Labor Force & Industry Employment May 2007

Between April 2007 and May 2007, total nonfarm employment in Orange
County increased by 6,900 jobs.

• Construction posted a month-over gain of 2,000 jobs, led by advances in
  specialty trade contractors, which added 1,700 jobs.  Heavy and civil
  engineering construction and construction of buildings grew by 200 jobs
  and 100 jobs respectively.
• Leisure and hospitality also recorded an increase of 2,000 jobs.  The
  accommodation and food services sector added 1,300 jobs, led by growth
  in food services and drinking places, while the arts and entertainment
  sector added 700 jobs.
• Government reported the addition of 1,300 jobs.  Over 92 percent of the
  growth was concentrated in local government education, which offset minor
  job losses in the federal government and state government education sectors.
• Financial activities posted the only decline in a major industry group with
  the loss of 200 jobs over the month.  A gain of 100 jobs in real estate and rental and leasing was offset by the loss of 300 jobs in the credit intermediation sector.

Between May 2006 and May 2007, total nonfarm employment in Orange
County grew by 12,100 to reach 1,532,400, an increase of 0.8 percent.

• Educational and health services recorded the largest year-over gain with
  the addition of 6,600 jobs.  Health care and social assistance reported an increase of 6,100 jobs, with 52 percent of the gain in ambulatory health care services.  Educational services grew by 500 jobs.
• Government employment rose by 3,200 jobs.  Minor job losses in federal
  government were offset primarily by the addition of 2,700 jobs in local
  government, which accounted for 84 percent of the increase.  Local
  government education contributed the largest portion of the gain with
  the addition of 1,100 jobs.  State government added 600 jobs.
• Financial activities posted the largest year-over decline with the loss of
  3,400 jobs.  A gain of 1,200 jobs in the real estate, rental and leasing
  sector was offset by the loss of 4,600 jobs in the finance and insurance sector.  While the largest job cutbacks were concentrated in credit intermediation (down 3,200 jobs), the insurance sector also reported job losses (down 1,200 jobs).

Sources:  Employment Development Department, Labor Market Information Division press release, June 15, 2007 http://www.calmis.ca.gov/file/lfmonth/oran$PDS.pdf   

Top government statisticians now acknowledge that the problem exists, and say it could prove to be significant.  The short explanation is that the growth of domestic manufacturing has been substantially overstated in recent years.  That means productivity gains and overall economic growth have been overstated as well.  The underlying problem is located in an obscure statistic:  the import price data published monthly by the Bureau of Labor Statistics.  Because of it, many of the cost cuts and product innovations being made overseas by global companies and foreign suppliers aren't being counted properly.  And that spells trouble, because, surprisingly, the government uses the erroneous import price data directly and indirectly as part of its calculation for many other major economic statistics, including productivity, the output of the manufacturing sector, and real gross domestic product (GDP), which is supposed to be the inflation-adjusted value of all the goods and services produced inside the U.S.  The result?  Business Week's analysis of the import price data reveals offshoring to low-cost countries is, in fact, creating "phantom GDP" -- reported gains in GDP that don't correspond to any actual domestic production.

The new evidence is reported by Susan Houseman in her paper, �Outsourcing,
Offshoring, and Productivity Measurement in U.S. Manufacturing�, for the W. E.
Upjohn Institute for Employment Research.  She writes that employment in U.S.
manufacturing began declining steadily in the late 1990s, and the decline accelerated dramatically after 2000.  Manufacturing employment was 19 percent lower in 2005 than in 1998, even though manufacturing output was 10 percent higher.  One bright spot for U.S. manufacturing has been its extraordinary growth in productivity.  The rate of productivity growth in U.S. manufacturing increased in the mid-1990s, greatly outpacing that in the services sector and accounting for most of the overall productivity growth in the U.S. economy.  In a comparison with 14 other industrialized or newly industrialized countries, manufacturing productivity growth in the United States over the last decade was greater than that in all but two countries (BLS 2006, Table B).  These strong productivity statistics have been taken to imply that what remains of U.S. manufacturing is highly competitive in international markets and provides a solid basis for improvement of American workers� living standards.

The drop in manufacturing employment coincided with an increase in outsourcing
to domestic contractors, including staffing services, and an increase in outsourcing of materials and services inputs to foreign companies or affiliates, commonly known as offshoring.  Outsourcing and offshoring might plausibly result in higher productivity.  However, the coincidence of U.S. productivity growth with the growth of outsourcing and offshoring has also raised concerns that strong productivity growth since the mid-1990s, particularly in manufacturing, is misleading and its implications misinterpreted.  Most analysis focuses on labor productivity measures, which in U.S. manufacturing are defined as constant dollar shipments divided by hours worked by manufacturing employees.  When manufacturers outsource or offshore work, labor productivity increases directly because the outsourced or offshored labor used to produce the product is no longer employed in the manufacturing sector and hence is not counted in the denominator of the labor productivity equation.

According to Houseman, measurement of outsourcing and offshoring in U.S. statistics is poor.  Existing statistics greatly understate outsourcing by U.S. manufacturers to temporary help and related staffing agencies and thus misses much of manufacturers� extensive outsourcing to this sector in recent years.  Outsourcing and offshoring may significantly alter what is counted as a productivity gain. Companies often are motivated to outsource to domestic and foreign contractors or affiliates in order to exploit cheap (relative to their output) labor.  Although such cost savings do not accord with common perceptions of what constitutes productivity improvements, they are recorded as productivity gains in multifactor productivity calculations.

While any cost savings from outsourcing and offshoring are counted as
productivity gains, outsourcing and offshoring simultaneously place downward pressure on manufacturing workers� wages. Understanding the source of productivity gains is also important for understanding the implications of manufacturing productivity statistics for that sector as well as for the aggregate economy.  Whether productivity growth derives, from better-educated U.S. workers working more efficiently, from U.S. companies investing in high-tech capital in U.S. establishments, or from U.S. companies offshoring materials and services inputs to exploit cheap foreign labor no doubt matters for the long-term competitiveness of the of the U.S. economy and living standards of American workers.

http://www.businessweek.com/magazine/content/07_25/b4039001.htm

Outsourcing, Offshoring, and Productivity Measurement in U.S. Manufacturing

Upjohn Institute Staff Working Paper No. 06-130* Susan Houseman, W. E. Upjohn Institute for
Employment Research   http://www.upjohninst.org/publications/wp/06-130.pdf

The DeLoitte study entitled:  "Supply chain's last straw:  A vicious cycle of risk"
studied 25 leading global companies from various industries with combined
revenues of more than $1.5 trillion.  It found that not one of them was fully
prepared to handle or prevent these risks.  "The search for cheaper labor, cheaper raw materials, and cheaper transportation -- the quest for efficiency - has forced the focus of companies to switch from revenue growth to cost reduction," Deloitte said in the study.  "Individually, these forces have changed the world in which we live and conduct business.  But when combined, these forces can create a perfect storm of risk not seen before in the history of commerce or humankind," it added (as cited in the Bureau of Labor Statistics, Daily Report, Tuesday, June 5, 2007, CNNMoney.com http://money.cnn.com/2007/06/04/news/economy/supplychain_risk/index.htm?postversion).

"Modern companies are already being impacted by both well-known and newly
emerging threats that are more prevalent and destructive than ever before," the
report said.  "Today, companies must deal with systemic risk or S-Risk. It
could be post-9/11 security concerns; the Sarbanes-Oxley (SOX) mandate for accountability, especially concerning 409 reporting; the Internet, including real-time blogs and manufactured �news� stories that can ruin company credibility; pandemics that can spread like wildfire through global travel; nationalistic leaders who can close borders and markets in an instant; and technology that can speed operations or grind them to a halt in the event of a malfunction.  If one of these dangers materialized, it would be bad enough.  But nothing happens in isolation in an extended, interconnected supply chain.   

The potential for cascading, cataclysmic effects creates a perfect storm of risk
that could very quickly damage or destroy the brand value and operational proficiency that take most companies years to create. Ironically, it is the businesses that have been the most effective in their pursuit of a competitive advantage that are becoming the most vulnerable to emerging S-Risks that lie beneath the surface of the current business environment.  

China, the second-largest trading partner of the United States, presents a number of supply chain challenges, the study said.  "The road, air and rail transportation systems have trouble keeping up with global [supply] requirements," it said, noting that quality risks "can be significant."  What can be done?  Attention at the top level of an organization needs to be immediately focused on this issue.  Risks like those identified here occur in the normal course of operations.  �It isn�t a question of if they will occur, but when.  An experienced senior executive reporting directly to the CEO should be given responsibility for managing the S-Risk of the company�s operations and brands."

Ken Landis, a principal with Deloitte Consulting who worked on the report, said
�recognize that efficiency leads to vulnerability�.  �As companies move to lower
costs across the supply chain, at some point it'll become difficult to buy quality products, and history has shown that when you squeeze the supplier, they will skimp," he said.

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