Saturday, July 9, 2011

The dynamics of the "Apple Economy"

One of the most intriguing and controversial dimensions of the globalization debate has been about the distribution of jobs and incomes in any industry between the host country and foreigners and among different categories of workforce in each.

In this context Greg Linden, Jason Dedrick and Kenneth L. Kraemer, who studied how the quintessentially American iPod has created jobs and profits around the world, have several interesting findings. Chrystia Freedland has a nice analysis of its findings here. The authors show that in 2006, the iPod employed nearly twice as many people outside the United States as it did in the country where it was invented — 13,920 in the United States, and 27,250 abroad. Of the foreign jobs, fewer than half, 12,270, are in China, and 4,750 are in the Philippines.

As regards salaries of these workers, the study shows that though most iPod jobs are external, the major share of total iPod salaries are in the US - the 13,920 American workers earned nearly $750 million, to less than $320 mn for the 27,250 non-American Apple employees. More stunningly, while more than half the US jobs, 7,789, went into low-skill retail and other non-professional workers (office support, freight, distribution etc) who earned just $220 mn, the 6101 engineers and professionals took home $525 mn.

This finding goes against the conventional simplified arguments against globalization that it causes job losses and reduces earnings for host country workers. The iPod economy is far more nuanced than such explanations. Since Apple is able to leverage the cheaper cost of production outside, its profitability increases. However, this profit is not widely shared. Since it keeps most of its R&D inside the US, its small number of higher skill workers reap a windfall. The same eludes the other non-professional workers in the US. Similarly, though workers in China and elsewhere gain jobs, their relative financial gains are marginal.

The biggest winners from globalization are the companies themselves, Apple in this case, and its scarce high-skill employees. It cannot also be denied that, despite their low financial value-added, workers in many emerging economies gain significantly. The big losers in the iPod economy appear to be the similarly skilled American workers who are outbid by the lower wage workers of emerging economies.

This forms further confirmation of the Samuelson-Stolper theorem which states that "unskilled workers producing traded goods in a high-skill country will be worse off as international trade increases, because, relative to the world market in the good they produce, an unskilled first world production-line worker is a less abundant factor of production than capital". In other words, labor intensive imports from developing countries exercises a depressing effect on the real wages of less-skilled workers (who are relatively less abundant in developed economies).

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