Sunday, Aug. 3, 2014 | 2:03 a.m.
Historically, unemployment in the U.S. has been a short-term phenomenon. Most of the unemployed found work relatively quickly. However, as the Great Recession took hold, the level of unemployment rose to double digits; it since has dropped to 6.1 percent as of June.
Also, the quality of jobs created in the U.S. has deteriorated. Blue-collar jobs in manufacturing and white-collar jobs for highly skilled workers have been painfully slow to return.
The vast majority of job creation has been in the services industry. Manufacturing has been a backbone of the high standard of living in this country, but we have lost much of that industry.
There are two major reasons for the offshoring of U.S. jobs to foreign countries: free trade agreements coupled with a low wage structure offered by many foreign countries, and the U.S. corporate tax structure.
The U.S. is now a party to 14 free trade agreements. Notable among them are the 1985 North America Free Trade Agreement and the 2005 Central America Free Trade Agreement. These agreements were intended to reduce tariffs, quotas and other trade restrictions among the signatories.
The U.S. aimed to promote the export of American products and expand the U.S. economy. For example, NAFTA made it easier for U.S. manufacturers to shift production facilities from the U.S. to Mexico to take advantage of low wages. This trend later shifted to China, with China’s accession in 2001 to the World Trade Organization, as it offered lower wages, few workers’ rights laws, a fixed currency pegged to the U.S. dollar, factories for new companies and few environmental regulations.
India, which also became a member of the WTO, benefited from the offshoring trend as it has a large pool of English-speaking people and technically proficient workers. India’s offshoring industry took root in low-end software jobs in the early 1990s and since has moved to high-value-added jobs. Because of the talented pool of technical workers available in India and China, U.S. companies offshored even basic research-and-development jobs, which used to be reserved for U.S. workers.
However, the free trade agreements benefited the other countries much more than the U.S. The present high level of unemployment in the U.S. is attributed to offshoring. It is estimated that in the Great Recession, as many as 300,000 jobs per year have been offshored.
Initially, many U.S. companies were reluctant to move leading-edge technology needed for manufacture to China and India because of lax enforcement of intellectual property laws. However, these fears were sidetracked because of the low corporate taxes offered by the foreign countries.
U.S. corporate tax policies have an influence on offshoring U.S. jobs. The U.S. was the first nation in the world to implement a research-and-development tax credit in 1981. It now ranks 27th in the world in terms of tax incentive generosity. Also, U.S. corporations face the highest corporate tax in the world at 39.1 percent compared with Ireland at 12.5 percent, China at 20 percent, Poland at 19 percent and the U.K. at 23 percent. U.S. CEOs consider taxes as the top business threat.
U.S. corporations with global operations are allowed to defer taxes on their foreign profits. Under U.S. law, companies are not required to pay U.S. tax on their foreign subsidiaries’ profits until the earnings are returned to the U.S. To avoid paying high taxes, many U.S. multinationals do not repatriate their foreign profits.
It may appear that the executives of U.S. corporations have no moral compass. However, by creation, corporations are capitalistic entities. The job of a corporate executive is to maximize profits to the shareholders.
The U.S. job market will not be healthy until changes are made to address the problems that affect our economy. The underlying problem is the lack of policies to incentivize U.S. businesses to create jobs in the U.S.
The U.S. should restore the research-and-development tax credit to reasonable levels in the 20 to 30 percent range, which would encourage businesses to invest in research and development in the U.S. as well as worker skill development. Going forward, the U.S. should lower the corporate tax rate to the low 20 percent range to be competitive with the rest of the developed world.
To motivate multinational companies to repatriate the money that they sheltered abroad, a one-time conditional tax holiday should be offered. The condition is that in return for repatriating the foreign profits tax-free, the companies should agree to reinvest that money to build the necessary research-and-development centers and manufacturing facilities, and create high-paying jobs in the U.S. combined with the necessary training in skills development to equip workers to handle such jobs.
With a judicious enactment as well as enforcement of such a policy, the jobs that moved offshore can be brought back to our shores.
T. Rao Coca, Ph.D., J.D., is a consultant and a former vice president of IGT and an executive at IBM. He lives in Henderson.