The Economics Of Brain Power

Is Economics a matter of opinion?

Well, we do our best not to make it as such, but then politicians come around and ruin pretty much everything we do. For instance, the recent stats of economic indicators showing a progressive slowdown of the economies in North America has gotten politicians of all colors, shape and form up in arms and crying out loud that both the United States and Canada are losing not only jobs, but indeed also talented people to the emerging economies.

Recently released figures from the Bureau of Labor Statistics show that whereas the median income in the U.S. finally ticked upwards in 2005 after a steady decline spanning throughout the previous five years, that is good news only for the top twenty percent of earners – those making more than USD 90,000 a year. Below that, everyone lost ground to inflation.

Likewise, household income has increased, but individual earnings have actually decreased. The likely explanation is that more members of households are working to make ends meet. Moreover, the real estate boom of the past several years has made Americans and Canadians feel richer, since millions of people have used their home equity like credit cards. But now that home prices are reversing and the equity shrinking, the money pool looks more and more like a sterile pond.

And as to job growth, although the unemployment rate stood at a low 4.7 percent in September, that does not include people who have given up looking for work. What is worse, the percentage of the working-age population that is employed remains below its January, 2001 level.

At the root of it all many in the political entourage seem to be saying that we are losing jobs because we are losing talent – that is those of us skilled, intelligent, educated and entrepreneurial enough to create jobs in the first place – to the emerging economies. Which then by proximate causation leaves the rest of us, the morons, out in the cold.

One great misconception is that the number of jobs is fixed, so that if some of them move abroad there must be fewer left at home. This is, of course, absurd in that the economy is in continuous movement and jobs appear and disappear on a daily basis. But even if the number of jobs were fixed, the fears of a great job migration are highly exaggerated.

The McKinsey Global Institute ( has conducted a large-scale study of the offshoring markets and has concluded that constraints on both the demand and supply side will keep the number of service and managerial jobs moving offshore much lower than it is widely believed. More specifically, the aggregate number of jobs will likely rise from 1.5 million in 2005 to 4.1 million in 2008, representing 1.2 percent of the demand for managers and labour in the developed world.

Contrast this with the normal job turnaround in North America where 4.6 million individuals start with a new employer every month.

As to our brainpower going abroad, especially the brain drain from science and engineering, that also is too exaggerated. Particularly the concern that our colleges and universities are not up to par with their counterparts abroad, both in Asia and in Europe, and the concern that we generate fewer students willing to grapple with difficult scientific problems and that there are too few teachers qualified to teach them are also nonsensical.

Many of the figures that have set alarm bells ringing – those millions of Chinese engineers, for example – are misleading. The McKinsey Global Institute calculates that in 2004 there were far more young engineers in North America who were capable of working for multinational corporations than China – 540,000 against 160,000. There are problems with cultural and language skills in China, and the quality of education is often inadequate as well. China may very well have twice as many engineering graduates as America, but only ten percent of them are equipped to work for Western multinational conglomerates. And as to Chinese teachers and their level of skill, it pays to remember that in 1966 – 1976 the brightest and sparkiest people were dumped into labour camps.

China’s biggest problem is a culture of deference – for many Chinese it is bad form to question superiors. Because of this, China has so far been much more adept at borrowing other people’s ideas than producing its own, particularly when it comes to high-tech innovation.

In fact, North America has still an overwhelming advantage in the war for talent. One is the quality of the universities, which regularly dominate global league competitions. The second is the quality of the business environment, from the ready availability of venture capital to the skilful management and the willingness to pay for the best people. The top eight regional ‘knowledge economies’, measured by such things as patent registrations, investments in R&D and the proportion of knowledge workers are all in North America.