Outsourcing: implications for employment
By John M. Baker, Ph.D., Resource Associate I, DOL

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.

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Housing Update
Strong showing in May permits

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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