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TRADE: Outsourcing Jobs

Author: Sharon Otterman
February 20, 2004
This publication is now archived.

What's the debate over outsourcing?

Shifting jobs to lower-wage countries--a form of what is known as offshore outsourcing--is an increasingly popular practice among U.S. businesses seeking to cut operating costs. Outsourcing has also become political shorthand for presidential candidates to describe what is perceived as unfair international trade and its costs for U.S. workers. The issue has become highly emotional because of outsourcing's two dramatically different effects: it leads to layoffs and dislocations for thousands of U.S. workers, even as most economists say it will ultimately strengthen the U.S. economy.

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Why has outsourcing become a major political issue?

With the U.S. economy still in recovery from a recession, many people argue that now is not the time to be sending jobs overseas. In addition, the kinds of jobs that are vulnerable to offshore outsourcing--also known as offshoring--have increased dramatically over the past five years. Advances in technology and low-cost telecommunications now mean that a computer programmer, data entry specialist, or help-desk operator answering calls for a U.S. company can work as easily from India or the Philippines as from Iowa--and save parent companies some 30 percent to 70 percent in costs, analysts say. This has led to considerable anxiety in some segments of the U.S. workforce that feel vulnerable to competition from well-educated workers abroad willing to work for, in some cases, one-tenth of the wages paid to Americans.

Why has outsourcing been in the news recently?

Media attention began to focus on the rising trend of white-collar outsourcing about a year ago, and since then, economists, labor leaders, business journalists, and politicians have been debating the practice's pros and cons. The pitch of the discussion rose further on February 9, when President George W. Bush's chief economic adviser, N. Gregory Mankiw, released the annual Economic Reportof the President and praised offshoring of U.S. service jobs as a "good thing." "Outsourcing is just a new way of doing international trade," he told reporters, adding that the practice is only "the latest manifestation of the gains from trade that economists have talked about" for centuries. The reaction from both sides of the political aisle was fierce. "They [the Bush administration] have delivered a double blow to America's workers, 3 million jobs destroyed on their watch, and now they want to export more of our jobs overseas," said Senator John F. Kerry of Massachusetts, the leading Democratic presidential contender, who has made outsourcing a major issue in his campaign. "I understand that Mr. Mankiw is a brilliant economic theorist, but his theory fails a basic test of real economics. We can't have a healthy economy unless we have more jobs here in America," said House Speaker J. Dennis Hastert (R-Illinois). President Bush later appeared to try to distance himself from Mankiw's comments.

What are the numbers behind this trend?

No one knows how many service jobs have been outsourced abroad, because U.S. companies are not required to maintain such statistics. And, if outsourcing leads to the creation of jobs elsewhere in the economy, as many economists argue, that is also difficult to quantify. Most estimates of U.S. jobs lost come from consulting companies or industry groups directly involved in outsourcing. Boston-based consultancy Forrester estimates that 400,000 service jobs have been lost to offshoring since 2000, with jobs leaving at a rate of 12,000 to 15,000 per month, says John McCarthy, the company's director of research. Other estimates say up to 20,000 jobs a month may be moving overseas. This is in addition to the 2 million manufacturing jobs that are estimated to have moved offshore since 1983. These numbers are predicted to rise. Management consulting firm McKinsey & Company's economic think tank, the McKinsey Global Institute, predicts that white-collar offshoring will increase at a rate of 30 percent to 40 percent over the next five years. By 2015, Forrester predicts, roughly 3.3 million service jobs will have moved offshore, including 1.7 million "back office" jobs such as payroll processing and accounting, and 473,000 jobs in the information technology industry.

How do these numbers compare to the total number of jobs in the economy?

Economists say they are relatively small. The United States employs some 130 million non-farm workers, according to the U.S. Department of Labor. Over the past 10 years, even factoring in the recent economic downturn, the U.S. economy created an average of 3.5 million new private-sector jobs a year, according to a McKinsey analysis. On the other hand some analysts argue that, in the longer term, the latest wave of outsourcing will lead to a significant shift in the kinds of U.S. jobs, even as the total number of jobs continues to increase. Just as the loss of U.S. manufacturing jobs to overseas markets has caused layoffs and difficulties for millions of American workers, so will this latest round of offshoring cause thousands of white-collar service employees to lose their jobs and seek new ones.

Is offshoring to blame for the slow job growth in the U.S. economy?

Many economists say that outsourcing of white-collar jobs is not the primary, or even a major, reason the U.S. economy is not creating enough new jobs to make a significant dent in the unemployment rate. Some argue that the practice is helping to stimulate the economy. However, these economists also concede that the low level of job creation in recent years has made it more difficult for workers who lose their jobs to outsourcing to find new ones. Some 3 million private-sector jobs have been lost since the U.S. economy peaked in 2000, most of them in manufacturing. These economists say the drop in employment, however, is primarily explained by factors other than outsourcing, such as:

  • the bursting of the tech bubble and its effects on Wall Street;
  • the general downturn in the business cycle;
  • the consolidation of retailing under mega-companies like Wal-Mart;
  • technological advances that have made some jobs obsolete;
  • and the chilling economic effects of the September 11 attacks and subsequent events.

"There's no evidence that outsourcing caused the recession, and there's no evidence that it's making it worse," says Erica L. Groshen, an assistant vice president at the Federal Reserve Bank of New York. Not all analysts agree with this assessment. Thea Lee, assistant director of public policy at the AFL-CIO, says outsourcing is a major cause of job loss since 2000. And, she says, "outsourcing is one of the causes for the truly dismal job performance since the recession has ended."

What steps are politicians attempting to reverse outsourcing?

There have been a variety of responses. Kerry is sponsoring legislation that would require operators answering help-desk calls for U.S. consumers in other countries to identify their location. He also wants to give tax incentives to American companies to keep jobs in the United States, close tax loopholes that he says encourage U.S. employers to move jobs overseas, and require other countries to meet more stringent environmental and labor standards so that employing people in those countries will cost more. Some states have proposed bills barring the export of some kinds of taxpayer-funded work, such as the processing of welfare checks. In addition, a Senate bill sponsored by George V. Voinovich (R-Ohio) and Craig Thomas (R-Wyoming) would limit the outsourcing of some work done for the federal government.

What is the reaction of economists to these ideas?

Many economists say that these steps are a form of economic protectionism that will only further slow the U.S. economic recovery. As an example, Benn Steil, the acting director of the Maurice R. Greenberg Center for Geoeconomic Studies at the Council on Foreign Relations, points to the overall negative economic effect that subsidies for the struggling U.S. steel industry had on the economy. Protecting the industry from lower-cost imported steel hurt U.S. carmakers and other domestic industries that use steel. "It's very clear that the price we paid as an economy per steel worker job was hundreds of thousands of dollars," he says. On January 26, Federal Reserve Chairman Alan Greenspan cautioned lawmakers not to increase trade barriers to keep jobs in the United States. While some workers will lose jobs because of outsourcing and other forms of foreign competition, he said the U.S. economy is resilient enough to generate new jobs to compensate. "We can thus be confident that new jobs will replace old ones as they always have, but not without a high degree of pain for those caught in the job-losing segment of America's massive job-turnover process," Greenspan said.

Why do economists say outsourcing is good for the economy?

Many economists argue that outsourcing is just another form of free trade, which increases wealth in the economy. They say that employing workers at lower cost allows U.S. companies to be more efficient and productive, permitting them to create the same amount of goods with fewer resources. In turn, this lowers the price of the goods in the United States, strengthening U.S. companies and freeing workers for other tasks. The savings allows U.S. companies to stay afloat and expand in a highly competitive global market, says Jagdish N. Bhagwati, the André Meyer senior fellow in international economics at the Council on Foreign Relations and the author of the recently published "In Defense of Globalization." "Outsourcing is not destroying American jobs. These jobs are going anyway, because otherwise the goods would be too expensive to produce" and the companies that make them would no longer be competitive, he says.

What can be done for U.S. workers who lose their jobs?

Even staunch free-trade advocates acknowledge that outsourcing has painful and destabilizing consequences for the hundreds of thousands of workers who find themselves laid off. Their recommendations tend to center on helping these workers find new jobs and adjust to the shifting labor market via expanded training and relocation assistance. In addition, many analysts call for improved unemployment benefits and health insurance to tide workers over between jobs and help those who are not able to find new work. "We feel as though if we fall through the cracks, Washington will not really take care of us. That's why we have this emerging problem of hysteria [about outsourcing]," Bhagwati says. Another remedy is improving the U.S. education system to better prepare workers for highly skilled, 21st-century jobs. Though all these steps will be expensive, they will likely be less costly than limiting trade, Groshen says. In addition, some analysts say a greater share of the costs of insuring workers should be borne by the companies that benefit from offshoring.

How many workers will not be able to find new or better work?

It's not clear. Some 70 percent of the U.S. economy is not vulnerable to offshoring because it is composed of services such as retail, restaurants and hotels, health care and other services that necessarily take place locally, according to a McKinsey analysis that examined the economic impact of offshore outsourcing. Among those workers who are vulnerable to trade-related displacement, however, not all end up with new or improved work. Between 1979 and 1999, the Bureau of Labor Statistics found that 31 percent of workers displaced by trade--mostly in the manufacturing industries--were not fully re-employed. Only 36 percent of workers soon found jobs that matched or increased their wages. Twenty-five percent saw pay cuts of 30 percent or more. "These concerns are real and need to be addressed," says Diana Farrell, the director of the McKinsey Global Institute. But she argues that rather than trying to stop offshoring--a practice that she argues increases wealth in the U.S. economy--"leaders should focus on its distribution and help workers who are disproportionately hit."

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