WASHINGTON - The rapid rise of China as a major actor in the global economy is provoking a reconsideration of whether free trade is still in America's interest.

For 60 years the United States has promoted free trade as a powerful way to generate prosperity at home and abroad. Trade tripled over the past 40 years as a proportion of the U.S. economy, thanks in part to eight successive global negotiations that opened markets by lowering trade barriers. Now, efforts to expand free trade rules are stalling from Congress to Europe and in an ongoing round of global negotiations.

U.S. policy assumes that free trade benefits all who engage in it. The assumption dates back to 1817, when classical economist David Ricardo defined his doctrine of comparative advantage - that when nations specialize in what they do best and most efficiently, each will win by trading with the others.

Today, that concept is being questioned as never before. China's rapid rise is feeding a common fear: that developing nations led by China and India may out-compete the world for high-tech jobs and keep the low-skill, labor-intensive manufacturing jobs they won already. China already is the world's biggest exporter of electronics.

The fear is that China, so foreign and large, might soon gain advantages of labor, capital and even technology that will allow it to dominate the world economy - and the strategic advantages that go along.

To be sure, smaller nations have raised the same complaint about the United States for years. Could China really displace America?

China has more than 1.3 billion people and a work force of 700 million. Last year's total U.S. work force was 147 million. Thanks to current technological advantages, U.S. workers are far more productive. But China's catching up fast.

China began to introduce market forces into its economy in 1978, though it retained strict authoritarian control over civil society. Since then, its economy has grown by 9.4 percent annually. Its gross domestic product - the broadest measure of goods and services - has soared from $147 billion in 1978 to $1.6 trillion last year. The United States' GDP last year totaled $11.75 trillion - still far ahead.

Want a snapshot of China's rapid growth? Right now, subway systems are being built in 84 Chinese cities.

For a decade now, debate has swirled over whether China - a "socialist market economy," according to its constitution - is a strategic trading partner or a budding rival.

Charlene Barshefsky, who was U.S. trade representative from 1996-2001, believes it's both. Over time, she said, China will evolve from merely adapting technologies from others to developing its own innovations, which will affect the world.

"There is no historic precedent to the rise of a country this vast and this rapid, changing trade and investment flows around the world, with China the hub of Asian manufacture," she said in an interview.

Author Ted Fishman recently documented the challenge in his book "China Inc." He believes China soon will have two distinct economic platforms that will rival the United States. One is low-wage manufacturing. The second will be a high-tech industry that matches the West's in sophistication, and that will drive down wages in other nations as they try to compete.

"It's everything from Christmas ornaments to aerospace. Other economies do not come at us this way," Fishman said in an interview. "That's kind of a unique set of problems. The world has to find an `out.' We have to figure out how everyone can prosper along with China."

Barshefsky made the same point: "China's rise is not a function of pervasive unfair trade - although trade disputes must be addressed. But resting concerns on claims of unfair trade as the basis of China's rise obscures the real challenge facing the U.S., and that is the utter absence of any focus on our own longer-term competitiveness, formulating and implementing policy measures - from the fiscal, to education, to the state of our scientific infrastructure to business incentives - that answer the challenge of an emergent, vibrant, smart Asia, with China at its center."

Late last year, Paul Samuelson, a Nobel Prize-winning economist, author of the long-standard college-economics textbook and an ardent supporter of free trade, suggested that China's growing economic might calls into question whether free trade is a win-win game for America.

Samuelson said open trade helped the U.S. economy grow since World War II, but that competition from abroad drove down wages in lower-skilled jobs. Over time, China and India could displace U.S. high-tech jobs, too, and more American wages could be cut to help the United States sustain competition. Even though U.S. consumers get less expensive Chinese-made goods, many Americans could be net losers from such trade, he wrote.

Other experts say China trades by rules aimed at building its national power rather than economic exchange.

"What we've been calling free trade is not free trade," said Clyde Prestowitz, a former top trade negotiator in the Reagan administration and author of the new book "Three Billion New Capitalists."

In it, Prestowitz warns that China is building an export-based economy. China's approach mirrors the mercantilist policies of 17th century Europe, when kingdoms tried to minimize imports, maximize exports and strictly administer their domestic economies to develop national wealth and power at rivals' expense.

Last year, the U.S. trade deficit with China was $162 billion.

"I think we have to go through a rethink" of trade policies, Prestowitz said.

China is the world's largest importer of steel, iron ore, copper, tin, other crude commodities and many semi-finished goods. It uses those to build an economy fueled by high-value manufactured exports, building surplus capital in the process.

China is already the world's largest exporter of electronic and information-technology products; it sold $142 billion worth of such goods in 2003, up from $39 billion in 1999.

Meanwhile, the United States borrows deeply from China to sustain its national debt; as of April, China's central bank held $230 billion worth of U.S. Treasury bonds.

Some experts think critics exaggerate the China threat.

"I think there is a tendency to overreach and think that they are going to move up the food chain very rapidly," said Nicholas Lardy, a China expert at the Institute for International Economics, a pro-free-trade research center in Washington.

In the book "The United States and World Economy," Lardy cautioned that China will continue to be hampered by its large population and lagging technology.

With all its people, China desperately needs to create jobs. Wage levels will remain low for many years, Lardy said. Because Chinese workers won't have much money to spend, that will constrain domestic consumption and China's internal economy.

Chinese President Hu Jintao laid out China's economic goals through 2020 in a May 16 address in Beijing. He vowed to quadruple to $4 trillion the nation's 2000 gross domestic product. That would still be only about one-third the size of today's U.S. economy, which itself will grow significantly by 2020.

Even if China's economy quadruples, the average Chinese will remain poor. If China succeeds, Hu said, per capita income would rise to $3,000. In contrast, U.S. per capita income was $40,100 in 2004.

Experts may differ on China's threat potential, but no one questions that fear of China is influencing politics here and abroad.

In an effort to reduce China's U.S.-trade surplus, 67 U.S. senators endorse a bipartisan measure by Sen. Charles Schumer (news, bio, voting record), D-N.Y., and Sen. Lindsey Graham (news, bio, voting record), R-S.C., to slap a 27.5 percent tax on all Chinese exports to the United States unless China revalues its currency.

Schumer said in an interview that China's failure to revalue the yuan and to protect U.S. copyrights and trademarks is souring policy-makers.

"There's always been dislocation and pain caused by free trade, but it's never prevented free trade from being the dominant policy because people felt overall that the benefits outweighed the liabilities. Nothing will fray the (pro free-trade) coalition more than the view that it's one-sided," Schumer said.

Frustration with China is also hurting President Bush's proposed Central America Free Trade Agreement.

"Many members of Congress from both parties have told me that they simply can't afford to cast another free trade vote until they do something that shows that they `Get It' - that they get the American anxiety about globalization," said Nancy Roman, the vice president in Washington for the Council on Foreign Relations. "A lot of it does tie to China."

Across the Atlantic, such fears are expressed in a general wariness about globalization. Voters in France and Holland recently rejected a European constitution that aimed to extend integration of the 25-member European Union. The negative votes were seen in part as a reaction to globalization, against the disruptive economic and cultural changes that flow from open borders.

"People do not know exactly what the implications are, but they intuitively see some potential dangers with China becoming bigger and bigger and the world becoming smaller," said Hugo Paemen, who was Europe's top trade negotiator in the early 1990s. "They feel pushed into a defensive position because of new developments in China and India."

They hear the stories about how the economy is turning around, and they truly want to believe it. Some are even cautiously optimistic that a job with their name on it is just around the corner.

But until that happens, they are part of an unprecedented trend. For the past 29 months, one-fifth of the nation's jobless people captured in federal statistics have been out of work for more than 27 weeks, which qualifies them as "long-term unemployed."

And unlike previous periods, many of those job seekers have college degrees and solid professional experience.

John Helyar Fortune Magazine    

Getting fired during your peak earning years has always been scary. You'd scramble for a few months, but you'd find something. Today it's different. Get fired and you can scramble for years-and still find nothing. Welcome to the cold new world of the prematurely, involuntarily retired.

In 1991, long before Starbucks became the waiting lounge of the damned, FORTUNE published a story about unemployed executives. "It now takes the average laid-off executive more than eight months to find a new position," we wrote. What's changed over the intervening 14 years is that discarded executives of a certain age may never find that new position. As Bob Miller has discovered, a great many of those jobs simply aren't coming back. Even if you're gainfully employed, uncomfortable questions are probably swimming around in your mind. Are you vulnerable? What would you do if you got the sack and couldn't find a new gig? Plus, your pension has been gutted, your once-rich 401(k) appears to have been converted to Canadian dollars, you keep seeing newspaper headlines about cuts in Social Security. "Of course I'm scared," says a 57-year-old executive vice president of a trade association in New York City. (He didn't want his name used.) "I got laid off in 1989 and again in 1995, so it could happen. There's always an extra layer of stress. I'm always aware that the wheels could come off-and if they did, this time it would be serious."

OUTSOURCING INNOVATION

First came manufacturing. Now companies are farming out R&D to cut costs and get new products to market faster. Are they going too far?

The result is a rethinking of the structure of the modern corporation. What, specifically, has to be done in-house anymore? At a minimum, most leading Western companies are turning toward a new model of innovation, one that employs global networks of partners. These can include U.S. chipmakers, Taiwanese engineers, Indian software developers, and Chinese factories. IBM (IBM ) is even offering the smarts of its famed research labs and a new global team of 1,200 engineers to help customers develop future products using next-generation technologies. When the whole chain works in sync, there can be a dramatic leap in the speed and efficiency of product development.

The downside of getting the balance wrong, however, can be steep. Start with the danger of fostering new competitors. Motorola hired Taiwan's BenQ Corp. to design and manufacture millions of mobile phones. But then BenQ began selling phones last year in the prized China market under its own brand. That prompted Motorola to pull its contract. Another risk is that brand-name companies will lose the incentive to keep investing in new technology. "It is a slippery slope," says Boston Consulting Group Senior Vice-President Jim Andrew. "If the innovation starts residing in the suppliers, you could incrementalize yourself to the point where there isn't much left."

Such perceptions are a big reason even companies that outsource heavily refuse to discuss what hardware designs they buy from whom and impose strict confidentiality on suppliers. "It is still taboo to talk openly about outsourced design," says Forrester Research Inc. (FORR ) consultant Navi Radjou, an expert on corporate innovation.

Outsourcing Gains Momentum
External service providers apply pressure on businesses to shrink their in-house staffs.

Red Herring

Pressures from external service providers will soon force changes in business technology employment, according to two independent reports issued Wednesday.

The reports, released by Gartner and The Yankee Group, suggest that competition from external service providers is forcing business managers to make tough decisions about their internal business departments.

Gartner warned that competition from outsourced IT providers will offer higher standards of service and price, and predicts that by 2015 the number of IT staff in business technology will decrease by 15 percent.

The research firm predicts that six out of 10 people in information systems (IS) will assume business-facing roles by 2010, resulting in a one-third decrease in IT departments within large and mid-size companies.

John Mahoney, chief of research for IT services and management at Gartner, advises managers either to focus on the reinvention of business management processes or to shift their focus to the outsourcing of IT services.

Offshoring accelerating
US study puts number of jobs sent overseas in 2004 at 406,000, double the estimates

Kimberly Blanton     The Boston Globe     

Data on numbers of US jobs moving overseas in recent years are scattered and unreliable. As the AT&T example shows, jobs may be cut in the United States, and employment may increase overseas, but companies are reluctant to draw connections between the two, while unions are only too willing to do so. Groups such as the US Chamber of Commerce peg the number at perhaps 200,000 jobs a year. But a new report commissioned by a bipartisan congressional commission said 406,000 US jobs will migrate overseas this year, double the conventional wisdom. This trend is expected to continue for several years as a greater variety of jobs are offshored, including to Latin America and the Caribbean.

Job movement overseas ''is absolutely accelerating, and it's changing in its nature," said Kate Bronfenbrenner, a professor in Cornell University's School of Industrial and Labor Relations, who prepared the report for the US-China Economic and Security Review Commission. ''Whereas in 2001 it was almost all in manufacturing, now we see an increase in information technology, communications, financial services, and white-collar work, from research and design to back office." The report will be presented at public hearings in Seattle in January. Some economists cite growing numbers of US jobs transplanted overseas as the main reason for slow employment growth during the current economy recovery. Another 400,000 jobs added to the total 1.8 million jobs created in the United States in 2004 would be ''a big deal," said Stephen Roach, Morgan Stanley's chief economist. ''Offshore labor pools have become increasingly attractive," he said, and ''more and more of the new hiring incrementally is occurring offshore."

JOB MARKET REALITY FOR HIGH-END EXECUTIVES WORSE THAN REFLECTED IN UNEMPLOYMENT FIGURES
New survey shows job statistics do not account for 42 percent of execs earning $100k or more who are actively looking for jobs and not collecting unemployment.

NETSHARE.com SURVEY RESULTS

Novato, CA- According to the latest poll by NETSHARE, 42 percent of American executives at the high end of the pay scale report that they are not finding work and not collecting unemployment, which means they are not being tracked by recent government unemployment. These executives have fallen off the unemployment radar and are forgotten statistics, according to a recent survey by NETSHARE.

NETSHARE (www.netshare.com), a confidential, subscription-based jobs and networking site for senior executives making $100,000 and up, surveyed over 2,700 six-figure executives across the U.S. via an Internet poll and found:

• Nearly half - 42 percent - of respondents are unemployed and not registered to collect unemployment - thus not counted by the Labor Department in the job market statistics released quarterly.
• Of those currently unemployed, almost 20 percent were self-employed or calling themselves consultants while actively looking for full-time employment.
• Only 8 percent of respondents were unemployed and collecting unemployment.

"I estimate that in my immediate pool there are 300 to 400 people not represented by the government figures as unemployed because their benefits ran out months and months ago, and every one of them is in the $100k plus range," said one NETSHARE member.

The most recent NETSHARE survey results confirm that current labor statistics fail to account for executives and others on the unemployment rolls. The statistics also fail to account for those executives who are "under-employed" or who list themselves as "self- employed" or "consultants" but are actively looking for full-time work. The inconsistencies between the statistics released by the Labor Department and the real figures are the result of the way the statistics are compiled, i.e., using a combination of unemployment figures and a household sampling to determine if people are working or looking for work. Those who are no longer collecting unemployment or list themselves as "self-employed" are not being counted.

"I'm a 'consultant' with no current projects or clients," offered another NETSHARE member. "I have a Master's degree and over 15 years of experience and I can't seem to crack the code to get back on a payroll. My unemployment benefits have expired long ago. It's a tough road and I suspect I'm one of the many flying and dying under the radar."

Beth Healy     The Boston Glove    

Jim Pinder lost his job to India before most people had ever heard of ''offshoring."

It was October of 2000. Pinder, then 40, had a master's degree in engineering from the University of Lowell and a resume packed with 14 years of technology experience. He was six months into a plum job as a software test manager at Lucent Technologies Inc.'s Westford office, making about $90,000 a year.

But Pinder's plans for building a career at Lucent were cut short on the day a supervisor told him and two dozen software designers and testers that their work was being shipped to India.

''It was a shock," Pinder said. ''I was looking forward to some good work there."

Times were good, so Pinder was able to land another technology job that very day, albeit as a contractor. Still, the notion of losing a job to someone thousands of miles away seemed as strange to him then as it does now.

''This is like sending your creative talent away," he said. ''It's delivering the ability to create a product to the hands of future competition. I think it's a big mistake." The flow of US technology jobs to India and other developing nations has become fodder for political debates, industry conferences, and business-school lectures. Many corporate leaders say the wave is inevitable, part of the never-ending hunt for low-cost labor. But the latest offshoring trend is hitting home in a way the others did not -- sending solidly middle-class, white-collar jobs, with their generous paychecks, overseas.

''We can't hide the reality of the situation," said Barbara Kunkel, chief information officer at the law firm Nixon Peabody and a member of the CIO Executive Council, a trade group in Framingham.

A council poll of information chiefs at large companies last month found that 38 percent house all or part of their information-technology staffs offshore. Of those, 65 percent said costs had driven the moves. And the CIOs expect offshoring to continue at a brisk clip for at least two to five more years before peaking. Numerous chief executives, venture capitalists, and economists say that for US companies to stay competitive, they must do some of their work overseas. Manufacturers are looking to China; South Africa is aggressively courting call centers; and software companies are moving research and development to India. By spending less on the most basic high-tech jobs, proponents argue, companies will have capital available to invest in more ambitious technology, and workers to create and implement it.

Midcareer Crisis

Marianne Kolbasuk McGee     Information Week    

Across the country, thousands of seasoned IT pros have faced career upheavals, or could in the near future. It's happening to their younger counterparts, too, as offshore outsourcing, corporate downsizing, and fast-changing technologies shatter the myth of job stability. Just this month, the Walt Disney Co. disclosed plans to cut about 1,000 IT jobs and outsource the work to other companies. For those IT pros in the second half of their careers--and the latest data compiled by the U.S. Bureau of Labor Statistics indicates there are about 301,000 who are 55 and older--the possibility of having to change gears amid these conditions presents unique challenges.

Eleven percent of the nation's 3.4 million IT professionals--including IS managers, programmers, systems analysts, and database administrators--will reach retirement age during the next 10 years, according to the Bureau of Labor Statistics. But instead of confidently moving forward in their careers, many are concerned about the threat of unemployment before they're ready to leave the workforce--and with that comes psychological stresses, the prospect of going back to school and worries about age discrimination in the workplace. "Some younger people have the attitude that older people 'do not know anything' because they assume the technologies they've worked with are old and irrelevant now," says Geoffrey Best, a 58-year-old independent consultant who was an IT director at Bell Atlantic until the company's merger with Nynex in 1996. At home, older IT pros face the reality of having less time before retirement to boost 401(k) accounts depleted by the economic downturn of the early 2000s.

Predictably, older workers have the toughest time. Sixty-nine percent of people ages 25 to 54 who lost jobs in 2001 to 2003 were re-employed when interviewed in January 2004, but just 56% in the 55 to 64 range were employed, and 20% had dropped out of the labor force. The problem is likely exacerbated in the IT industry. "More so than other industries, the tech field is a young field," says John Challenger, CEO of executive search firm Challenger, Gray & Christmas. "There's no question that older IT professionals face additional obstacles, but they aren't insurmountable."

THE UPSHOT Pressure is mounting on thousands of U.S. IT professionals who'll hit retirement age in the next decade Offshore outsourcing, corporate downsizing, and fast-changing technologies are impacting job security Older workers who are laid off have a tough time finding new jobs, and those that do find work often take a pay cut Meanwhile, Social Security, pensions, and 401(k)s are all being squeezed The bottom line? Many IT pros in their 50s and 60s have to rewire their careers to stay on track.

India Poaches U.S. Executives
For High-Ranking Tech Posts

J. Solomon The Wall Street Journal Online

Indian software giants and other Indian outsourcing companies are becoming more profitable as demand for their low-cost services increases. Tata Group's Tata Consultancy Services, Infosys Technologies Ltd. and Wipro Technologies Ltd. all have had annual revenue growth of around 50% in recent quarters and are hiring thousands of new workers each quarter. Such growing financial clout is allowing Indian companies to woo Western executives -- especially with higher salaries. "Six or seven figures are often involved, and equity is also in play," says Rohit Ambekar, an Asia-based partner with Morgan Howard Worldwide, a Stamford, Conn., executive search company.

Headhunters working for Indian companies say their clients have to pay a premium to attract U.S. talent due to their companies' lower profiles and limited track records. In one recent case, an Indian company offered an American executive a base salary of $350,000 plus a potential bonus of $2 million over two years to join its U.S. operations, according to an executive with knowledge of the deal. The executive's salary at his U.S. company was $300,000 annually plus stock options equal to around $1.2 million over four years. U.S. companies, meanwhile, say they are competing aggressively with Indian companies for both talent and market share. EDS has nearly 3,000 workers in India focusing on software development and back-office duties, and expects to add 2,000 more this year. Intel says it is growing its research and development facilities in India and has been investing in Indian companies through its Intel Capital unit in a bid to boost its business in Asia.

A (Rare) Look at IBM's Decision
To Transfer Jobs Overseas

William M. Bulkeley      The Wall Street Journal Online

In a rare look at the numbers and verbal nuances a big U.S. company chews over when moving jobs abroad, internal documents from International Business Machines Corp. show that it expects to save $168 million annually starting in 2006 by shifting several thousand high-paying programming jobs overseas. Among other things, the documents indicate that for internal IBM accounting purposes, a programmer in China with three to five years experience would cost about $12.50 an hour, including salary and benefits. A person familiar with IBM's internal billing rates says that's less than one-fourth of the $56-an-hour cost of a comparable U.S. employee, which also includes salary and benefits.

High-tech start-ups feel push to outsource

Beth Healy     The Boston Globe    

Venture capitalists have a pressing new question for high-tech entrepreneurs who come looking for money: What's your India plan? While large American companies have drawn the most attention for shifting jobs to cheaper overseas markets, the practice has quietly taken hold among start-ups as well. It's a trend that financiers of young technology companies say is inevitable. But they also admit it's controversial, and likely to rock a sector that Boston relies on for jobs and a vibrant economy.

''It's the invisible hand," said Ramanan Raghavendran, a managing director of TH Lee Putnam Ventures, a $1.1 billion dollar venture fund, referring to the corporate world's inexorable search for low-cost labor. But, he acknowledged, ''That's not a compelling answer for the 35-year-old software engineer who's out of a job." Speaking to a group of venture capitalists and business executives at a Harvard Club dinner on Tuesday evening, Raghavendran said that Boston-based TH Lee is urging the companies it invests in to ''build offshoring into the business plan from day one." If management doesn't ''get it," Raghavendran said, ''venture firms need to drive the thinking" about hiring offshore.

Increasingly, young companies are getting it. Many say they have no choice, if they want to be competitive in selling software, telecommunications equipment, and services. They can get an Indian employee for $21,000 in Bangalore or Hyderabad who would cost three or four times as much in Cambridge, Waltham or Silicon Valley. And the foreign workers are highly productive, people who manage them say.

A Large Burst of Hiring Now Appears Unlikely

Productivity growth appears to be slowing in the U.S. after an unusual surge. Does that mean the pace of hiring is about to pick up significantly? do not count on it. Many companies have clearly stretched their existing work force as far as they can and will be adding more employees in the months ahead. But larger economic forces -- from the growing ability of companies to meet more domestic demand with production outside the country, to lingering anxiety about overexpansion, to further technological advances -- will curb the appetite for workers. There will be job growth, but it will be moderate, and disappointing to those waiting for a big burst.

Daniel Meckstroth, an economist at the Manufacturers Alliance/MAPI, an Arlington, Va., association of manufacturing companies, is among those expecting only a slight increase in the pace of hiring this year, partly because demand growth itself is decelerating. If employers can get more out of each worker, they do not need to hire so many. But it also has a lot to do with how much demand there is in the economy, and that is edging down. The Manufacturers Alliance predicts gross domestic product will grow 3.4% this year -- down from 4.4% last year.

"Businesses have discovered just-in-time hiring, and that's not going to change," says Joel Naroff, chief economist at Naroff Economic Advisors Inc. in Holland, Pa. Mr. Naroff says uncertainty continues to play a big role in damping employers' appetite for workers and also is visible in the continuing dearth of investment in major expansions. Mr. Naroff believes new facilities, not just capital spending on machines and software, are needed before hiring can really take off again. Moreover, the picture is mixed. "Some companies are running full out; some are not," he says.

There is no question that the economy has benefited from the unprecedented run of strong productivity gains over the past decade. When productivity grows rapidly, companies can produce more and pay workers more -- or offset other expenses such as costlier materials or higher medical-insurance costs -- without raising prices. That is why slumping productivity sparks inflation fears. Slowing productivity makes additional output more costly, which can lead companies to charge more.

There is also no question that productivity is slowing. The Labor Department reported earlier this month that productivity in the nonfarm business sector slowed to a seasonally adjusted annual growth rate of 0.8% in the fourth quarter of last year, down from 1.8% in the third. That is the lowest level in nearly four years.

But one reason job growth may continue to disappoint is that productivity isn't really expected to fall all that much when viewed over the longer term, which is really the best way to interpret the meaning of productivity anyway. Productivity numbers are prone to gyrations from quarter to quarter. Most economists predict that productivity growth will ultimately stabilize at between 2% and 2.5%. That would be well below the 4.1% growth logged last year or the 4.4% in 2003, but still extremely robust by historical standards.

And in manufacturing, the winds of productivity keep blowing strong -- ending any hope that this part of the economy will see a bounce in jobs. Manufacturing productivity grew a muscular 5.6% in the fourth quarter, up from 4.2% in the third. And sure enough, factories cut 25,000 jobs in January, according to the Labor Department, after shedding 7,000 in December. Rising manufacturing productivity has allowed the factory sector to produce more with fewer workers, but manufacturing is a shrinking source of jobs, and employment elsewhere in the economy has grown significantly.

Economists believe one reason manufacturers have a consistently higher rate of productivity gains than other parts of the economy is the intense global competition they face. They have been forced to grow more productive to survive, while the vast service sector has been largely insulated. But that is changing, too. "Now that information technology has been improved, it's going to be easier to offshore more of the service sector," says Mr. Meckstroth, the Manufacturers Alliance economist. That will bolster productivity growth in services and is one reason that, over the long term, he expects productivity growth to remain healthy. Meanwhile, companies continue to find ways to make more without adding employees.