Dissecting outsourcing

Daniel Drezner’s excellent piece in Foreign Affairs really gets into the nuts and bolt of offshore outsourcing. I recommend reading the whole thing, but here are some highlights: The loss of manufacturing jobs has much more to do with technological innovation than outsourcing: If outsourcing were in fact the chief cause of manufacturing losses, one would expect corresponding increases in manufacturing employment in developing countries. An Alliance Capital Management study of global manufacturing trends from 1995 to 2002, however, shows that this was not the case: the United States saw an 11 percent decrease in manufacturing employment over the course of those seven years; meanwhile, China saw a 15 percent decrease and Brazil a 20 percent decrease. Globally, the figure for manufacturing jobs lost was identical to the U.S. figure — 11 percent. Job losses from outsourcing will likely affect only a tiny percent of the American workforce: As for the jobs that can be sent offshore, even if the most dire-sounding forecasts come true, the impact on the economy will be negligible. The Forrester prediction of 3.3 million lost jobs, for example, is spread across 15 years. That would mean 220,000 jobs displaced per year by offshore outsourcing — a number that sounds impressive until one considers that total employment in the United States is roughly 130 million, and that about 22 million new jobs are expected to be added between now and 2010. Annually, outsourcing would affect less than .2 percent of employed Americans. There is also reason to believe that the unemployment caused by outsourcing will be lower than expected. Gartner assumed that more than 60 percent of financial-sector employees directly affected by outsourcing would be let go by their employers. But Boston University Professor Nitin Joglekar has examined the effect of outsourcing on large financial firms and found that less than 20 percent of workers affected by outsourcing lose their jobs; the rest are repositioned within the firm. Even if the most negative projections prove to be correct, then, gross job loss would be relatively small. Moreover, it is debatable whether actual levels of outsourcing will ever match current predictions. Despite claims that the pace of onshore and offshore outsourcing would quicken over time, there was no increase in 2003. In fact, TPI Inc., an outsourcing advisory firm, even reports that the total value of business process outsourcing deals in the United States fell by 32 percent in 2003. You can’t talk about how we lose jobs with outsourcing without talking about the jobs we gain: Delta Airlines outsourced 1,000 call-center jobs to India in 2003, but the $25 million in savings allowed the firm to add 1,200 reservation and sales positions in the United States. ……. The case of IBM reinforces this lesson: although critics highlight the offshore outsourcing of 3,000 it jobs, they fail to mention the company’s plans to add 4,500 positions to its U.S. payroll. Large software companies such as Microsoft and Oracle have simultaneously increased outsourcing and domestic payrolls. What should politicians do? The best piece of advice is also the most difficult for elected officials to follow: do no harm. Politicians never get credit for inaction, even when inaction is the best policy. President George H.W. Bush, for example, was pilloried for refusing to follow Japan’s lead by protecting domestic markets — even though his refusal helped pave the way for the 1990s boom by letting market forces allocate resources to industries at the technological frontier. Restraint is anathema to the political class, but it is still the most important response to the furor over offshore outsourcing. As Robert McTeer, president of the Federal Reserve Bank of Dallas, said when asked about policy responses to outsourcing, “If we are lucky, we can get through the year without doing something really, really stupid.” Our impulse is to assume that we live in unique times, and that the old rules no longer apply: The refrain of “this time, it’s different” is not new in the debate over free trade. In the 1980s, the Japanese variety of capitalism — with its omniscient industrial policy and high nontariff barriers — was supposed to supplant the U.S. system. Fifteen years later, that prediction sounds absurd. During the 1990s, the passage of NAFTA and the Uruguay Round of trade talks were supposed to create a “giant sucking sound” as jobs left the United States. Contrary to such fears, tens of millions of new jobs were created. Once the economy improves, the political hysteria over outsourcing will also disappear.