Why We Have Nothing to Fear from Foreign Outsourcing

Free Trade Bulletin, Center for Trade Policy Studies, CATO Institute ^ | March 30, 2004 | Daniel T. Griswold

[CSM]

Foreign outsourcing, or offshoring, is being blamed for job losses in the information technology (IT) sector. Announcements of jobs being moved to India and other low-wage countries have provoked criticism of "Benedict Arnold" CEOs and calls for governmental restrictions on the practice of outsourcing. But critics who scapegoat outsourcing are ignoring the realities of today's IT labor market.

Contrary to the popular perception, foreign outsourcing is not to blame for the deep recession that struck the information technology industry beginning in early 2000. The IT recession began in March of that year when the dot.com and telecom bubbles burst, and the tech-laden NASDAQ lost three-quarters of its value during the next three years. Meanwhile, business investment collapsed during the 2001 recession, reducing domestic demand for both IT hardware and services. The terrorist attacks of September 11, 2001, and the ensuing war on terrorism put a further chill on business confidence. Adding to the IT sector's woes were corporate scandals and slow growth abroad among our major trading partners. Foreign outsourcing was not an important variable in the equation.

A fundamental mistake made by the critics of outsourcing has been to confuse the passing pain of the IT recession with an alleged long-term decline in the sector. That mistake is compounded when current output and employment levels are compared with levels at the frenzied peak of the boom in 2000 rather than with more normal levels from the late 1990s. A more accurate and less alarming picture of the industry emerges if we compare the state of the industry a few years after the bubble burst with its state a few years before.

Beginning in the early 1990s, with the takeoff of Windows-based computing and the Internet, employment in the IT industry surged. Employment in software and related services grew by one million between 1993 and 2000, before dropping by 166,000 between 2000 and 2002.[1] The story has been much the same across other IT sectors: stupendous growth throughout the 1990s, then a pullback in employment of 10 to 20 percent during the recession. In the IT industry as a whole, employment levels even after the recession were still no lower than in 1998. During the past decade, annual employment in the industry has still grown at a rate twice as fast as employment in private industry in general.[2]

Despite the turbulence of the past four years, the U.S. information technology services sector remains a major force in the U.S. economy. The software and computer services industry accounted for $278 billion of U.S. GDP in 1999, before the hurricane hit, and an estimated $329 billion in 2003, long after its fury had been spent. Communications services accounted for $232 billion of GDP in 1999 and an estimated $292 billion in 2003. Even as a share of total U.S. GDP, the IT services industries accounted for 5.6 percent in 2003, slightly higher than their share before the storm.[3] The IT services that are moving offshore are being more than offset by increased output here at home. Any sluggishness in employment growth has been because of rising productivity, not because of falling production.

The jobs that have been lost in the IT sector tend to be the lower skilled and lower paid jobs in the industry—just as trade theory would predict. From 1999 through 2002, total employment in the IT industry did drop by more than a quarter of a million, from 6.24 million to 5.95 million.[4] But declining employment was concentrated in those occupations requiring relatively low or moderate levels of training and education.

The biggest drop in employment was among data entry keyers and electrical and electronic equipment assemblers, jobs that may require vocational training but not typically a bachelor's degree. Job losses were also heavy among IT occupations requiring even less education and training, such as billing and posting clerks, machine operators, communications equipment operators, and computer and office machine operators. From 1999 through 2002, total jobs in the first category requiring moderate education and training declined 14. 6 percent, and those in the second category requiring the least education and training declined by 10.5 percent.[5]

In contrast, the number of jobs in the IT industry that require a relatively high level of training and education was actually slightly higher in 2002 than it was in 1999. In the year before the dot.com and telecom bubbles burst, the industry employed 3.43 million workers whose jobs required an associate's degree, bachelor's degree, or work experience plus a bachelor's degree or more. After a surge of hiring in 2000, followed by a painful shakeout, the number of such highly skilled workers stood at 3.51 million in 2002, up 2.3 percent from 1999.[6]

Contrary to the popular angst that "our best jobs" are going overseas, the best jobs appear to be staying here. In fact, as a share of the IT workforce, those jobs requiring relatively high skills increased from 55 percent of all jobs in 1999 to 59 percent in 2002. Just as the free traders predict, we are swapping less skilled and lower paying jobs for relatively higher skilled and better paying jobs.[7]

The recovery and expansion of job creation that has already begun in the IT sector should continue into the future. According to the U.S. Department of Labor's biannual projections, the number of jobs in computer and mathematical science occupations is expected to increase from three million to four million in the next decade, a rate of growth twice as fast as employment in the rest of the private economy.[8]

"The demand for computer-related occupations should increase, despite the recent downturn, as a result of rapid advances in computer technology and the demand for new computer applications, including those for the Internet and Intranets," the department reported in the February 2004 issue of its Monthly Labor Review. "Growth will not be as rapid as during the previous decade, however, as the software industry begins to mature and as routine work is increasingly outsourced overseas." Most of the new jobs will be in computer systems design and related services and in the information industry, primarily in software publishing, data processing and related sectors, and Internet-related industries.[9]

Of course, the IT recession has been painful for hundreds of thousands of workers who lost jobs and were forced to find new employment. Compensation in the industry has also been under pressure because of the temporary drop in demand for services and workers. Average wages fell 1.3 percent in IT-producing industries in 2002 from the year before, from $68,330 to $67,440 (in contrast to a 1 percent increase for other workers.)[10] But IT jobs still remain among the best paying in our economy, and we have solid reason to believe opportunities for employment in the field will expand in the coming decade.

The United States continues to enjoy tremendous advantages in global IT competition. Our domestic economy is one of the most free, flexible, and open in the world. Our telecom, transportation, and utility systems deliver dependable service. Our talent pool of scientists and our university research facilities are second to none. Entrepreneurs can obtain financing for their ideas and intellectual property protection once they are developed. Relative to many other systems of government, ours is transparent, predictable, and dedicated to the rule of law. Our domestic market is the largest in the world. Those inherent advantages of doing business in the United States cannot always be offset merely by lower labor costs elsewhere and are especially important in those aspects of production that require creative freedom and specialized skills.

U.S. companies are also discovering the limits to outsourcing. There are perfectly good, market-driven reasons why U.S. companies will continue to do most of their IT work onshore if not in-house. Foreign outsourcing can generate costs of its own, such as the need for more travel, training, and management oversight. Depending on the type of project, those costs can eat into if not entirely erase the costs savings from lower wages abroad. Sending work abroad can also risk the loss of control of sensitive personal and financial data and copyrighted material. It can mean the loss of control over time-sensitive aspects of a project or becoming too reliant on outside firms. As some U.S. companies have discovered, it can result in reduced quality of service if the providers are not sensitive to cultural differences or lack specialized information expected by customers.

The phenomenon of foreign outsourcing creates tangible benefits for the U.S. economy and American workers. Whatever negative impact it has had on specific firms and workers has been limited and is far outweighed by the benefits.

-------------------------------------------------------------------------------- [1]U.S. Department of Commerce, Economic and Statistics Division, Digital Economy 2003, December 2003, p. 22, www.esa.doc.gov/DigitalEconomy2003.cfm.

[2]Ibid., p. 20.

[3]Ibid., Appendix Table 1.2.

[4]Ibid., Appendix Table 2.4.

[5]Ibid.

[6]Ibid.

[7]Ibid.

[8]Daniel E. Hecker, "Occupational Employment Projections to 2012," Monthly Labor Review 127, no. 2 (February 2004): Table 2, p. 83.

[9]Ibid., p. 98.

[10]U.S. Department of Commerce, p. 23.

[CSM]

I found this article while looking for a different one written by this author. His current article in the National Review is better than this one. If I can find it I'll post it.

[E. Pluribus Unum]

Willie Green ain't gonna like this.

Facts confuse him so.

[CSM]

Who runs the outsourcing ping list? I wanted to make sure to ping them.

[Mears]

Sorry,CSM,but no one wll ever convince me that outsourcing of good jobs is good for our economy as long as there is one unemployed person in this country with the skills to do the job,

It benefits the corporation itself, and the stockholders,not the workers---God,I sound like a Communist here,but that's the way I feel

[Libertarianize the GOP]

bump

[CSM]

Shouldn't the unemployed person be responsible to ensure that their skills match the available jobs? Or is it the corporation's responsibility to ensure that they can offer a specific job to a person with specific skills?

[E. Pluribus Unum]

I don't know. Sorry.

[Mears]

Sure it's up to the employee to have the skills to match the jobs. You aren't telling me that these call center jobs that are being outsourced couldn't find anyone here in the USA that have the correct skills.

Baloney!

[E. Pluribus Unum]

Sorry,CSM,but no one wll ever convince me that outsourcing of good jobs is good for our economy as long as there is one unemployed person in this country with the skills to do the job,

I am still pissed off that the buggy whip business was destroyed by the automobile. Those were good jobs. They should never have been displaced.

[NormalGuy]

Sometimes, the unemployed's problem is attitude, not lack of skills. They won't take any job that would have them. They have marketable skills in proven technologies. But they refuse yesterday's technology and will only accept positions on the bleeding edge where a company can make no profit.

I could be a case in point. There are jobs in Chicagoland. But I don't want any of them. So I work 120 miles from home in a company that is killing funded projects faster than it is sending them to India because it cannot find enough people like me who will take the jobs available.

[CSM]

Did you read the article? It is clearly presented with statistics, from reputible sources,that for each $1 spent on labor overseas, the overseas company spends $3 here. Would you eliminate the $1 spent and enter into a trade war losing the $3?

[beelzepug]

"Shouldn't the unemployed person be responsible to ensure that their skills match the available jobs?"

If it is only a matter of skills training, the companies can train their own workers right here in America more easily than they can train workers in India. It's all about larger profits at the expense of American jobs, plain and simple. Guess I'm a commie as well.

[Mears]

Yes,I read the article,but statistics make me weary.They change so often I have no faith in them anymore.Statistics are tweaked to obtain the desired results.

[CSM]

My apologies, I think I confused the other article with this one. In the "National Review" article, he does present the stats I posted above. If I can find the article I will post it. Page 37, National Review, May 3rd.

"In 2002, US companies exported $14.8 billion worth of computer, data processing, research, development, construction, architectural, engineering, and other IT services. During that same year, Americans imported $3.9 billion of those same kinds of services."

[CSM]

I agree. However, that attitude does not merit more government intrusion into the market. Nor does it merit the demonization of corporations. The protectionists would love to have the government protect their job, but they aren't willing to pay the premium costs associated with that protection.

[Mears]

Aw,come on,not the old buggy whip argument.That doesn't apply here.

I'm not talking about jobs that are no longer relevant,I'm talking about jobs that still are relevant,but going elsewhere.

[CSM]

Fine. The question should still be answered. Would you forgo the $3 imported for the $1 not exported?

[cyborg]

I'm getting plain confused, nevermind facts!

[mommybain]

This is what I don't get about all this: these articles consistently maintain that only the lower-paying jobs are being outsourced and offshored. The company I work for is outsourcing and offshoring IT jobs that are not lower-paying. We have an old system that is sunsetting and a less-old system that is being modified. The maintenance programming tasks on the old system are being outsourced. My coworkers and I spent months documenting everything we did to analyze and make programming changes to that system, and then performing "knowledge transfer" sessions to impart our wisdom on the programmers from Covansys that were taking our old jobs so that we can move onto new ones. All well and good, but.....

It took us years to learn that old system, and the performance we're getting from the offshore contractors indicates that they really needed years to learn to do our jobs, not months. What a surprise! The end result here is that folks who were supposed to be freed up by now to move onto greener pastures are still hand-holding the contractors. In the meantime, the greener pasture has deadlines approaching and no staff to do the work. Soooooo, we have foreign contractors learning the new stuff too.

Gives me a headache.

[CSM]

I don't understand your post. Yes, a contractor was hired to take actions related to the "old" system. But I don't see any loss of jobs related in your post, instead a reallocation of jobs to the "new" system. At least that is the intent.

What would your reaction be if they had hired a contingent of US IT professionals to do the contractors job, then after the transition they laid them off? Would you consider that job loss?

[E. Pluribus Unum]

I'm not talking about jobs that are no longer relevant,I'm talking about jobs that still are relevant,but going elsewhere.

Let me guess.

When you go to the store, you always buy from the place with the highest prices, right?

It's immoral to do otherwise. Think of the poor people at that store who will lose their jobs if you don't.

[Palmetto]

It benefits the corporation itself, and the stockholders,not the workers

So stop working and become a stockolder.

I am convinced that investing will be the occupation of the future for Americans.

[mommybain]

No, we haven't had job loss yet. The issue will be in about a year when the new work we were supposed to be doing has been done by foreign contractors and we're finished babysitting the other foreign contractors that sunset our old system. We're effectively useless at that point.

And, like I said, these articles always refer to lower-paying jobs being outsourced, and that's not the case here. They aren't lower-paying jobs. They are jobs that were being done by Americans with college degrees and making $50,000 and up.

[Mears]

Well,you really chose the wrong person to ask that question about bargain hunting.

I spend more than I have to spend most of the time because I am a firm believer in supporting small,local businesses.

I never go to Big Box stores or the Walmart type stores,ever.

[Elric@Melnibone]

Let me offer another case to bolster your point:

Two years ago, shortly after I had been laid off, I got a call from a recruiter in Grand Rapids, MI, wondering if I would be willing to take a 3-month contract in Spring Lake, MI.

I did a little investigating; contract could not possibly lead to anything long term, didn't pay noticeably better than my last contract some dozen years previous, wouldn't improve my resume noticeably and would require I set up a second residence some 2000 miles away from my wife and kids.

I jumped on the contract (and would have taken more when that one ended, if I could have found them).

Knowing the state of embedded software development in the automotive industry at that time, I asked both the recruiter and the client why they didn't get someone out from Detroit to do the contract.

Short answer was, they simply couldn't find anyone willing to spend 3 months in the Muskegon area for they price they could pay.

What amazed me was that I had to find an apartment, deal with utilities, coordinate receipt of paycheck and payment of bills with my wife and say goodbye to my family for 3 months while someone from Detroit could have taken a hotel room and gone home every weekend!

[E. Pluribus Unum]

I'm getting plain confused, nevermind facts!

Companies that go out of business because their labor costs price them out of the market don't employ anyone.

Is that simple enough for you?

[E. Pluribus Unum]

I never go to Big Box stores or the Walmart type stores,ever.

Should people who do be arrested?

[cyborg]

How can an American worker here compete with someone in India and China or Mexico? There is no comparision with respect to labor costs. I don't know about now but China used to use prisoners *LOL*

[cyborg]

I used to go to Walmart a lot. Not anymore really. It's not all that. There's something weird about shopping for groceries and car batteries under the same roof.

[Wolfie]

We're having layoffs next month (again), and maybe even an office shutdown or two. And the guy who went to India to train our replacements brought back some nice pictures of the new Bangalore office. But, at least outsourcing's not to blame.

[E. Pluribus Unum]

How can an American worker here compete with someone in India and China or Mexico?

They have been competing for years, and still are.

There are all kinds of costs involved in producing something besides straight labor costs. Training, communication, transportation, quality. Raw labor costs mean nothing out of context.

What would you suggest be done about this horrible "oustourcing" situation that is taking away good union jobs? Imprison employers who do so? Fine them? Confiscate their property?

I am interested in hearing about the Marxist solution you have in mind.

[mommybain]

Do I detect a note of sarcasm??? Covansys sent contractors here so we could impart knowledge and then sent some of them back home to Bangalore. Interesting side note: several of our management types spent a lovely week in Bangalore last January. We still haven't figured out why managers who consistently tell us that we won't be affected by this had a vacation week in India.

[CSM]

Sounds to me like you have a management problem at your company. If the original company is not able to effectively do their job, they should be fired and a replacement should be found. If the Management at your company is allowing this to continue, I would get out now!

The scenario you describe is not an "outsourcing" scenario. The intent was to maintain those positions for the "new" tasks. The results may be different, however, to say that these are high paying jobs being outsourced isn't accurate.

[TXBSAFH]

One interesting point on free trade. An aurgument used often by free traitors is that when these jobs go overseas we will get the goods cheaper and that is where the middle class will see a benefit. I noticed something this weekend I went to Home Depot to buy a jig saw for a project I ahve at the house. I was going to buy a Dewalt, but they are now all, or at least the half dozen of their tools I checked are made in Mexico. I asked the tool guy and he told me that recently they shut down their plant in the Mid west and moved their production to Mexico. The price (Dewalts always have been a bit costly, but they WERE the best) is the same. Now price break here. The same thing is happening with Chicago Cuttlery kithen knives. Were made in USA, now made in China. Price still the same.

And as a side note the tool guy told me he would not buy one of the new Mexican Dewalts because the quality had dropped serverly. He said the number of tools returned with defects has more then doubled since their move.

[cyborg]

No marxist solutions... I want to see less government regulations that drive up labor costs. Again HOW can American career people compete with someone in another country who has a lower pay standard than here?

[CSM]

Labor is a small percentage of the total cost of the product and in many cases it is offset by higher transportation costs and inventory carrying costs. The real issues driving business off shore is the government artificially driving up the cost of doing business. Not only do they drive up labor costs, but they also drive up every other cost to the business. Sorbanes-Oxley will add $12.5 Million in costs to my company every year. Now, we have to offset that somewhere.........

No, most companies in China don't use prisoners. There may be about the same number of exceptions as we have here.

[Wolfie]

Again HOW can American career people compete with someone in another country who has a lower pay standard than here?

By lowering our standard of living, of course.

[mommybain]

is not an "outsourcing" scenario...

Semantics: it is an offshoring scenario. Jobs that used to be done by Americans in North Carolina on Eastern time are now being done by Indians in whatever-the-heck it is over there.

Management problem: agreed, whole-heartedly. These managers do refer to this arrangement as outsourcing, though, even if there are no job losses at this point. Go figure.

[cyborg]

Yep. It's either going to be that the standard of living in China,India and other popular outsourcing countries increase or it decreases here. I don't think most Americans want the standard of living for the common man in these countries.

[cyborg]

Why aren't those issues being addressed then? We can talk about it ad nauseum here in FR, but I don't see government paying any attention.

[E. Pluribus Unum]

Again HOW can American career people compete with someone in another country who has a lower pay standard than here?

You didn't read the article, did you?

The crash in IT jobs was a direct result of the dot-bomb scams of the late 1990s, where companies would acquire some venture capital, hire a bunch of people, issue an IPO and cash out filthy rich before the company had ever generated one penny of profit.

We have been paying for these scams ever since.

The IT industry has finally reached the point where sustainable employment levels are going to rise.

IT has ALWAYS been cyclical. There is nothing new here except to people short in memory or years.

[CSM]

Interesting. The price remained constant, while the continual cost increases drove these companies to look for a way to reduce cost. Must have been a profitability thing, just think, they could have been heroes if they stayed in the US and went bankrupt!

[TXBSAFH]

Please read post # 34. Your comments? Thank you.

[CSM]

There is no displaced worker as a result of these actions. Instead, poor management of a process will result in job losses.

[TXBSAFH]

I did some research this morning. The company that makes dewats were profitable in the US. They were not in danger of going out of business if they did not move.

[Wolfie]

Sounds like a quality of workmanship issue. Of course, you get what you pay for!

[mommybain]

Whatever. I'm just telling you the world I'm living in right now.

On the bright side, it's now taking 2 people (1 American / 1 Indian) to do what 1 person (American) used to do, so I guess that helps our economy in the long run, doesn't it?

[cyborg]

My mother remarked that cheaper goods end up being more expensive than a high quality product (American made). She remembers coming to this country when Ideal Toys was still in business. How many toys are still made in this country? Not many I'm sure.

[CSM]

Because of all the crying by the protectionists. They want the government to take further actions to make sure that they have a job, in the field they want, for as long as they want and for a high wage. At the same time they want to buy cheap goods.

The government will do nothing but grow, otherwise they would cease to exist.......

S-OX is a direct result of the government protecting the "common" worker from further Enron scandals. It just adds compliance costs and still doesn't ensure anyone's 401K against bankruptcy. But the poeple feel safe!

[TXBSAFH]

I am in IT, but I am the son of a carpenter and in my younger days worked in the building trades. I will only buy tools that or of top quality. I was laid off for 4 months in 2002 and had to hassle some fences and decks until I found a new position. You may pay a little more up front but they last longer and work better in the long run. I have switched my buying to Milwakki(SP?) and porter cable.