Read an Excerpt
What Outsourcing Means for America
The cover of the February 3, 2003, issue of BusinessWeek showed a man in a business suit hanging on for dear life to cargo that was going to be shipped overseas. “Is Your Job Next?” the headline blared, followed by this disturbing preview of the article inside:
A new round of GLOBALIZATION is sending upscale jobs offshore. They include chip design, engineering, basic research—even financial analysis. Can America lose these jobs and still prosper?
This story started the debate over whether transferring good jobs to cheap overseas locations—outsourcing, or more specifically, offshore out-sourcing—is good for America.
The debate raged in relatively small circles until nearly a year later, when President Bush’s chief economic adviser, Dr. Gregory Mankiw, flippantly answered a reporter’s question as to whether outsourcing was good or bad, “Yes, it is probably good for America in the long run.” That’s when the story hit the front pages of nearly every major newspaper in the country. The reaction was swift and divided. The elites in corporations, policy circles, and newspaper editorial boards unequivocally and resoundingly supported Mankiw’s assertion that exporting high-paying U.S. jobs is a good thing, while most “average” Americans reacted in just the opposite way, with grave concern about the consequences of outsourcing for themselves and their children’s futures.
Who is right, and why is there such difference in opinion about whether this is good for America? Unfortunately, the public debate has been drenched with innuendo presented by both sides as unassailable natural laws and sensationalism. This has made it nearly impossible to explore the positive and negative consequences of outsourcing and what we should do about it.
The problem isn’t so much that outsourcing is happening as howit is happening. In this book, we investigate outsourcing by presenting the full set of facts—what we know and, more important, what we don’t know about how it is affecting America’s economy, jobs, national security, and future.
Outsourcing Cannot Be Ignored
As the twenty-first century moves through its first decade, Americans have begun to notice a growing trend in their economy: the accelerating loss of jobs to overseas workers. Whether it’s called “outsourcing,” “offshore outsourcing,” “offshoring,” or some other term,1 it’s a phenomenon that cannot be ignored. The media have started to highlight the devastating impacts on individuals and communities, and some politicians have begun to pay attention. But the trends indicated by the facts and figures are truly alarming.
. What does the future hold? We are at just the beginning of the outsourcing phenomenon, or as some experts like to put it, “the outsourcing tidal wave.” It will only grow in scale, scope, and speed by dragging out to sea many good-paying U.S. jobs with it. Experts at the University of California have estimated that a staggering 14 million white-collar jobs— nearly one in nine of all U.S. jobs—are vulnerable to being outsourced. These are high-paying jobs, with more than half of them paying above the average salary of $31,720. A 2004 report predicted that approximately 3.5 million white-collar jobs and $151 billion in wages would move overseas by 2015, with 830,000 jobs leaving by the end of 2005.
. What types of jobs are involved? A wide array of jobs have already been shipped overseas, including call-center operators, information tech nology, accounting, architecture, newspaper reporting, medical and legal services, and high-level engineering design. One report estimates that 2.3 million U.S. jobs in banking and securities may move overseas. Another study predicts that 700,000 customer service and corporate back-office jobs will move from the United States to India by 2008. According to one outsourcing CEO, any work that can be sent over a wire can be sent offshore. As a result, highly sensitive information on personal finances and medical records is being handled offshore.
Who’s driving the outsourcing phenomenon? U.S. companies are enthusiastically embracing offshoring. Company managers and executives are being told that offshoring is an “imperative,” and if they want to keep their jobs, they must outsource. Many companies have employed programs to accelerate the process that they euphemistically call “knowledge transfer,” whereby they force their U.S. workers to train foreign replacements. The U.S. worker is then laid off after his or her knowledge has been extracted. Venture-capital firms are forcing their start-up firms to outsource as much work as possible. Venture-capital-funded start-up firms are recognized as the lifeblood of future innovation and a major reason for Silicon Valley’s success. If these jobs are outsourced, what are the implications for future innovation? And the response from "American" universities has been nothing short of remarkable. Rather than focus their vast resources, intellectual and financial, on helping American students and workers respond to outsourcing, they have instead pursued business opportunities. They have embraced outsoucing by creating research institutes, really consulting shops, to help firms more effectively ship jobs overseas. They are working hand in hand with corporations to improve management practices of shipping high-level work overseas. And they have begun to build campuses and programs in low cost countries to serve workers in the outsourcing sectors of those countries. So, the universities, which are heavily subsidized by U.S. taxpayers, are undercutting American workers in the pursuit of their own profits just as multinational corporations. In fact, Cornell University, an Ivy-League school and land-grant institution, has declared itself a "Transnational University" in its mission statement.
Can the United States compete with low-cost labor abroad? Wages in developing countries such as India and China are 10 to 20 percent of comparable U.S. workers, and there is a nearly endless supply of educated underemployed workers in those countries. And it is much cheaper to live in a developing country. For example, the cost of living in India or China is one-fifth that of the United States. Wages in those countries will not reach parity with those in the United States for many years, maybe decades. Many other developing countries, such as those in Eastern Europe and Latin America, are trying to emulate India’s success, adding even more competition for U.S. workers.
Will the United States be out front in the next technological revolution? Not necessarily. Many of our best and brightest students are not majoring in technology disciplines because of the fear of offshoring. For example, computer science enrollment dropped by 20 40 percent in the between 20013– 064 academic years. This threatens America’s future ability to innovate. The next generation of innovative jobs easily could move overseas as India, China, and other low-cost countries attract high-level research and development work. So, the expectation that the United States will generate the next wave of innovation in biotechnology or nanotechnology is just blind faith. No one knows when those jobs will appear and, more important, how many of them will be captured by other countries. China is the number two producer of scientific papers on nanotechnology, a field that is considered on the cutting edge. And companies are expanding their research facilities in low-cost countries much faster than in the U.S. General Electric employs more researchers in India than America.
Can displaced U.S. workers find other jobs? The track record for the reemployment of displaced U.S. workers is abysmal. The Department of Labor reports that more than one in three workers who are displaced remains unemployed, and many of those who are lucky enough to find jobs take major pay cuts. Many former manufacturing workers who were displaced a decade ago because of manufacturing that went offshore took training courses and found jobs in the information technology sector. They are now facing the unenviable situation of having their second career disappear overseas. And no one can point to the logical replacement occupation of the future, the way that information technology once served for manufacturing.
Can’t the government help? The U.S. government is actively pursuing policies that accelerate outsourcing by undermining U.S. workers’ primary competitive advantage over foreign workers: their physical presence in the United States. The government has a guest-worker policy that enables companies to bring cheap foreign white-collar professionals to America to work on-site, replacing U.S. workers. The process also accelerates outsourcing as the United States transfers knowledge to foreign workers. Many then go back to their countries and compete with U.S. workers from there. Even more ominously, the U.S. Trade Representative, the chief U.S. representative for negotiating trade agreements, wants to make this process even easier through the World Trade Organization and trade agreements.
And here’s another thought to ponder: While private companies are spearheading the outsourcing movement, they are not alone. Federal, state, and local governments are outsourcing government services, raising the question of whether it is right to use tax dollars to create jobs offshore while there are so many unemployed people in America.
What Actually Happens with Outsourcing
Contrary to popular belief, understanding the impact of offshore outsourcing doesn’t require any formal economics training. Most economists assume the following idealscenario when thinking about outsourcing.
Before Outsourcing After Outsourcing
U.S. workers do tasks A, B, C. U.S. workers do tasks B, C, D.
Offshore workers are idle. Offshore workers do tasks A and some of B.
In this scenario, U.S. workers were doing tasks A, B, and C and offshore workers were idle before the outsourcing occurred. After the outsourcing,
U.S. workers no longer do task A, but have moved on to a new task, D. And instead of being idle, offshore workers are now doing tasks A and some of B. So, in the ideal scenario, U.S. workers remain fully employed but the mix of tasks they do has changed because of outsourcing. Offshore workers are now fully employed with tasks A and B. This is what one hopes will happen.
There are two important problems with this scenario. First, the presumption is that the U.S. workers who were previously doing task A will easily be reabsorbed into the workforce by doing tasks such as B, C, and D. This is what economists refer to as the “adjustment” process. Unfortunately, the practical problems with adjustment are substantial. For example, let’s assume that task A is computer programming, which is increasingly moving offshore, and task C is nursing, which is in high demand in the United States. Is it realistic to expect computer programmers to easily become nurses? The track record for adjustment is terrible, and there are no resources to facilitate the adjustment process.
The second problem is whether the new mix of tasks B, C, and D is better than tasks A, B, and C. Does the United States have a better set of jobs after outsourcing? No one really knows. It is important to note that many of the jobs being outsourced are very high paying jobs, and they are not being replenished with better jobs. In other words, task D has yet to appear. Plus, developing countries are targeting high-wage jobs for their own citizens. So, even in the ideal scenario there are major disruptions and uncertainties caused by outsourcing as U.S. jobs are destroyed, and there is only hope that those workers find better jobs. Reality, of course, rarely follows the ideal scenario.
