Expect to hear much more about concerns over offshoring/outsourcing of white-collar American jobs to places like India as the Presidential election nears. Expect the degree of economic sophistication of what we hear to decrease in direct proportion to the days left before the election.
Read on for my latest collection on this subject.
Let’s start with the longest and most economically sophisticated piece, from Foreign Affairs: “The Outsourcing Bogeyman” (by Daniel W. Drezner)
You could probably guess from the title what this article’s perspective is. This article is totally worth reading in full if you want an intelligent, factfilled discussion of the subject.
The author is an Assistant Professor of Political Science at the University of Chicago and keeps a blog in his own name: Daniel W. Drezner, which I have just added to my blogroll under “blogs, misc.”
The journal’s editors provided this convenient summary:
According to the election-year bluster of politicians and pundits, the outsourcing of American jobs to other countries has become a problem of epic proportion. Fortunately, this alarmism is misguided. Outsourcing actually brings far more benefits than costs, both now and in the long run. If its critics succeed in provoking a new wave of American protectionism, the consequences will be disastrous — for the U.S. economy and for the American workers they claim to defend.
A few snippets:
Should Americans be concerned about the economic effects of outsourcing? Not particularly. Most of the numbers thrown around are vague, overhyped estimates. What hard data exist suggest that gross job losses due to offshore outsourcing have been minimal when compared to the size of the entire U.S. economy. . . [T]he law of comparative advantage does not stop working just because 401(k) plans are involved. The creation of new jobs overseas will eventually lead to more jobs and higher incomes in the United States. [B]elieving that offshore outsourcing causes unemployment is the economic equivalent of believing that the sun revolves around the earth: intuitively compelling but clearly wrong.
Should Americans be concerned about the political backlash to outsourcing? Absolutely. . . The short-term political appeal of protectionism is undeniable. . .
Protectionism would not solve the U.S. economy’s employment problems, although it would succeed in providing massive subsidies to well-organized interest groups. . .
The predictions of job losses in the millions are driving the current outsourcing hysteria. But it is crucial to note that these predictions are of gross, not net, losses. . .
[M]ost current predictions are not as ominous as they first sound once the numbers are unpacked. Most jobs will remain unaffected altogether: close to 90 percent of jobs in the United States require geographic proximity. . . There is also no evidence that jobs in the high-value-added sector are migrating overseas. . .
If offshore outsourcing is not the cause of sluggish job growth, what is? A study by the Federal Reserve Bank of New York suggests that the economy is undergoing a structural transformation: jobs are disappearing from old sectors . . . and being created in new ones . . . In all such transformations, the creation of new jobs lags behind the destruction of old ones. . . The recent recession and current recovery are a more extreme version of the downturn and “jobless recovery” of the early 1990s — which eventually produced the longest economic expansion of the post-World War II era.
[T]he media’s coverage of outsourcing has focused on its perceived costs. This leaves out more than half of the story. The benefits of offshore outsourcing should not be dismissed. . .
Thanks to outsourcing, U.S. firms save money and become more profitable, benefiting shareholders and increasing returns on investment. Foreign facilities boost demand for U.S. products, such as computers and telecommunications equipment, necessary for their outsourced function. . .
Outsourcing also has considerable noneconomic benefits. It is clearly in the interest of the United States to reward other countries for reducing their barriers to trade and investment. . .
So if protectionism is not the answer, what is the correct response? The best piece of advice is also the most difficult for elected officials to follow: do no harm. . .
It is easy to praise economic globalization during boom times; the challenge, however, is to defend it during the lean years of a business cycle. Offshore outsourcing is not the bogeyman that critics say it is. Their arguments, however, must be persistently refuted. Otherwise, the results will be disastrous: less growth, lower incomes — and fewer jobs for American workers.
There is much more in this excellent article. Read more
Also suggesting the concern may be overblown is this article from CNN/Money: “What outsourcing? Layoffs from work going offshore resulted in just 2.5% of total layoffs in quarter” (by Chris Isidore)
Only a small portion of jobs lost in the first quarter were due to outsourcing of work overseas . . .
The Bureau of Labor Statistics (BLS), in its first look at layoffs due to the relocation of work, identified only 4,633 jobs that were lost due to relocation of work overseas during the first quarter.
The jobs lost to overseas relocations were outweighed by 9,985 jobs lost due to relocation of work within the United States.
And both types of relocations made up just a tiny fraction of the mass layoffs that accounted for the loss of 239,361 jobs in the quarter. Read more
Skeptical critics of this BLS study quoted in the article are the Economic Policy Institute (EPI) and AFL-CIO.
Here’s the detailed press release from the BLS, including the study’s data summary tables and methodology.
EPI has some interesting stuff on the subject at their site, including these offshoring FAQ’s and this Issue Guide on offshoring. There are some useful graphical presentations here. EPI is less sanguine about the impact of offshoring, though not alarmist:
[W]hite-collar offshoring alone cannot explain the current jobless recovery. In fact, it probably cannot account for more than 10% of the job gap of more than five million that has developed since the last recession began in March 2001.
The poor job performance in the current recovery reflects a combination of relatively slow output growth since the recession ended in 2001 and relatively strong growth in measured productivity. .
The anxieties felt by American workers over offshoring are rational. This has been a particularly tough recession and recovery for college-educated workers, especially for those in occupations and industries newly considered vulnerable to offshoring. Furthermore, corporate threats of offshoring have probably played a role in the rapid deceleration of wage growth and the quick acceleration in measured productivity over the course of this recession and recovery. Read more
Showing the dangers of headline reading (and writing), here’s the New York Times headline for the Reuters story on the BLS study: “New Report Says Outsourcing Causes 9% of U.S. Layoffs”
Reading the text of the story, you see that 9% is attributable to outsourcing (or job movement), but only 2% is due to offshoring (job movement to foreign countries). 9% sounds better if you want to stir up the protectionist fervor, that’s for sure.
In Workforce Management, John A. Challenger, chief executive officer of the global outplacement firm Challenger, Gray & Christmas, writes: “You Can’t Stop the Outsourcing Tornado”
Right now, many people are attempting to stop the wave of globalization that is sending an increasing number of American jobs overseas. Such efforts are a waste of valuable time, energy and resources.
The fact is, there may be no way to halt the migration of jobs to foreign countries where labor is highly educated and less costly. . .
Instead of trying to halt the expansion of the global economy, we must direct our efforts toward preparing the workforce to compete in it.
There’s no reason to think that our workforce cannot be redeployed in new directions and endeavors. However, to do this we must restructure our education system to reflect the fact that lifelong learning is crucial to our economic growth. . .
In 5 to 10 years, the problem will not be the lack of jobs caused by outsourcing. It will be the lack of workers who have the advanced technical, management and problem-solving skills that the jobs here require. . .
While many corporate leaders decry the lack of fundamental and technical skills among those exiting high schools and colleges today, very few are actually doing anything to remedy the situation. Federal, state and local governments should also be making a concerted effort to train tomorrow’s workforce.
One area where government and businesses can contribute is through school-to-work programs. . . Some of the most successful programs are the ones that reach down to the elementary-school level to plant the seeds that could one day influence a career choice. . .
If we fail to get children interested in math, science and computer technology, fail to increase the number of graduates in these areas, and fail to expand opportunities and accessibility to lifelong education, America will be wholly unprepared to compete in the global economy we helped create. Read more
From law.com (Miami Daily Business Review): “Offshoring Begins to Reveal Hidden Costs” (by Scott Austin)
This article by an intellectual property (IP) and business lawyer explores some “hidden structural, cultural, legal and financial risks and costs [that] are often overlooked” in the rush to cheap outsourcing.
These include different legal systems, less IP protections, political considerations, tax complexities, and financial issues.
An important cautionary read for anyone considering getting on the offshoring bandwagon.
Here’s a really depressing article from Business Week: “U.S. Programmers: Bargains Go Begging; Mark Jennings finds work for Americans at rates not much more than those of India. Corporate America’s response has been underwhelming.”
This story features a company that is offering American programmers at rates competitive with India, and finding it a hard sell with American compnaies that are hellbent on outsourcing.
The reality appears to be that major American corporations are addicted to the financial savings they’re gaining from outsourcing IT work overseas, and an appeal to a combination of economics and patriotism is an uphill battle. . . Read more
A more hopeful Business Week story: “India’s Outsourcers Turn West: Aiming to expand their reach and customer base, they’re buying U.S. and European companies — often hiring more workers there”
Sphere: Related ContentIn recent years, Western companies have rushed to India, outsourcing their back-office operations, call centers, and software development — or in some cases flat-out acquiring Indian outfits that do such work. Now it’s turnabout time. In the past two years, Indian businesses have snapped up a dozen U.S. call centers and business-processing companies. “Indian companies are looking to build a global model quickly,” . . .
Why the reverse migration? As India’s outsourcing sector matures, companies there need to increase their industry expertise, geographic reach, and, most of all, their customer base. . .
Are the Indians buying up their U.S. competitors simply to close them down and shift most of their operations overseas? Not at all, the Indians insist. . . “We’re transitioning the middle part to India, leaving the beginning and end work in the U.S.” Read more
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