Sending Jobs Offshore from the United States: What are the Consequences?

Whalen, Charles J. Article Sending Jobs Offshore from the United States: What are the Consequences? Intervention. Zeitschrift fuer Ökonomie / Journal of Economics Provided in Cooperation with: Edward Elgar Publishing Suggested Citation: Whalen, Charles J. (2005) : Sending Jobs Offshore from the United States: What are the Consequences?, Intervention. Zeitschrift fuer Ökonomie / Journal of Economics, ISSN 2195-3376, Metropolis-Verlag, Marburg, Vol. 02, Iss. 2, pp. 33-40, https://doi.org/10.4337/ejeep.2005.02.04 This Version is available at: https://hdl.handle.net/10419/277049 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Sending Jobs Off shore from the United States: What are the Consequences? Charles J. Whalen* In the United States, the Fourth of July is usually a day of celebration. But the date has a darker meaning for families of more than a thousand workers in central New York. Th at is because Independence Day, , was when Carrier Corporation halted its Syracuse-area production of cooling equipment, and , hourly and salaried employees watched their jobs move to Asia (Fay ). Carrier workers are not alone. In July , U. S. manufacturing employment totaled . million, down three million since July . Th at is a loss of about  percent of America’s manufacturing jobs in just a few years. Of course, not all of these jobs moved outside the U. S. But competition from lowerpaid foreign workers is a major cause of the decline, according to the Congressional Budget Offi ce (). Josh Bivens, an economist at the Economic Policy Institute in Washington, DC, estimates that as many as two-thirds of the domestic manufacturing jobs lost since the mid-s can be blamed on the substitution of imports for goods that had been produced in the U. S. (Bivens ). In short, U. S. consumers are substituting goods produced by foreign labor for goods produced by their fellow citizens. And often this occurs because U. S.-based multinatio nals close U. S. operations and either relocate their production facilities overseas or contract with foreign-based producers. Th is sounds like »off shoring«, and it certainly is. But it has been happening since the s; in fact, U. S. manufacturing employment has been falling since . Off shoring, however, has appeared more recently in the lexicon of economists, policymakers, and journalists. Th is article explains the term’s more recent appearance and often very limited meaning. It also explores the magnitude of the phenomenon, identifi es the jobs aff ected or »at risk«, describes the impact on enterprises, workers, and communities, and recommends some steps that could help policymakers achieve a more prosperous economy in the face of this trend. Th is is Progress? A brief historical sketch will set the stage for a closer look at the current wave of off shoring. By most accounts, manufacturing jobs represented the Old Economy, and could not or should not be saved. Th ese jobs were heavily blue-collar and unionized, did not require more than a high-school diploma, got your hands dirty, and, according to the conventional wisdom, paid workers »too much«. When the jobs disappeared, workers were told to pull themselves up by their bootstraps and join the New Economy: learn to use – or even program – computers, and jump on the service-economy bandwagon. More than anything else, this transition was considered a sign of economic progress. * Labor and Employment Relations Association, University of Illinois at Urbana Champaign/USA. 33 34 Forum I recall that in the early s, Buff alo, New York, landed a call center employing a few hundred people. Local leaders touted that center’s customer-service phone jobs as a sign that western New York was part of the high-tech economy. But enthusiasm over the New Economy never really made it into the new millen nium. Th e technology-driven investment boom went bust, as did the dot.com frenzy – and the stock market. Call-center workers were just a fraction of the many service-sector em ployees suddenly fi nding themselves out of work or at risk of unemployment as jobs were relocated to places such as the Caribbean and China. It was not so easy to call this »progress« any longer, and the term »off shoring« began appearing in news accounts and academic papers. Moreover, although off shoring can be applied to both blue-collar and white-collar jobs, it has become most closely associated with the substitution of foreign labor in white-collar, service jobs. In short, off shoring (also called international outsourcing) is used most often to describe the loss of positions previously considered insulated from foreign competition. »At Risk« Jobs Run the Gamut Who is being aff ected by services off shoring? Th e federal government does not collect reliable statistics. Some private sector researchers estimate that services off shoring has cost the U. S. a half-million jobs over the past three years; others suggest that close to a half-million jobs were lost in  alone. Th e consulting fi rm Forrester Research predicts that , U. S. service jobs will be lost to off shoring this year – and it projects that a total of . million will be lost from this sector by  (Associated Press ). Assuming the Forester projection for  proves accurate, that is still less than six percent of the workers who involuntarily lose their jobs each year. Moreover, the U. S. eco nomy ended  with a total of . million jobs more than existed at the end of ; the economy has not lost its ability to create jobs. Nevertheless, job loss can be traumatic, and the creation of new jobs does not always benefi t those who see their positions go off shore. So, who in the service sector is at risk to lose their job to off shoring? A recent study by economists at the University of California at Berkeley concludes that  million Americans are in jobs that are at risk, which means the job of one out of every ten nonagricultural workers is threatened. Th eir estimate is based on a combination of historical data, announced business plans, and job attributes (Bardhan/ Kroll ). Among the most »at-risk« occupations mentioned by the Berkeley economists are the following: – offi ce and administrative support jobs, which include about two-dozen occupations such as computer operator, switchboard operator, data enterer, and a range of offi ce clerks;  With data updated in . Charles Whalen: Sending Jobs Off shore from the United States 35 – many business and fi nancial occupations, including fi nancial analyst, credit card and insurance-claim processor, tax preparer, accountant, and payroll record keeper; – paralegals, legal assistants, and medical workers, including x-ray readers and medical transcriptionists; – graphic designers, technical writers, and computer and math professionals (such as programmers, software engineers, statisticians and actuaries). Th ese economists also off er another glimpse at what jobs are at risk. Th ey report a saying among companies providing outsourcing services to businesses: »Any job that involves most ly sitting at a desk, talking on the phone, and working on a computer is under potential threat.« (Bardhan/Kroll : ) Th at statement lends support to a point buried in a  study by the McKinsey Global Institute (MGI), the research arm of the McKinsey & Company consulting group. Th e McKinsey study suggests that up to  percent of the economy’s jobs can be off shored (MGI : ). Th e study also makes it clear that work currently off shored runs the gamut (MGI : ): – back-offi ce processing of documents and data; – customer contact jobs, such as customer service and telemarketing; – corporate services, such as fi nance, accounting, human resources and informationtechnology support; – knowledge services and decision analysis, such as research services, portfolio analysis, risk management and credit underwriting; – and even path-breaking research and development, such as engineering, design, and testing of new products. Sixty-Four Cents an Hour Th e prime motivation behind off shoring is the desire to reduce labor costs. Th ere is a huge diff erence between the U. S. and developing countries when it comes to compensation of workers with equivalent skills. For example, a U. S.-based software developer who costs a company $  an hour can be replaced by an Indian developer with the same skills for $  an hour (MGI : ). A programmer in the Philippines who is paid $ . an hour can replace a U. S.-based computer programmer who costs $  an hour (Outsource Philippines ). And if we include manufacturing in our defi nition of off shoring, then a U. S.-based factory worker hired for $  an hour can be replaced by a Chinese factory worker who is paid  cents an hour. In addition to the wage diff erence, employers believe that work ers are motivated to be dependable and highly productive in nations to which jobs are off - shored (Coy ). Th e main reason off shoring is happening now is because it can. Innovations in information technology have given us personal computers, the ability to computerize and digi tize most business services, and the opportunity to cheaply connect operations around the globe by means of international telecommunications. Toss into the mix sagging profi ts 36 Forum from the tech bust, and a fear that competitors are already doing it, and there is no surprise companies have been rushing to relocate jobs. According to McKinsey, the top destinations for services off shoring have been Ire land, India, Israel, and Canada. Other destinations include China, Eastern Europe, the Philippines, Australia, South Africa, Russia, and Th ailand. A major factor is access to Englishspeaking workers;  percent of worldwide services off shoring is done by U. S.-based businesses (MGI ). Winners and Losers What are the consequences of off shoring? According to mainstream U. S. economists, off - shoring is just another form of international trade, which means they see it as benefi ting America and its trading partners. Dislocations are acknowledged, but conventional economists stress that »the economy overall benefi ts« (Mankiw a, b). American hetero - dox economists and labor unions, meanwhile, draw attention to the dislocations, and emphasize that negative eff ects (job loss, a lower standard of living, etc.) may be felt by many more than those who watch their jobs disappear overseas. Indeed, such econo mists argue a »crisis of demand« could be triggered, which might result in a deep recession and a prolonged period of weak economic performance. Even worse, off shoring can mean the loss of jobs and production capabilities vital to national defense (Public Citizen , Con nell , Parks , Sleigh et al. ). Off shoring certainly produces winners and losers. Big winners are stockholders and consumers. For every dollar of services off shored, McKinsey estimates that a company’s shareholders and/or consumers gain  cents in the form of higher profi ts and/or lower prices. Some of the gain in profi ts might even lead to further job creation in the U. S., and there is evidence that many U. S.-based companies continue to create jobs here even while they off shore others (Slaughter ). For enterprises, off shoring means substantially lower production costs. When companies off shore jobs, the huge gap between U. S. and overseas wages is off set somewhat by higher telecommunications costs and the expenses associated with coordinating global op er ations. Still, researchers estimate that even when these off setting costs are considered, com panies save at least  percent over U. S. production. In fact, the savings are often increased to  percent by means of a reorganization of the work process (MGI : ). Here is a specifi c off shoring example: BellSouth Corporation plans to send the jobs of about  computer programmers and software maintenance technicians to India by , for an estimated fi ve-year savings of $  million. No wonder India’s National Association of Software Companies reports that the number of Indian workers producing software for export to the U. S. increased by over , between  and . Over the same period, U. S. software employment fell by almost , jobs (Economic Policy In sti tute ). Th e clearest gain from off shoring is found in corporate profi ts. Two years into the current recovery, which began in late , the profi t share of national income grew  percent Charles Whalen: Sending Jobs Off shore from the United States 37 (on a pretax basis), compared with only a three percent gain in the recovery of  – . Worker compensation, however, was down four percent – which, according to economists at the Brookings Institution, represents a steeper decline than in any previous recovery of the last  years (Brainard/Litan : ). Th e gain in corporate profi ts relative to wages translates into a substantial redistribution of income. Th at is because half of the house holds in America hold no stock in any form, including mutual funds and (k)-style pen sion plans. In fact, half of the workers with (k) plans have less than $ , in their accounts (Gleckman ). At the same time, the top  percent of the nation’s stockholders own almost  percent of all stocks (Mishel et al. :  f.). Big Losers Workers who watch their job off shored are the big losers. After losing their job, sixty percent of service workers reported taking a pay cut when becoming reemployed, accord ing to U. S. Department of Labor surveys conducted between  and . One out of ev ery fi ve of those re-employed reported taking a pay cut of  percent or more. Even worse,  per cent of service workers losing their job to off shoring were unemployed for an extended period, often a year or more. Losses from off shoring are even more substantial among manufacturing workers (Kletzer :  f.). Long periods of unemployment and large declines in income are likely to persist among those aff ected by off shoring. Of the dozen occupations projected by the U. S. Department of Labor to produce the most jobs in the nation by , half of them pay poverty wages. Th ese high-growth jobs include janitors, cashiers, and home health aides. Of course, workers who do not lose their jobs might gain from slower growth in product prices (it is possible that off shoring might restrain infl ation by a couple tenths of one percent), but there are also negative eff ects on these workers. For example, off shoring means a larger portion of payroll taxes has to be paid out in the form of unemployment benefi ts; that leaves less tax dollars for other public initiatives. Further, since most workers losing jobs to off shoring take a pay cut when rehired, everyone is aff ected by the reduction in consumer purchasing power. Th e continuously employed also lose because the threat of having their own jobs outsourced means they settle for lower wage increases – and may even accept a pay cut or benefi t concessions. Off shoring of goods and services has other negative consequences. At the national level, for example, off shoring adds to the U. S. trade defi cit, which was a record $  billion last year. Th e largest imbalance was with China, from which America imported $  billion in goods and services more than it exported. At the community level, off shoring has ripple eff ects. For example, Robeson County, in southeastern North Carolina, lost , manufacturing jobs to international trade between  and . As those employment losses rippled through the community, another , jobs were lost according to a recent study (Hossfeld/Legerton ). Another example is Galesburg, Illinois, a small city in the western part of that state. Last September, it lost its largest employer, as Maytag Cor poration moved a refrigerator plant and its , jobs to Mexico. A Western Illinois University 38 Forum study estimates the total job losses in the area will be , (Rural Economic Technical Assistance Center ). Th ese ripple eff ects run through two main channels. First, when jobs are off shored, suppliers often reduce their workforces too. Second, households aff ected by job loss tend to spend less on local goods and services – so all establishments feel the pinch, including restaurants, the local post offi ce, the hardware store, the neighborhood bank, and so on. Even local charities are aff ected. At the family level, meanwhile, job loss has long been shown to have economic, social, medical, and psychological costs. For example, unemployment is associated with increased rates of suicide, homicide, mental hospital admission rates, and alcohol abuse. Achieving a More Prosperous Economy Th ere are at least three constructive steps U. S. policymakers can take in the face of off shoring. First, they can ease the dislocation faced by workers who lose their jobs. Today, there are training, healthcare, and income benefi ts for manufacturing workers who lose jobs to foreign trade. Service workers, however, are not eligible for such benefi ts. Trade Adjustment Assistance needs to be extended to service workers. Second, policymakers can keep the overall economy running hot so the unemployment rate is as low as possible. In the year , for example, the unemployment rate was four percent. Last year, it was . percent, and it was even higher in  and . More budget discipline would help by allowing the Federal Reserve to keep interest rates low. (Recent tax cuts, tilted toward the wealthy, have produced much red ink without adding much consumer demand.) Low overall unemployment means higher national output, greater demand by households, and a smoother transition to re-employment for job seekers (Bernstein/Baker ). Finally, companies in the United States should be encouraged to compete by treating their domestic workers as a source of innovation, high productivity, and product quality, rather than to compete by viewing employees as a cost to be minimized. Th ere are two routes to competitiveness. When fi rms compete by focusing on innovation, productivity and quality, they take the »high road« – and there are benefi ts for workers, shareholders and consumers; when fi rms search the globe for low wages and compete by using cheap labor to undercut each other, they set out on a »low road« that sets up a »race to the bottom«. At fi rst, it is just displaced workers who suff er from the »low road« approach, but eventually communities and corporate profi ts can be hurt too, as purchasing power stalls. Policymakers could encourage more companies to take the high road by making more eff ec tive existing programs such as the Manufacturing Extension Partnership (based loosely on the national agricultural extension concept) and by expanding tax incentives for employers who support workers continuing education and training. Of course, it won’t be easy to achieve a high-employment economy in which companies choose the competitive high road over the low road, and in which displaced workers are given a helping hand. But achieving such an economy would certainly give Americans more reason to celebrate on Independence Day. Charles Whalen: Sending Jobs Off shore from the United States 39 References Associated Press (): Study: Off shoring of U. S. Jobs Accelerating, www.MSNBC.com (..) Bardhan, Ashok D./Kroll, Cynthia (): Th e New Wave of Outsourcing, University of Cali for nia, Berkeley, Fisher Center Research Reports No. , updated data on »at risk« oc cu pations provided to the author in March  Bernstein, Jared/Baker, Dean (): Th e Benefi ts of Full Employment, Washington, DC: Eco nomic Policy Institute Bivens, Josh (): Shifting Blame for Manufacturing Job Loss, Economic Policy Institute Briefi ng Paper, No.  Brainard, Lael/Litan, Robert (): Services Off shoring, American Jobs and the Global Economy, in: Perspectives on Work, Vol. , No. , pp.  –  Congressional Budget Offi ce (): What Accounts for the Decline in Manufacturing Employment?, CBO Economic and Budget Issue Brief, February ,  Connell, Tula (): America Needs Good Jobs, in: America at Work, Vol. , No. , p.  to p.  Coy, Peter (): Just How Cheap is Chinese Labor, in: BusinessWeek Online, December , , www.businessweek.com Economic Policy Institute (): EPI Issue Guide: Off shoring, www.eipnet.org Fay, Timothy A. (): Th e Carrier Move from Syracuse, in: Perspectives on Work, Vol. , No. , pp.  –  Gleckman, Howard (): Social Security: Th ree New Ideas, in: BusinessWeek Online, February , , www.businessweek.com Hossfeld, Leslie/Legerton, Mac (): Th e Economic and Social Impact of Job Loss in Robe son County, North Carolina,  – , in: Sociation Today, Vol. , No. , www. ncsociology.org/sociationtoday Kletzer, Lori G. (): Job Loss from Imports: Measuring the Costs, Washington, DC: Institute for International Economics Mankiw, N. Gregory (a): Press Briefi ng on the  Economic Report of the President, Th e White House, Washington, DC, February ,  Mankiw, N. Gregory (b): Ask the White House, www.whitehouse.gov/ask/jan.html (..) McKinsey Global Institute (): Off shoring: Is It a Win-Win Game?, San Francisco, CA: McKinsey & Company Mishel, Lawrence/Bernstein, Jared/Allegretto, Sylvia (): Th e State of Working America /, Washington, DC: Economic Policy Institute Outsource Philippines (): Why the Philippines: Quality of Knowledge Workers and Comparison of Labor Costs, www.outsourcephilippines.org Parks, James (): Th e Future of Manufacturing and America’s Middle Class, in: America at Work, Vol. , No. , pp.  –  Public Citizen (): Th e Politics of Off shoring, www.citizen.org/trade/off shoring/views 40 Forum Rural Economic Technical Assistance Center (): Maytag Plant Closure: IMPLAN Economic Impact Analysis, Macomb, IL: Illinois Institute for Rural Aff airs Slaughter, Matthew J. (): Globalization and Employment by U. S. Multinationals: A Framework and Facts, in: Daily Tax Report, March ,  Sleigh, Steve/Almeida, Paul/Khan, Faraz (): Losing Altitude: Employment in the Aerospace Sector, in: Perspectives on Work, Vol. , No. , pp.  –  Th e British Economy: A Growth and Employment Miracle? Andrew Glyn* Since  the UK economy has grown at . percent per year, compared to . percent in the Eurozone. Th e growth diff erential in favour of the British economy, previously regarded as the »sick man of Europe«, has even been increasing. Since  the UK has grown twice as fast as the Eurozone’s . percent per year. As a result the UK labour mar - ket looks distinctly healthier than Europe’s. Both the UK and Euroland had around ten percent unemployment in the early s. But UK unemployment has been around fi ve percent since  whilst in Europe it has been has fl uctuating around nine percent. In the UK around  percent of the working age population are in work, as compared to  per cent in the EU-. Moreover provision of jobs in the UK has not been at the expense of improvements in productivity, the basic determinant of the long-term growth of living standards. Since  labour productivity in the UK business sector has been growing about . percent per year, around three times the rate of advance in Europe. In one sense such comparisons are rather fl attering to the UK. For the UK economy has not been doing outstandingly well. Rather Europe, and in particular the big countries of continental Europe, have been doing extremely badly. Further, inequality rose faster in the UK than in any other EU country since . Th e ratio of incomes ten percent from the top of the distribution to ten percent from the bottom is around . in the UK as compared to three to . in Northern Europe. Even so, thirteen years with UK growth between . per - cent and . percent, combined with comparatively low unemployment, must seem an enviable record to European countries struggling with stagnation. How has the UK done it? Th ere are two obvious explanations. Keynesians would argue that the UK, once freed from the straightjacket of the Exchange Rate Mechanism (ERM), has benefi ted from ex- * Corpus Christi College, Oxford.  All data in this note is from current issues of OECD Economic Outlook, Employment Outlook and other OECD Reports.