visited a leading automotive company back in 1999 and talked to a senior executive about changes in their global operations. When asked if they could make upscale models anywhere in the world, his response was an emphatic “No.” He explained that the quality of engineering required in the production of luxury models meant they could only be produced in Germany. When we returned several years later, we met up with the same executive and posed the same question. He gave us a quizzical look, not because we’d asked the question before, but because the answer today was obvious: “Yes.” They were already building their entire product-range not only outside Germany but in emerging economies as well.
We found the same story in a host of companies. In financial services, jobs including client research along with back office tasks like data entry, payroll, or invoicing are now commonly found in emerging economies. In Bangalore, a senior Indian manager working for an American investment bank told us they were no longer “doing those menial call center type jobs. It’s global work and that’s where we think we’ve been able to add a lot more value than what was initially expected, and that will continue.” In corporate law, a major global firm headquartered in New York has moved some of the work previously given to newly qualified lawyers in London or New York with an annual salary of $100,000 or more to law graduates in the Philippines, where the same work is done for less than $15,000.
As barriers to entering the competition for knowledge work melt away, it no longer makes sense to talk about a high road based on quality and a low road based on cost. Most companies need to take account of both if they are to be competitive. At the same time, companies have greater flexibility in the way they organize global value chains. Many operations we only thought could be done in the West can now be done in other parts of the world for less, and sometimes better. It has also opened the door for Chinese and Indian companies to extend their global reach by using their cost advantage to undercut Western competitors higher up the value chain.
The quality-cost revolution is turning the business world inside out. At an electronics plant near New Delhi, televisions for the domestic and international markets, using the latest production technologies, were rolling off an assembly line while within its shadows in a nearby slum, two men were trying to balance industrial cable on an old bicycle en route to a construction site. Emerging economies are poised on the cusp of an unprecedented opportunity to leapfrog decades of changes in technologies and business practices.
One taxi driver in Mumbai told us on the way to the airport that he’d like to shake the hand of the person who invented the mobile phone. It had transformed his world. Innumerable entrepreneurs, companies, and government officials are finding their universe transformed as well, since it’s no longer necessary to invest in expensive cabling in homes, villages, offices, towns, and cities. Instead, mobile phone masts or base stations can be installed for a fraction of the price. But at the same time, rapid economic development based on these new paradigms inevitably creates winners and losers. Today there is little economic need for all boats to rise, so long as those connected to the global economy are meeting corporate quality standards at an appropriate cost.
This abrupt challenge to the Western conceit that it will do the thinking for the world is only part of the story. The global distribution of knowledge work needs to be examined alongside trends in the demands for skills and quality demanded in a range of tasks. The Internet was meant to raise the prospects for creative work. The rhetoric of the knowledge economy led to a focus on innovative products and creative industries, highlighting the demand for clever people exploiting clever ideas. Conventional wisdom describes a world of work where those with a college education are in increasing demand as knowledge becomes the key to corporate success. But at the same time, it has given company managers and executives new powers of command and control that Fredrick Winslow Taylor, who laid the foundation for scientific management and mass production over 100 years ago, could only have imagined in his wildest dreams. New technologies have increased the potential to translate knowledge work into working knowledge, leading to the standardization of an increasing proportion of technical, managerial, and professional jobs.
This is our second trend that reveals how companies and the cash-strapped public sector across the United States and Europe are attempting to reduce costs and increase control through a process we call Digital Taylorism. The same processes that enabled cars, computers, and televisions to be broken down into their component parts, manufactured by companies around the world, and then configured according to customer specifications, are being applied to any job that doesn’t depend on face-to-face interaction with customers. If the 20th century brought mechanical Taylorism—mass production where the knowledge of craft workers is captured, codified, and re-engineered in the shape of the moving assembly line by management—the 21st century is the age of Digital Taylorism. This involves codifying, standardizing, and digitizing knowledge into software prescripts, platforms, and packages that can be transmitted and used by others regardless of location.
We shouldn’t be surprised by this trend. If knowledge is the new source of wealth, then it’s not much use to companies if it’s locked in the heads of employees who can sell it for a higher salary to a competing firm. The benefits of global value chains are limited unless the same software and systems are aligned across global operations. This is why Suresh Gupta from Capco Consulting foresees the arrival of the financial services factory. As soon as banks or insurance companies begin to break tasks down into a series of procedures or components that can be digitized, it gives each more global sourcing options. Tomorrow’s banks would look and behave no differently than factories.
This is exactly how it felt to one business relations manager at a leading British bank. His discretion over the amount of money he could lend to his clients was removed when the bank introduced new IT systems around 2005. The bank previously respected his expertise and judgment in making decisions, but loans are now authorized by a software package that automatically assesses a loan application according to standard criteria. Only in appealing the software’s judgment does the manager have a role, but even in these cases, he is often overruled. From a position of authority and respect, he now describes himself as a salesperson, armed with a series of software manuals instructing him how to sell particular kinds of products, which means that, “a junior with a ready smile could now do my job.” He is not alone.
A human resources manager from Bangalore with many years of industrial experience at a major American high-tech company says, “The presence of Digital Taylorism can’t be overstated, because it is happening everywhere. All your call center jobs or your business processing that happens is typically Taylorism in a more digitalized world. There are only five or six things you have to answer, and they’re on your system, and you don’t customize anything. … This is true of all kinds of jobs today in India. … Much of the work is very much like an assembly line.”
This is why some of the leading IT consultants are able to take on as many as 10,000 university graduates a year. The source codes where the software is built—not unlike the secret formula for Coke—are strictly controlled by the company, and like digital Legos, can be combined in different ways to develop new software. Or as the chief operations officer for a major telecommunication company suggests, “We need fewer fighter pilots and more drone operators.”
Finally, we need to understand how companies respond to having a more highly qualified workforce. With more people attending college both at home and overseas, the rhetoric of the knowledge economy would have us believe that companies would respond by moving up-market to take advantage of this new wealth of human capital. Indeed, the promise of the knowledge economy rests on the view that it will lead companies to create more middle-class jobs offering higher wages as educated workers contribute more to corporate profits. If we think about the job market today, we quickly understand that companies confront a major problem when a large proportion of potential hires expect their earnings to match their learning. In the old days, rising wage costs were passed along to consumers. But in competitive global markets, and with a greater emphasis on shareholder value, companies are seeking ways to cut the costs of educated labor while retaining the people they need to innovate and drive their business forward.
Just as students and their families are being asked to pay more for a college education, the relationship between learning and earning is being called into question by the business community. Leading consultants argue that we need a different way of thinking about productive contribution, because education is not synonymous with productivity. Despite an apparent wealth of talent, many companies in our study talked of a perennial “war for talent” as they struggled to attract, hire, and retain recruits promising high potential or who are already top performers. These people are believed to add much of the value to the bottom line. So the few deemed especially talented are treated and rewarded differently from the rest, including many with a college education.
Today, when companies talk about talent management or knowledge management, it usually involves new ways of segmenting or stratifying their workforces based on performance and function, rather than credentials, experience, or expertise. This is driven by an attempt to reduce the cost of knowledge work, while retaining what they perceive as top talent—those who will continue to enjoy permission to think for a living. At the same time, many others who may still have middle-class job titles such as the ubiquitous “manager” are constrained in how they conduct their work, following tightly controlled performance targets, using diagnostic software dictating what actions to follow, or, in the case of teaching, what curriculum content to deliver to students.
Concerns about hiring the next generation of talented employees have also led companies to gravitate toward global elite universities, because they are believed to attract the best and brightest. The head of human resources for a major global bank is in no doubt why her company sets the bar that way. They are not “selling anything but our brainpower,” so “we are very keen to get the best talent, so we go after the elite. … In other words, we want to get the top half percentile of university students. … We’re not interested in the rest.”
This assumes the best people gravitate toward elite universities—a view actively promoted by leading universities given that higher education itself has become a global business. The branding of universities and faculty members is integral to the organization of academia. Claims to world-class standards depend on attracting the most renowned academics and forming alliances with elite universities elsewhere in the world, while recruiting those perceived to be the right kinds of students. Universities play the same reputational games as companies—in both cases a logical consequence of global market competition.
THE GLOBAL JOBS AUCTION
Most governments around the world have bet that education and skills will deliver rising living standards in a Sotheby’s style auction. But simply increasing the stock of skilled individuals is not going to be enough to create middle-class jobs. The global auction thrusts a stake through the heart of the opportunity bargain based on the concept of “learning equals earning,” splintering the middle classes. For a lucky few, often from very privileged backgrounds, the global auction will remain in forward gear as their investments of effort, time, and money will be handsomely rewarded. But most others, including those with a college education, will struggle to achieve the trappings of a middle-class lifestyle, with shrinking paychecks, longer working hours, inferior retirement provision, reduced health care coverage, declining career prospects, and greater job insecurity. In this cut-price competition of brainpower, workers will be forced to do more for less.
The same mixed fortunes are even more pronounced in countries such as China and India, who may be thought to be winners in the global jobs auction. These countries are characterized by extreme forms of uneven development even in the same zipcode. While some Chinese university graduates have never had it so good, others have been involved in riots as an expression of their frustration at being excluded from the Chinese economic dream. In India, almost a third of the population continues to live in abject poverty.
The stark reality is that while the global labor market may narrow some aspects of global inequalities, it has contributed to widening domestic inequalities. How the global auction plays out in countries such as Britain, China, India, and the United States will vary depending on national context, including systems of education and skill formation, labor market policies, occupational structure, and wider political economy, including the capacity for industrial policy. Hence the key question is how policy makers should respond.
Given the huge budget deficits in many Western countries, it is not surprising that the primary focus is on deficit reduction and reigniting economic growth. The policy initiatives now being pursued, however, are unlikely to succeed. They’re based on the mistaken assumption that developed countries will eventually return to business as usual. But there is no return to the days before the 2008 financial crisis. The world economy is being transformed in ways that undermine the neo-liberal assumptions about education, employment, and income. Countries, including Britain and the United States, can no longer respond to the global auction by continuing to stake everything on supply side solutions resting on education and skills training. An alternative policy response must begin by acknowledging the death of human capital (at least in the way it has been understood by policy makers).
This does not mean education is unimportant even if it’s not the source of the same competitive advantage it used to be. Recent evidence from around the world shows that it’s relatively easy to build a system of education based on a high stakes standardized competition. It’s much more difficult to create (or copy) a system that builds the capacity for individual growth and experimentation as envisioned by the American philosopher John Dewey and others. Radical reform is needed in the classrooms of Europe and the United States, still based on a factory model of batch learning, standardized assessment, and teaching to the test. This does little to develop the employment and life skills needed for the future.
Even something as basic as teamwork is discouraged as cheating despite being highly valued in the workplace. Divergent thinking and problem solving skills still are mission critical with respect to future innovation and business development, but a grade-obsessed education system is turning inquisitive children into acquisitive adults. It is not by chance that Bill Gates, Paul Allen, and Steve Jobs dropped out of formal education. They were inquisitive in ways that the paper chase does not recognize. Equally, failure is the essence of innovation. Through trial-and-error, people learn from mistakes and move on. But in a high stakes competition the risks are simply not worth it as parents constantly encourage their offspring to stay in the game by going for top grades.
Basil Bernstein, a well-known education sociologist, observes that education cannot compensate for society. Education mirrors the wider society. Therefore the success of educational reform depends on labor market reform as it sets the agenda for students and their parents. It depends on creating a broad range of middle class jobs that offer decent prospects and standard of living, rather than winner-takes-all job markets in countries such as Britain and the United States. The global auction doesn’t make this task any easier.
RE-BALANCING THE ECONOMY
A key question is how to create good quality jobs for an increasingly skilled workforce. Claims such as those of Gary Becker, a Nobel Prize-winning economist, that the “best industrial policy is none at all,” now look dangerously complacent. When we look at economies that have engaged in active industrial policies, including Singapore, South Korea, Denmark, Germany, and China, we see different ways of organizing economic policy and the advantages that smart industrial policies can bring. Indeed, any willful neglect of industrial policy can now be seen for what it is—a political decision that has little to do with the workings of an advanced economy.
Recently, faith in the idea that anyone with a college education could become a knowledge worker has largely been abandoned in the developed economies, unsurprising when the Great Recession left almost a quarter of young people between the ages of 16 to 24 unemployed in the European Union and United States. This masks huge variations both within and between nations, with youth unemployment in Spain hovering above 50 percent. In response, some students are lowering their sights, thinking of two-year colleges, while policy makers search for green shoots. There has been a rediscovery of the importance of manufacturing, along with new hope of repatriating offshored jobs. As median incomes fall in the United States and across Europe, the cost advantage of relocating less valued activities to the richer parts of China or India are less compelling.
Western economies can’t avoid low-cost competition or the realities of Digital Taylorism, yet there remains the potential to build a new skills base by combining manufacturing and services. In the United States, manufacturing jobs have a multiplier effect on service sector employment with estimates ranging between 2.9 and 4.5 related employees created for each manufacturing job. But if we are to mitigate the effects of the global auction, manufacturing and service need to integrate in new ways. Major American and British engine manufacturers in the aerospace industry now sell service contracts rather than simply engines, spreading costs and profits over many years, while making it difficult for other engine manufactures to break into the market. It’s this integration or re-composition of a range of business activities previously divided into distinct sectors that offers a source of competitive advantage base on the embedded capabilities of the workforce, that are difficult to copy, standardize, or offshore.
In characterizing Digital Taylorism as a new form of digital Legos, it’s instructive to see how the Lego company itself responded to low-cost competition, given the simplicity of manufacturing interlocking blocks of plastic. Niels Nielsen and his colleagues in a study for the Danish Technological Institute describe how information and computer technologies are being built into some of its products along with building online communities of different kinds of Lego users, including the use of crowd sourcing to encourage co-developers to present new ideas. California alone now has over thirty Lego Creative Child day care centers as the company moves into selling Lego educational kits and toolboxes. This extends the embedded capabilities of the company and its workforce into new areas of activity enabling the company to expand its skills base and maintain decent incomes for its employees.
The same integrated approach to manufacturing and services can be applied across the economy including the development of green industries that typically involve recomposing and integrating industrial skills such as in agricultural production and organic crop development. Here the role of small- and medium-sized companies is crucial, as they create local employment. So instead of thinking of national champions of a previous age, we need to focus on the champions of tomorrow and the way they integrate manufacturing and services. The market alone will not produce these firms. They need the judicious support of industrial policies on a government level.
This is not the kind of industrial policy where money is thrown at companies in tax breaks and other financial incentives that simply extend the reverse auction from individuals to neighborhoods in a race to the bottom. It requires the trained capacity of civil servants to engage as a business partner in coordinating economic activities. Each requires a detailed understanding of new convergence in industrial sectors linked to skill sets such as the growth of mechatronics in the automotive industry or the combination of bioscience and digital technologies in medical biotechnology.
Above all, such policies need to provide financial support, capacity building, and business networks for small and medium sized companies (SMEs), which often struggle to find the resources to make the leap to competing in larger markets. In Germany, concerns that not enough companies are competing at the cutting edge of innovation led to a cluster competition. Consortia of universities, companies of various sizes, and vocational training institutions
competed for significant federal funds to develop new ideas and products. The competition is judged by a panel of policy makers, academics, and business people with awards made in fields including logistics, biomedical, information, and telecom. This competition exhibits the principles of integration and networking across sectors, firms, and educational institutions, as we are advocating, while building the capacity for SMEs to grow into national champions.
The policy response to the global auction starts from its fundamental offer of new opportunities to drive national economic growth through building a skilled workforce with a lower cost base than traditional developed economies. A desire to compete higher up the value chain requires a new kind of industrial strategy, while identifying links within corporate global value chains as new sites for offshoring into the domestic economy.
A major challenge is how to respond to the inside-out business model that can lead to growing tensions between the haves and have nots. A senior policy-maker in India describes those on the outside of economic development as “explosive material” that could threaten broad social stability. Part of this challenge is to expand islands of production so that foreign direct investment can be harnessed to develop local businesses and wider job opportunities. It has often been assumed that national interests and those of transnational companies coincide. They may, as a marriage of convenience, but often companies are on the lookout for attractive and cheaper options. Winning investment—and jobs—from these companies should be seen as a first step to indigenous capacity building.
A leading economist in China describes foreign companies as his nation’s teachers. At the same time, China gains jobs from investment. It uses these companies to benchmark its business practices and managerial skills against the best in the world. In turn, this allows Chinese companies to move from being the world’s factory to become global innovators—competitors for profits previously monopolized by Western companies. Of course, China’s power also enables it to operate a deliberately lax intellectual property regime so that foreign corporations are forced to transfer knowledge to local companies. Smaller countries do not have the same market power to impose their will on global companies. But the economic rise of Singapore shows that it can be done. It started with a clear vision of improving the living standards of all to be delivered by a civil service of highly trained and well-paid professionals given the need, as one senior policy adviser told us, “to be smarter than the smartest captains of industry.”
The global auction has pushed the labor market to the heart of a titanic struggle transforming the relationship between education, jobs, and incomes. The outcome will depend on political leadership. When a country is at war, differences in wealth, education, or race are ignored as everyone pulls together for the good of the nation. But the global auction does not lead to a common cause. There are winners and losers pulling in different directions. Building a political consensus on sustainable economic growth for a shared prosperity will not be easy. But the alternative is to auction the future of work to the lowest bidder.
Phillip Brown is a distinguished research professor at Cardiff University in Wales. Hugh Lauder is a professor of education and political economy at Britain’s University of Bath. Together with David Ashton, they are the authors of The Global Auction: The Broken Promises of Education, Jobs, and Incomes (2011).
[Photo Courtesy of Pankaj Kaushal]
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