World Student Community for Sustainable Development

Unravelling the Rhetoric over Outsourcing

by Aaron Holdway

Until recently, sending white-collar jobs overseas to take advantage of lower labour costs seemed to many like an ideal business strategy. In recent months, however, outsourcing — the movement of jobs overseas [1] — has become the defining economic issue of this yearâ€^TMs US election campaign. Gregory Mankiw, chair of President Bushâ€^TMs Council of Economic Advisors, ignited what The Wall Street Journal called “a political firestorm†when he told reporters in February of this year that outsourcing “is probably a plus for the economy in the long run.†[2] Heated reaction from politicians on both sides of the aisle and extensive media coverage have attached to “outsourcing†the ominous implication that every job in America is at risk of being moved to India, China, or some other distant locale. The issue of outsourcing, however, is being somewhat exaggerated by politics and by the use of anecdotes instead of data. Instead of being the “bogeyman†that some contend it is, outsourcing may ultimately be good for the US economy and should not be so hastily restricted by the federal and state legislation that lawmakers currently wish to impose on it for political gain.

The trend of sending work overseas began in earnest in the 1980s with manufacturing. Outsourcing (or offshoring) held a relatively low profile throughout the 1990s, when the US economy was booming and employers had little difficulty filling positions. In recent years, however, the explosion of the Internet and information technology (IT) has brought about a second large shift, this time in services. White-collar professional jobs are now following similar routes to India, China, the Philippines, and elsewhere, and the list of functions that outsourcing may provide is growing. Half of the Fortune 500 companies, for example, currently send work to India, [3] and the trend is increasing, particularly in financial services and IT. [4] In a widely-cited 2002 report, John McCarthy of Forrester Research estimated that 3.3 million US white-collar jobs representing $136 billion in wages will move overseas by 2015. [5] International Data Corp. (IDC) Research predicts that spending on outsourcing will quadruple by 2007. [6] To many workers increasingly anxious about their employment prospects during the current “jobless recovery,†outsourcing seems like an obvious culprit.

The rhetoric

A number of factors have contributed to the current firestorm surrounding outsourcing. The commotion began when Mankiw, as stated above, told reporters that the export of US service jobs “is probably a plus for the economy in the long run.†[7] As politicians know well, “. . . public hostility toward trade increases during economic downturns. When forced to choose between statistical evidence showing that trade is good for the economy and anecdotal evidence of job losses due to import competition, Americans go with the anecdotes.†[8] In a presidential election year that coincides with an uncertain economy, it is not surprising that politicians quickly began to throw fuel on the fire. Democratic presidential candidate John Kerry was quick to describe executives who outsource services as “Benedict Arnold CEOs.†[9] “Weâ€^TMre going to end the days,†he said, “when our government encourages big business to turn its back on Americaâ€^TMs workers.†[10] Even House Speaker Dennis Hastert (R-IL) tried to distance himself from Mankiwâ€^TMs comment, saying that “an economy suffers when jobs disappear.†[11] Outsourcing is perhaps even more potent an issue in this election campaign because the states with the greatest job losses in manufacturing — the sector that has been hardest hit by the economic slowdown — are swing states such as Pennsylvania, Ohio, and Michigan. [12]

The media has provided extensive coverage of the debate, much of it focusing only on the perceived downsides of outsourcing. CNN pundit Lou Dobbs, for example, has berated US companies involved in outsourcing in his “Exporting America†series. [13] Even some IT executives have contributed to the commotion. Hewlett-Packard CEO Carly Fiorina, testifying before Congress in January, said that “there is no job that is Americaâ€^TMs God-given right anymore.†[14] White-collar workers, now feeling the insecurity that manufacturing workers know all too well, have intensified the debate, creating a number of online coalitions. [15] John McCarthyâ€^TMs estimate of the impact of outsourcing over the next decade — 3.3 million jobs representing $136 billion in wages [16] — further fueled the growing media and political storm, and the lack of government statistics on outsourcing has not helped. Moreover, the possible benefits of outsourcing are not immediately tangible to American workers, while the costs to those who lose their jobs are obvious. Thus, as University of Pennsylvania professor Jitendra Singh says, when it comes to debating outsourcing during this heated election campaign, “There is a great deal of partial telling of the story.†[17]

While understandable given the political season, the backlash has resulted in more than simply rhetoric. Federal and state lawmakers alike have produced a flurry of bills aimed at limiting outsourcing. Proposed federal bills include Senate Minority Leader Tom Daschleâ€^TMs (D-SD) Jobs for America Act, which would require call centre workers to state where they are located, [18] and Senator Christopher Doddâ€^TMs (D-CT) USA Jobs Protection Act, which would prevent companies from hiring foreign workers when qualified American workers are available. [19] In March, the Senate overwhelmingly approved legislation that would prevent federal contracts from going to firms that outsource any of the work. [20] Lawmakers in some 30 states have produced approximately 80 bills aimed at imposing similar restrictions. [21] The federal and state bills are supported in large measure by labour unions, but the US Chamber of Commerce and other trade groups have formed a group called the Coalition for Economic Growth and American Jobs to combat the proposed legislation. The candidates in the November election face the challenge that outsourcing is a relatively new and poorly understood phenomenon. Clouding the issue with overly emotional perspectives, however, will only further confuse the situation, leaving voters to separate fact from fiction.

The reality?

The attention outsourcing has received in the current media and political storm creates the impression that it is a completely new phenomenon. In fact, the same technological advances that are making outsourcing possible have been eliminating white-collar jobs in large numbers for years. [22] When outsourcing was occurring in the 1990s, little attention was paid because many more jobs were being created in the US than were being sent overseas. [23] Although many critics are quick to blame outsourcing, most job losses in the past three years have had nothing to do with American jobs moving offshore, but have instead resulted from an unusually long jobs recession. [24] Furthermore, while the US “exports†jobs overseas, it also “imports†jobs as foreign corporations invest in the US. Data from the Bureau of Labor Statistics show that as the number of outsourced jobs increased from 6.5 million in 1983 to 10 million in 2000, the number of “insourced†jobs increased even more over the same period, from 2.5 million to 6.5 million. [25]

In the current heated debate over outsourcing, many of the numbers cited by critics are “vague, over-hyped estimates.†[26] John McCarthy of Forrester Research, for example, now says his estimates were hyped and points out that outsourcing will affect only 0.2% of the total job market in any given year. [27] The projections of IDC Research, which have also been widely cited, now appear to be flawed. While IDC estimated that 23% of all white-collar IT jobs would be outsourced by 2007, an increase of 5% from 2004, IDC spokesman Michael Shirer now says that the methodology used was “a little wobbly†and that the result was probably an overestimate. [28] Exaggerations have also led to the common misperception that getting outsourced could happen to almost anyone. Researchers at the University of California at Berkeley, however, recently estimated that only about 11% of the US workforce is vulnerable, [29] as the remainder of the jobs in the US require geographic proximity. [30] Studies have also shown that those whose positions are outsourced often do not experience job loss. Professor Nitin Joglekar of Boston University, for example, found that in large financial firms, more than 80 percent of workers affected by outsourcing are repositioned within the firm. [31] Clearly, the outsourcing estimates proffered by some must be taken with a grain of salt.

Moreover, most economists agree that the current shortage of jobs is merely cyclical and not permanent. [32] In the past, such cyclical economic downturns have led to predictions of permanent job shortages, but this outcome has never occurred. Two decades ago, for example, the loss of jobs in the automotive industry and other high-paying manufacturing jobs prompted fears that the US economy was “hollowing out.†[33] Painful as these job losses were, however, strong economic growth and innovation created many more — and better — jobs to replace them. The same process, many economists argue, is now occurring in the service sector. [34] The Department of Labor estimates, for example, that the total number of computer and mathematics-related occupations will rise from just over 3 million in 2002 to just over 4 million in 2012. [35] Furthermore, data from the Bureau of Labor Statistics show that “the number of jobs in service sectors where outsourcing is likely actually increased, even though total employment decreased by 1.7 percent.†[36] IBM, for instance, outsourced 3000 IT jobs but plans to add 4500 positions to its US payroll. [37]

How outsourcing may be beneficial

The possible benefits of outsourcing have received scant attention during the current debate. As Information Technology Association of America president Harris Miller says, “The political debate has been heated, but not informed.†[38] Nevertheless, outsourcing is not a panacea. One of the oft-cited downsides is exemplified by a McKinsey Global Institute study that found that only 36% of US workers displaced in the past 20 years found jobs at the same or higher pay. [39] The increasing number of white-collar workers displaced by outsourcing, some fear, will share the same fate. Critics also point to the lack of a “social contract†binding employer and employee, which “makes long-term jobs an illusion.†[40] Others, like Rochester Institute of Technology professor Ron Hira, say that “nearly every economist has had a very poor track record over the past three years in predicting job growth, so we should take forecasts with a grain of salt.†Many critics also agree that the difficulties for those affected by outsourcing require more of the nationâ€^TMs attention. [41]

In spite of these perceived shortcomings, outsourcing may be good for both US companies and the US economy as a whole. Savings on labour costs lead to increased labour productivity, allowing companies to use their resources where they count most. For many small IT firms, hiring overseas workers lets them stretch their research and development budgets. Many companies also report gains in quality through outsourcing. For example, since call-centre work is considered a lucrative job in India instead of a dead end, employee motivation is generally higher and turnover lower than in the US. [42] The benefits of outsourcing reaped by US companies can translate into benefits for the entire economy. Competition ultimately passes the cost savings of productivity on to consumers, which in turn increases demand for goods and services. For example, Catherine Mann of the Institute for International Economics estimates that the globalization of IT hardware production has accounted for up to 30 percent of the drop in hardware prices and boosted US GDP by $230 billion between 1995 and 2002 by making IT more available. [43] Moreover, McKinsey Global Institute estimates that every dollar the US spends on outsourcing to India results in $1.12 to $1.14 in benefits. The cost savings lead to greater profitability and increased shareholder returns. Higher productivity has also led to increased employment in the US. One industry-sponsored study, for instance, found that 90,000 jobs have been added across the economy in the last year as a result of these savings. [44]

Outsourcing also clearly benefits developing countries like India, allowing them to expand their middle class and reduce poverty by providing new and higher-paying jobs. A McKinsey Global Institute study reports that by 2008, outsourcing will employ 1.2 million workers in India and take in $21 billion. [45] “If India can turn into a fast-growth economy,†says one commentator, “it will be the first developing nation that used its brainpower, not natural resources or the raw muscle of factory labor, as the catalyst.†[46]

Quelling the hysteria

The pain of economic change can be lessened by public policy, so a key question is what governmentâ€^TMs role should be in outsourcing. First and foremost, government must understand that protectionism is not the answer. While this method offers short-term political appeal — as with the Bush Administrationâ€^TMs recent tariffs to protect the US steel industry — “trade protectionism amounts to an inefficient subsidy for uncompetitive sectors of the economy,†preserving “jobs in less competitive sectors while destroying current and future jobs in sectors that have a comparative advantage.†[47] Barriers to outsourcing, such as the legislation proposed by federal and state lawmakers, may therefore ultimately destroy jobs, not protect them. Instead, a renewed focus on education and innovation, and compensation for those who lose their jobs to outsourcing, would be a good start. Governments could offer incentives to universities and to students to complement technical degrees with training in, for example, finance, marketing, or operations. Incentives could also be offered to US companies for retraining workers to fill positions that would otherwise go to another country. Companies could also try to find a way to “share some winnings with those who lose.†[48] Governments could help firms buy insurance policies that would help offset the transition costs to workers affected by outsourcing. IBM, for example, recently created a $25-million retraining fund for employees who fear job losses from outsourcing. [49] As in most cases, the best advice to government here is “also the most difficult for elected officials to follow: do no harm.†[50] Though it never garners politicians any credit, inaction — or minimal action — is sometimes the best policy.

Conclusion

Outsourcing is unlikely to be a merely cyclical phenomenon. The Internet, IT, the global spread of white-collar skills, and the significant costs savings from outsourcing will likely combine to make this phenomenon of globalization a permanent feature of the US economy. Until the end of this election year and until strong job growth returns, the debate over outsourcing will not go away. Despite the heated rhetoric of campaigning politicians, however, outsourcing is not the villain it has been made out to be. While outsourcing is indeed taking place and will likely accelerate over the next decade, its effect on the US job market has been exaggerated. The current period of high job anxiety will eventually end, as have all such periods in the past, with a surge in job creation. Critics may then be able to see that outsourcing was not the cause of the slow job recovery. In the meantime, the focus of public policy should be to provide a safety net for workers who lose their jobs to outsourcing, and to promote education and innovation. The government must avoid enacting legislative barriers meant only “to preserve the past and forestall the future,†[51] for “regarding globalization as the enemy is a much greater threat to Americaâ€^TMs economic health than any Indian software programmer.†[52]

- Aaron Holdway, School of Policy Studies, Queenâ€^TMs University, Kingston, Ontario, Canada

Footnotes

[1] Elizabeth L. Bland, Barbara Kiviat, and Sora Song, “The Fuss Only Fuels the Outsourcing,†Time, 24 May 2004, p. 20.

[2] Jack Beatty, “Free Trade vs. Good Jobs,†Atlantic Unbound, 25 February 2004, http://www.theatlantic.com/unbound/polipro/pp2004-02-25.htm.

[3] Mary Carmichael, “Help from Far Away,†Newsweek, 12 May 2003, p. E16.

[4] Daniel W. Drezner, “The Outsourcing Bogeyman,†Foreign Affairs, May/June 2004, http://www.foreignaffairs.org/20040501faessay83301/daniel-w-drezner/the-outsourcing-bogeyman.html.

[5] Clare Ansberry, “Outsourcing Abroad Draws Debate at Home†Wall Street Journal (Eastern edition), 14 July 2003, p. A2.

[6] Brad Stone, “Should I Stay or Should I Go?†Newsweek, 19 April 2004, p. 52.

[7] Jack Beatty, “Free Trade vs. Good Jobs,†Atlantic Unbound, 25 February 2004, http://www.theatlantic.com/unbound/polipro/pp2004-02-25.htm.

[8] Drezner

[9] Jagdish Bhagwati, “Why Your Job Isnâ€^TMt Moving to Bangalore,†On the Issues (American Enterprise Institute for Public Policy Research), March 2004, http://www.aei.org/docLib/20040225_%2316420graphics.pdf.

[10] Bob Evans, “Outsourcing Debate Enters Political Arena,†InformationWeek, 12 January 2004, p. 64.

[11] George Gilbert and Rahul Sood, “Outsourcingâ€^TMs Offshore Myth,†CNET.com, 15 December 2003, http://news.com.com/2010-1022-5121783.html.

[12] Jyoti Thottam, Karen Tumulty, and Sara Rajan, “Is Your Job Going Abroad?†Time, 1 March 2004, p. 26.

[13] Drezner

[14] Ibid.

[15] Ibid.

[16] Ansberry

[17] Jon E. Hilsenrath, “Data Gap — Behind Outsourcing Debate: Surprisingly Few Hard Numbers,†Wall Street Journal (Eastern edition), 12 April 2004, p. A1.

[18] Michael Schroeder, “Business Coalition Battles Outsourcing Backlash,†Wall Street Journal (Eastern edition), 1 March 2004, p. A1.

[19] Inside Washington Publishers, “U.S. Chamber, Others form Coalition to Fight Attack on Outsourcing,†5 March 2004, http://www.insidetrade.com/secure/dsply_nl_txt.asp?f=wto2001.ask&dh=144449246&q=placeholder.

[20] Drezner

[21] Ansberry

[22] Brink Lindsey, “Job Losses and Trade: A Reality Check,†Center for Trade Policy Studies (Cato Institute) Trade Briefing Paper No. 19, 17 March 2004, http://www.freetrade.org/pubs/briefs/tbp-019es.html.

[23] Drezner

[24] Robert B. Reich, “Nice Work If You Can Get It,†The American Prospect, 26 December 2003, http://www.prospect.org/webfeatures/2003/12/reich-r-12-26.html.

[25] Drezner

[26] Ibid.

[27] Hilsenrath

[28] Ibid.

[29] “The Price of Efficiency,†Business Week, 22 March 2004, p. 38.

[30] Drezner

[31] Ibid.

[32] Lindsey

[33] Kathleen Madigan and Michael J. Mandel, “Outsourcing Jobs: Is It Bad?†Business Week, 25 August 2003, p. 36.

[34] Ibid.

[35] Lindsey

[36] Drezner

[37] Ibid.

[38] Michael Schroeder, “Outsourcing May Create U.S. Jobs,†Wall Street Journal (Eastern edition), 30 March 2004, p. A2.

[39] Manjeet Kripalani and Pete Engardio, “The Rise of India,†Business Week Online, 8 December 2003, http://www.businessweek.com/magazine/content/03_49/b3861001_mz001.htm.

[40] Thottam, Tumulty, and Rajan

[41] Jeff Madrick, “Questioning Free Trade Mathematics,†New York Times, 18 March 2004, http://mason.gmu.edu/ dchetson/awc/nytimes-madrick.html.

[42] Carmichael

[43] Lindsey

[44] Schroeder, “Outsourcing May Create U.S. Jobsâ€

[45] Carmichael

[46] Kripalani and Engardio

[47] Drezner

[48] Thottam, Tumulty, and Rajan

[49] Drezner

[50] Ibid.

[51] Evans

[52] “The Great Hollowing-Out Myth,†The Economist, 19 February 2004, http://www.economist.com/agenda/displayStory.cfm?story_id=2454530.