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Friday, March 31, 2006

A Defense of Outsourcing

This article from Economists' Voice argues that concerns over the loss of jobs in the service sector due to outsourcing are overstated, and that with the appropriate change in policy the costs to workers displaced by globalization can be minimized:

U.S. Offshoring: Small Steps to Make It Win-Win, by Diana Farrell: Companies from the United States lead the world in offshoring white-collar jobs to low-wage countries. Today they employ more than 900,000 service workers overseas. But widespread concern about the effects on the U.S. job market has prompted policymakers to call for curbs on offshoring... Trying to protect jobs this way is a mistake. For one thing, fears of job losses ... are greatly exaggerated. ... In addition, curbs on offshoring would deprive the United States of its many benefits and impose new costs instead. ...

Policymakers should let offshoring continue. But that doesn’t mean they should ignore its consequences. None of the benefits of offshoring currently flow directly to those who suffer most directly, namely US workers whose jobs move overseas. Companies can and should ... use some of their gains from offshoring to help their displaced employees... Wage loss insurance ... would cost only a fraction of the savings that offshoring will bring. Governments too, must work ... to increase retraining, provide life-long learning programs, and ensure portable health and pension benefits...

Job loss will be limited According to our research, the maximum number of U.S. service jobs that could in theory be performed offshore is 11 percent of total service employment. ... In reality, we project that less than 2 percent of all U.S. service jobs actually will be done offshore by 2008. We expect that U.S. companies will create some 200,000 to 300,000 offshore jobs per year over the next 30 years.

Why will so few service jobs go overseas?

Only a small fraction of service jobs could ever go offshore mostly because a much larger percentage require face-to-face customer interactions or a worker’s physical presence, for example, to stock shelves, provide nursing care, or install networks. In two of the largest service sectors—health care and retail—only 8 percent and 3 percent of jobs ... could be performed remotely... And the industries in which the highest percentage of jobs could be performed remotely—packaged software (49 percent) and IT services (44 percent)—represent only 1 or 2 percent of overall employment.

Even fewer jobs actually will migrate for several reasons. About one third of U.S. workers work for companies too small to justify the costs of offshoring. Even larger companies ... find the major changes ... that offshoring requires to be a significant deterrent. ... Furthermore,... [c]ompanies consider a host of factors beyond labor cost when deciding where to place an activity, including each potential location’s risk profile, infrastructure, domestic market, non-labor costs, business and living environment, and the availability of vendors. Against these criteria, the U.S. remains a logical choice for the many companies that do not rank labor cost far above other factors...

A new offshore job does not always represent a job lost at home, because many offshore jobs would not be viable at higher wage levels. ... Mounting evidence confirms that offshoring is not what lies behind mass layoffs. The U.S. Bureau of Labor Statistics confirms that only 1 percent of service layoffs involving more than 50 employees in the first quarter of 2004 was associated with offshoring.

Imperceptible impact on wages Because offshoring has such a limited impact on the U.S. jobs market, its effect on U.S. wages will also be negligible, even in the computer and data-processing industry ... Although many programming jobs have moved offshore, more positions for systems analysts and software engineers have been created in the U.S. Average wages have actually grown at a faster pace than elsewhere in the economy, since the new jobs have higher productivity... These findings confirm what other research has found. A new study by Mary Amiti and Shang-Jin Wei, two economists at The IMF, confirms that U.S. and UK service sectors subject to offshoring are creating as many — or more — new jobs than the ones that move offshore. ...

Offshoring benefits the United States Past MGI research found that for every $1 of cost on services that U.S. companies move offshore, the U.S. economy gains at least $1.14. The companies doing the offshoring reap 58 cents of these gains. This gives companies scope to invest in new opportunities that create jobs both at home and abroad... Offshoring also gives companies access to distinctive skills abroad, making them more competitive...

The U.S. also benefits as a destination for offshoring companies. In 2004, it received $121 billion of direct investment ..., more than any other country. Foreign subsidiaries provided jobs for 5.4 million U.S. workers in 2002. ... U.S. trade negotiators are arguing for freer trade in services precisely because so many companies in financial services, accounting, law, consulting, and IT services would gain.

Helping displaced workers is better than protectionism

Continuing to allow offshoring and free trade in services will benefit the United States as a whole. But one undeniable corollary is less job security: there will be more jobs, but a higher level of job turnover. Workers need help ... So rather than trying to prevent offshoring, governments and companies should ease the transition for those workers it displaces, and prepare all workers for more frequent job changes.

Ease the transition Not all workers who lose their jobs find new ones quickly, and many that do suffer pay cuts. More than 75 percent of U.S. service workers who lose their jobs due to trade find new jobs within six months; however, the median wage of those re-employed is 11 percent below its level for their previous jobs.

The U.S. already has two ... programs targeting workers displaced by trade, the Trade Adjustment Assistance and the Alternative Trade Adjustment Assistance, but neither has been particularly effective. U.S. spending on policies to assist displaced workers, at 0.5 percent of GDP, is low compared with other developed nations ...

U.S. policymakers should invest in additional measures to help workers move between jobs, especially job retraining credits for employers, to encourage them to hire displaced workers, and on-the-job training, demonstrably the most effective kind. Continuing education grants will help workers to build skills in ... growing areas of the economy such as healthcare, education, and social services. Portable medical insurance plans and pension benefits are also essential to a workforce changing jobs more frequently.

Companies benefiting from offshoring can ease the plight of displaced workers too. More generous severance packages would help. Companies could also fund wage insurance programs to help fill the gap between workers’ previous wages and their new ones...  Companies may not volunteer to do this on their own, suggesting that some kind of public policy intervention may be warranted.

Indeed, policy makers might consider extending wage insurance to all displaced workers... Globalization and advances in technology require a more flexible and fluid workforce than ever before. But there is no reason that individual workers should bear the full cost of that flexibility. Robert Litan and his colleagues found that a wage insurance program that insures 30-70 percent of wage loss for two years for all involuntarily displaced full-time workers with two years or more of tenure would cost only $1.5 billion to $7 billion (depending on the program design), or $12 to $50 per worker per year.

Forward-looking labor unions are beginning to push for similar approaches, rather than trying to protect jobs. ... This kind of response to offshoring gives union members a better chance of long-term future employment than struggling to preserve existing jobs.

Prepare people for more job changes Changes to the U.S. educational system are also needed to prepare future workers for more changes of job in their working lives. As well as technical skills, which may become obsolete, students will need business knowledge, and teamwork and communication skills, to be more broadly employable. Engineering, computer science, and other science programs at U.S. universities should adapt their curriculums accordingly... Life-long learning should be an aspiration for all workers in the economy.

At the same time, industry associations, unions and companies can collaborate to help workers anticipate job changes. They could, for example, monitor occupations where employment demand is rising—in healthcare, business services, communications and leisure—and plot potential career paths for workers switching into them. Software programmers may need to become systems analysts; information specialists may need to move into analysis. But companies and unions can identify future employment opportunities and help workers prepare for them.

Conclusion Fears about job losses and wage cuts in the U.S. due to offshoring are vastly overstated. Protectionism may save a few jobs for a while, but it will stifle innovation and job creation in the longer term. Rather than trying to stop globalization, the goal must be to let it happen, while easing the transition for workers who lose out.

    Posted by on Friday, March 31, 2006 at 12:33 AM in Economics, International Trade, Politics | Permalink  TrackBack (1)  Comments (76)

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