Job Outsourcing

by Bruce Fenton

Job outsourcing is not a new problem for any economy—history is replete with examples. In the 1830s, England became so proficient at milling cloth that India cried “foul” as jobs in the textile mills fled India for England. Lately, we’ve been hearing a lot of anecdotal evidence of the US economy being driven to its knees by job outsourcing, but the facts paint a different picture. Outsourcing is a natural result of technological innovation and growing world economies.

Gregory Mankiw, head of President Bush’s Council of Economic Advisors, recently observed that outsourcing is just “a new way of doing international trade, which makes it a good thing.” This touched off a political firestorm on both sides of the aisle, since jobs are an emotional issue, especially in election years.

What makes this picture different is that for the first time, white collar jobs are at risk. As Nandan Nilekani, CEO of the India-based Infosys Technologies, said at this year’s World Economic Forum, “Everything you can send down a wire is up for grabs.”

During the 1980s and the early 1990s, many corporations began shifting jobs overseas to take advantage of lower cost structures. This shift drew little attention as our economy was creating jobs faster than jobs were leaving. During the recent downturn, however, outsourcing has become the dog to be kicked, even though close to 90% of jobs in the US require geographic proximity. Jobs requiring high skill levels, communication and innovation skills and business expertise are not leaving. Analysis by the International Data Corporation concluded, “The activities that will migrate offshore are those that can be viewed as requiring low skill, since process and repeatability are key underpinnings of the work. Innovation and deep business expertise will continue to be delivered predominantly onshore.”

Research by the Forrester Group predicted that 3.3 million jobs will be lost over the next 15 years to offshore outsourcing. That is a tiny fraction of total US employment—less than .2%. Because outsourcing enables our corporations to produce at lower costs, our economy benefits from lower inflation and better service. As IT costs come down, for instance, industries such as health care can make better use of technology at lower costs while improving the quality of their output. Research by the McKinsey Global Institute has estimated that for every dollar spent on outsourcing to India, the US reaps between $1.12 and $1.14 in benefits.

Yes, manufacturing jobs have suffered . . . but not because of outsourcing. Technology has increased productivity both here and abroad, allowing manufacturers to do more with fewer people. An Alliance Capital Management study of global manufacturing trends from 1995 to 2003 showed that the US lost 11% in manufacturing employment during those seven years. Meanwhile, China showed a 15% decrease and Brazil had a 20% decrease. Our job losses in manufacturing were mirrored worldwide.

Outsourcing has also proven to reallocate skilled workers to more competitive, better-paying jobs. According to McKinsey, from 1999 to 2003, 70,000 computer programmers lost their jobs, but during the same period, 115,000 computer software engineers found higher-paying jobs.

Protectionism is not the answer. A recent tariff on steel imports sought to protect 40,000 steel workers. However, over 40 times as many jobs are related to steel use rather than steel production. According to estimates by the Institute for International Economics, between 45,000 and 75,000 jobs were lost because higher steel prices made US steel-using industries less competitive.

The bottom line is that trade protectionism forces inefficiencies on an economy, subsidizing uncompetitive sectors while preserving jobs that are less competitive or less productive. This leads to higher prices for consumers while destroying current and future jobs in sectors that have comparative advantage. If barriers are erected to prevent offshore outsourcing, the overall effect will not create jobs, but destroy them.

Bruce Fenton is a financial consultant, a writer, and the president and founder of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.