April 06, 2004,
U.S. manufacturing jobs have been going abroad for decades. Now, however, workers in a wide range of other fields from accounting to electrical engineering are discovering that their jobs aren’t immune from offshore outsourcing. For the past decade American companies have shipped computer programming and call-center jobs to India, the Philippines, Mexico, Canada, and other places where educated workers reside. Economists maintain that globalization benefits the U.S. as old-economy jobs that move abroad are replaced by better, higher-value jobs at home. Yet many Americans don’t buy it. Polls show that anxiety over job security is a top voter concern.
In spite of what is said in much of the press, the greatest beneficiary of outsourcing is the U.S. itself. We import many more jobs than we export. Foreign companies all over the world are attracted by our political stability and high worker productivity. Efforts to restrict outsourcing by U.S. companies may backfire, especially it they provoke retaliation by U.S. trading partners.
Contrary to the statements of many politicians, the outsourcing phenomenon is easily understood in the context of traditional economic analysis. The calculus outsourcing situation by outsourcing situation is fairly straightforward. Look at two of the main outsourcing culprits.
Mexico. The origins of outsourcing here can be traced to NAFTA, signed in 1993. The elimination of trade barriers created profit opportunities for the production of goods and services in Mexico. Even though productivity was lower in Mexico than in the U.S., and there were additional transportation costs, the wages in the country were low enough to compensate. The search for higher profits led to a shift in production facilities to Mexico. U.S. consumers were happy because they were able to buy similar products at lower prices. Mexican workers were happy as the higher demand for labor services resulted in higher wages. The standard of living for Mexican worker’s rose. NAFTA was a win-win situation.
India. Over the last decade, India and the Asian tigers (and China later on) embarked on market-oriented economic policies. But technology has added a different twist to India’s outsourcing story. The capacity of fiber-optic lines that connect telephone systems into India increased almost sevenfold in 2001 and 2002. Increased bandwidth, falling prices, compression, and secure methods of connectivity reduced the “transportation costs” of sending work India’s way. Information-based jobs are especially vulnerable because it is easy and cheap to transmit data almost anywhere these days. That’s exactly what happened in India’s case. So-called “placeless jobs” animation, application and insurance-claims processing, benefit administration, desktop publishing, digitizing, financial analysis for Wall Street banks, accounting and bookkeeping, tax preparation, medical transcription and billings, telemarketing jobs that don’t require face-to-face customer interaction, have gone to India (and other wired-in regions).
The benefits to the U.S. economy are obvious: prices move lower for consumers and profits rise for corporations. As for U.S. workers displaced by outsourcing, they are once displaced able to move to other more-productive, higher value-added activities.
The benefits to India are also evident. India’s National Association of Software and Service Companies estimates that more than 300,000 white-collar jobs serving overseas clients have been created in the country since 2000. But more importantly the salaries of the most sought-after workers are surging, offsetting the cost savings that lure U.S. companies overseas. In other words, outsourcing is also raising the standard of living of foreign workers.
Executives are also developing a keen sense of how critical it is to keep core managers people who know the product and how customers use it in the United States. Core development for new products remains in the U.S. where engineers are closer to marketing teams. In other words, the high value-added jobs still remain here and afford opportunities for displaced workers with the necessary skills.
Outsourcing, coupled with the explosion of global trade, has also transformed delivery into a complex engineering task. Contrary to popular belief, the U.S. is creating new high-paying jobs, and logistics is one of the latest growing fields. Yes, we allow companies to freely outsource their payroll departments and software operations. But that frees American workers to concentrate on new cutting-edge (i.e., higher value-added) activities like logistics.
It’s not hard to see why outsourcing has become such a major political issue. The benefits of outsourcing lower prices and higher profits are spread out among shareholders and consumers. Consumers see lower prices and shareholders see higher profits. The stock market, when strong enough, offsets any protectionist pressure generated by the fear of job loses due to higher imports or job outsourcing. The investor class understands that a rising tide lifts all boats.
In contrast, the costs of outsourcing are concentrated in a particular special-interest group displaced employees. And this group is supported by many powerful political voices.
An example is the tension mounting within the National Association of Manufacturers, with many smaller members urging the big lobbying group to do more to fight the migration of jobs overseas even as many of the larger members embrace the trend. The larger companies are more likely to have multi-plant facilities all over the world and thus may be the ones taking advantage of outsourcing. But the smaller companies are likely to be the single-plant facilities that are threatened by the outsourcing drive.
In another example, the AFL-CIO has filed an unprecedented petition against China under Section 301 of the 1974 Trade Act. It alleges that China’s “brutal repression” of worker’s rights gives its manufacturing sector a cost-savings between 10 percent and 77 percent and has led to a loss of 727,000 American jobs.
It’s not surprising that politicians catering to the union vote are likely to be the sponsors of protectionist legislation. (When the Bush administration gave into steel protectionism, it was a deliberate attempt to buy some of the union vote in the steel-producing states. It did not work and luckily the administration gave up on the protectionist slant.) Dozens of bills to protect U.S. jobs have been introduced in state legislatures and Congress. Some bills would require state contract work be done in the U.S. Other proposed legislation would require workers at call centers to disclose their location to consumers. Finally, there are bills that would restrict companies from bringing foreign workers to the U.S. on guest visas to do jobs previously done by Americans. This is an ironic piece of legislation; employees not allowed by the U.S. to immigrate permanently come here for a period, get training, and then go back and work in outsourced industries.
Some Americans will accept less prosperity and opportunity in return for more stability and security (unions do that), but the trend is not going that way. It the private sector the majority would choose prosperity and opportunity. While it is easier to get laid off in America than in Europe it is also easier to find a job in America. The result is a constantly rejuvenating economy. Take the former rust belt where the complaints about outsourcing are the loudest. Data shows that Ohio has imported 242,000 jobs, Indiana 163,000, and Michigan 244,000. Outsourcing isn’t a symptom of America’s decline. It is part of a process that prevents decline.
Victor Canto, Ph.D., is the founder of La Jolla Economics, an economics research and consulting firm in La Jolla, California.