The use of outsourcing, long a common business
practice, has increased as use of computers and broadband communication
has made it possible to have many business operations take place at remote
locations. Remote now can just as well mean overseas. As low wage
countries like India and China with growing numbers of technically
educated workers offer more support services of high quality, outsourcing
of the offshoring variety becomes a common, often essential, way of doing
business. Human resource professionals have counseled those who are
entering the labor force and those who have become unemployed to seek
advanced training in technical areas, particularly anything having to do
with information technology, in order to assure possession of saleable
workforce skills. Now those jobs suddenly seem exportable and information
technology professionals, including programmers, have lost positions they
believed secure to newly trained professionals abroad, particularly in
India, but also in other countries whose educated workers speak
English.
To many, offshoring now seems the explanation for why
this recovery has not generated jobs in the numbers that usually
materialize as economic activity returns to normal. Over the past two
years of recovery, companies have greatly increased output, earning record
profits, but have managed to avoid hiring new employees. Not until March
2004, did new employment numbers show up in the size required just to keep
pace with the employment needs of a growing labor force. Nevertheless,
hiring activity is still not enough to recoup the lost jobs. In
Connecticut, companies waited until this April to begin hiring again,
adding some 4,000 jobs. Nationally, some 2 million jobs - around 58,000 in
Connecticut - have vanished. How can economic statistics be so positive -
the US economy is growing at a rate above 4.5% annually - without new jobs
unless hiring and production are occurring elsewhere?
Stories abound of highly skilled persons who have done
all the right things in terms of preparation but who have lost jobs to
foreign companies, many located in India where information technology
companies enjoy rapid growth. The Los Angeles Times relates the story of
highly skilled programmer, Craig Cotterill. Cotterill had the dubious
pleasure of staying on to work alongside and help train the Indian workers
who replaced his colleagues until his job also vanished. "Cotterill, 54,
joined the growing ranks of computer professionals who so recently
occupied a prized position in the U.S. economy but are now seeing their
jobs disappear - many outsourced to foreigners."1 While the
outsourcing company is providing jobs in the US (insourcing) as well as in
India, its Indian workers here earn much less than their US counterparts,
and most work functions now take place in India. There, technical
industrial parks, isolated from urban disorder and poverty, and built and
staffed with government assistance, attract increasing numbers of
companies looking to obtain quality service at bargain prices. Still, the
number of service positions lost to offshoring is not large; 300,000 seems
a reasonable estimate. A frequently cited estimate by the firm Forrester
Research holds that more than ten times that number will be lost over the
next decade.2 These are small numbers in an economy employing
138 million. Offshoring clearly cannot account for the present continued
lack of hiring, but should it still be a matter of concern? The
Progressive Policy Institute estimates about 12 million information
technology jobs could be done at remote locations.
Analyses of outsourcing and offshoring have tended to
follow two opposed lines. Most economists take the view that outsourcing
and offshoring not only have a very small impact upon jobs overall, but
also actually contribute strongly to economic growth. A recent Foreign
Affairs magazine article by Michael Drezner, "The Outsourcing Bogeyman,"
is representative. Drezner argues that hard data do not support the notion
that outsourcing has led to the present lack of replacement jobs for those
lost in the US. There have obviously been losses in specific kinds of
employment, such as the high-level programming work done by Mr. Cotterill
and his colleagues, where employers can find a real cost advantage in
foreign suppliers. But it would not be wise to attempt to write laws to
protect those jobs. Market interference has unintended consequences. Candy
manufacturers, for instance, suffer from artificially high prices
maintained for US sugar producers and, as "…candy makers have relocated
production to countries where sugar is cheaper, between 7,500 and 10,000
workers in the Midwest have lost their jobs." New US steel tariffs,
recently eliminated because of World Trade Organization action, created
higher price levels for domestic users of steel who then became
uncompetitive in the world market and laid off thousands. In the longer
view, the present situation is not unique. The recession of the early 90s
was also followed by a jobless recovery and for the same reasons: Economic
restructuring destroys jobs in old sectors like manufacturing and creates
new jobs. "[T]he recent recession and current recovery are a more extreme
version of the downturn and 'jobless recovery' of the early 1990s - which
eventually produced the longest economic expansion of the post-World War
II era. Once the structural adjustments of the current period are
complete, job growth is expected to be robust." At the same time, laid-
off workers will need assistance. Government will need to expand
retraining and other employment programs. Perhaps the time has come to
look at insurance for workers to offset costs associated with qualifying
for new employment, a measure that would do a great deal to allay job loss
fears. Employers seem receptive and the costs would be
small.3
Paul Craig Roberts, whose credentials include service
as an Assistant Treasury Secretary in the Reagan Administration, has
become a prominent spokesman of the view that offshoring represents a new
and threatening trend. Roberts has come to believe that economists need to
rethink competition in international trade. In his view, modern
communications and the steady advance of developing low-wage economies
whose citizens possess technologically advanced skills, particularly in
India and China, means that high wage nations, like the US and Western
European countries, really can have no production advantage for any
exportable product or service. Roberts argues that "[f]rom the perspective
of trade theory and economic-development theory, it is hard to see the
benefit to the country whose firms outsource. With domestic capital and
technology reallocated to the employment of foreign labor, there is less
to employ domestic labor. Either unemployment results or the remaining
capital is spread more thinly with a decline in labor productivity and
real incomes. As industries move offshore, suppliers are forced to follow.
The domestic economy becomes a less-efficient place to produce as
concentrations of skills are diluted by movement offshore…." What Roberts
calls the First World - the advanced high wage economies - faces a severe
economic challenge "…because all tradable goods production and service
jobs can be outsourced." The incentive to outsource work to China or India
will continue to grow because those countries have "…enormous excess
supplies of labor…." First World countries will experience continuing
downward pressure on wages. Roberts suggests that "[t]he resulting
declines in employment and/or real wages can bring political instability
to First World countries." While it is true that the numbers at present
are not alarming - numbers of technical service jobs are still increasing,
for instance, although slowly - Roberts argues that the long-range trends
are cause for concern. Economists need to look dispassionately at the
realities and consider the possibility of developing a trade strategy,
should that seem necessary. Analysts who speak of the unalloyed benefits
of free trade assume that innovation will create a new structure of
opportunity, but the rapid progress of advanced technology and science in
developing societies like China and India means that the opportunities may
arise just as well abroad - and, again, the high wage society can have no
advantage.4
Berkeley economists Brad DeLong, who served as a Deputy
Assistant Treasurer in the Clinton Administration, and Stephen S. Cohen, a
professor of regional planning, in a draft posted on DeLong's Website,
advance a position similar to that of Roberts. The short term, they say,
is not a problem. But, down the line, perhaps sooner than later,
offshoring will be a very large problem. The advanced economies will
simply not provide a service product superior enough to that produced by
low wage economies abroad so that the work and the high paying jobs will
remain at home. There are, of course, a very large number of jobs that
cannot go elsewhere because they require proximity. However, downward wage
pressure on exportable high-paying, technologically advanced positions
will drag down other well-paying positions that must remain at home.
Luckily, say DeLong and Cohen, the US and other advanced economies can
prepare for this challenge: "Because this is an economic transformation
that is going to hit not in one shot next year but over the course of the
next generation, we have plenty of time: time to build the social safety
net, the education and retraining programs, the social and economic
institutions needed to turn the coming of trade in white-collar services
from a win-lose to a win-win affair for America and Americans; time to
rebuild confidence that employment will be full and the duration of
unemployment spells short. But we will need all this time, because the
magnitude of the approaching economic trade shock will be much larger than
anything in our historical memory."5
The Progressive Policy Institute study noted earlier
draws a similar conclusion: "Hopefully, the rise of service sector
offshoring needs will serve as a wake up call to our nation's policymakers
to do the right thing. The right response is to enhance our nation's
ability to specialize in innovative, high-valued-added work, get tough
about practices by other countries that distort free trade, and boost aid
to workers and communities hurt by global competition."6
But what then has happened to the jobs? The short
answer is productivity, which grew at a very high rate through the 1990s
and has continued to advance even through the recession and into the
recovery. First quarter 2004 productivity in the nonfarm business sector
increased at a 3.8 percent annual rate nationally, following a rate of 4.4
percent during 2003.7 Several factors have contributed to this
historically high rate. Businesses invested very heavily in computers and
software in the 1990s and the problems expected with the advent of Y2K
prompted still more investment. When the downturn came with the crash of
the dot coms, the end of computer personnel needs associated with Y2K, and
the recession - a "perfect storm" in the employment world of Information
Technology, according to Harris Miller, president of the Information
Technology Association of America - companies across the board shed IT
staff. Those remaining had learned how to use the new tools and could meet
increasing demand, when business began to pick up without the need for
additional help.8 Technological advance more generally supports increased
productivity. Manufacturing output has continued to expand worldwide even
as worldwide manufacturing employment continues to decrease.9
While analysts disagree about the impact of offshoring,
they share the view that national and state economies need to invest in
scientific and technological research to support innovation. That
investment requires an investment in scientific and technical education
too, both for students and for workers who have lost their jobs and need
training. Is it significant in that regard that the Milken Institute
comparative ranking of states according to scientific and technological
resources finds Connecticut slipping from 8th place to
10th?10
1 Warren Vieth, "Outsourcing Ax Falls Hard
on Tech Workers; As the slump persists, some train their low-cost
replacements before being shown the door," Los Angeles Times, May 30,
2004. p. A.1
2 Robert D. Atkinson, "Understanding the
Offshore Challenge," Progressive Policy Institute, Policy Report, May
2004, www.ppionline.org, p. 1
3 Daniel W. Drezner, "The Outsourcing
Bogeyman," Foreign Affairs, May/June 2004.
4 Timothy Aeppel, "Offshore Face-Off: Moving
jobs overseas can cut a company's costs; But is it bad for the U.S.
economy? Two economists debate the issue," Wall Street Journal, May 10,
2004, p. R.6
5 Stephen S. Cohen and J. Bradford DeLong,
"Thinking About Outsourcing," Draft 1.3, http://www.j-bradford-delong.net/
Posted 4/2/4.
6 Atkinson, PPI, p. 19.
7 US Bureau of Labor Statistics
8 "Inside the debate over outsourcing
information technology service jobs. (Industry Overview), Manufacturing
& Technology News, Oct 17, 2003 v10 i19 p1(3)
9 Drezner, "Outsourcing." Drezner points out
that the worldwide percent of decrease in manufacturing payrolls is nearly
the same as that in the US. Commentators tend blame loss of jobs in
manufacturing on outsourcing, but since payrolls decline everywhere, it is
clear that the ultimate culprit is productivity and technology.
10 Stacy Wong, "State Slips As Tech Turf,"
Hartford Courant, April 7, 2004, Milken Institute, http://www.ctdol.state.ct.us/lmi/misc/www.milkeninstitute.com.
Commissioner James F. Abromaitis of the Connecticut
Department of Economic and Community Development (DECD) announced that
Connecticut communities authorized 942 new housing units in May 2004, a
2.8 percent increase compared to May of 2003 when 916 units were
authorized.
The Department further indicated that the 942 units
permitted in May 2004 represent a 10.4 percent decrease from the 1,022
units permitted in April 2004. The year-to-date permits are up 19.8
percent, from 3,455 through May 2003, to 4,140 through May 2004.
The Hartford Labor Market Area showed the largest
increase in permits (55) compared to a year ago. Hartford and Oxford led
all municipalities with 34 units each, followed by Bloomfield with 31, and
Brookfield with 28. From a county perspective, all counties showed
year-to-date gains.
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