The Bright Side of Sending Jobs Overseas
nytimes.com
By EDUARDO PORTER
The New York Times
Week In Review
February 15, 2004
CASE STUDY: CELLPHONES
FOR most politicians - Democratic or Republican - the issue of outsourcing jobs to faraway countries is a no-brainer: It's bad for the United States economy and it's even worse for their careers, especially in an election year when the work force has just lost more than two million jobs. So it is unsurprising that politicians of both parties ripped into N. Gregory Mankiw, chairman of the president's Council of Economic Advisers, when his annual economic report on Tuesday made precisely the opposite point: that if services like software programming can be done more cheaply in India, it makes sense for companies to procure them there. Outsourcing will ultimately enhance their productivity.
Yet while debate is raging over globalization's costs and benefits, Mr. Mankiw's comments are based on solid, age-old economic arguments. Most economists agree that higher productivity - whether it comes from trade, outsourcing or technology - is good, even when it creates pain for many workers.
"Outsourcing does not reduce the total number of jobs in America," said Robert Reich, who served as labor secretary under President Bill Clinton. "If other countries can do something cheaper we ought to let them do it, and concentrate on what we can do best."
Indeed, despite the hemorrhage of jobs since Mr. Bush took office, the past performance of the American economy - particularly the pattern of job creation and destruction over the past several years - supports Mr. Mankiw's case.
In many ways, the economists' argument for outsourcing is as straightforward as the case for importing products. If an Indian software programmer is paid a tenth of an American's salary, a company that develops software in India will save money and - provided competitors do the same - the price of its software will fall, productivity will rise, the technology will spread, and new jobs will be created to adapt and improve it.
Take cellphones, which 20 years ago were luxury items with the size and weight of a brick. Today - thanks to competition and inexpensive, globalized production - they are cheap, ubiquitous, tiny and packed with a mind-boggling complement of ancillary functions. The industry and the number of jobs have only increased. Global outsourcing also played a big role in the information technology boom of the late 1990's. Personal computers were imported from abroad. Chip companies shipped production overseas. But this outsourcing prompted the creation of new jobs here, on the higher end of the technological spectrum.
A report released last December by Catherine L. Mann of the Institute for International Economics, a Washington research group that backs free trade, calculated that lower costs due to globalized production accounted for 10 percent to 30 percent of the decline in hardware prices during the technology boom of the second half of the 1990's, when computer prices fell 10 percent a year.
The impact of cheap hardware was felt throughout the economy. Ms. Mann calculates that outsourcing boosted productivity growth from 2.5 percent to 2.8 percent a year from 1995 to 2002, a gain that in turn added at least $230 billion to the country's total output of goods and services.
As lower-priced technology flooded the marketplace, it helped generate new jobs, as companies that snapped up computers suddenly required software and workers who could adapt the products to their needs.
Ms. Mann notes that demand for people who knew how to use computers grew by 22 percent through the 1990's boom, twice as fast as overall job creation. "This is despite the fact that outsourcing of computer jobs was going on," Ms. Mann said.
Moreover, lower prices also muted inflation, allowing interest rates to be lower than they otherwise would be - thus boosting investment and growth. And the Asian countries that made computers and chips spent some earnings buying other American services - like legal and financial assistance.
Over all, Ms. Mann notes, "unemployment in the 1990's fell to 4 percent," despite aggressive outsourcing during this period.
But for many unions, investment in foreign lands is undisputedly bad. "For every investment you make there is investment you don't make here," says Bob Baugh, executive director of the Industrial Union Council of the A.F.L.-C.I.O. , which has suffered a relentless decline in manufacturing jobs since the late 1990's. "People are concerned about their own job. They know it's a problem and they are absolutely stunned by the admission of this administration."
Fears of outsourcing have heightened even further, because it is no longer just manufacturing jobs that are threatened, but high-paying, white-collar service-sector jobs. Moreover, the worldwide pool of available well-trained workers is much larger, and they are only a mouse-click away.
The Internet and other technologies have enabled Dell, the personal computer manufacturer, to open customer support centers in India, and allowed Delta Airlines to send reservations jobs to the Philippines. The trend seems to be moving up the skills ladder: Oracle, a software company, and Ericsson, the telecommunications equipment manufacturer, have moved product and software development jobs to India. An often-cited report by Forrester Research says 3.3 million American white-collar service industry jobs will move overseas by 2015. People are afraid that they will be left with low-paying jobs at Wal-Mart.
Yet most economists agree that the impact on productivity, economic growth and jobs should be similar to that of the outsourcing of hardware in the late 1990's. Prices of technology services will fall, technology will become more pervasive, and jobs will be created as businesses find new things to do with the technology.
"We tend to keep the high end of the value chain," said Janet Yellen, an economist at the University of California at Berkeley who was head of Mr. Clinton's Council of Economic Advisers. "We're outsourcing the more standardized part of high tech."
Indeed, employment in the service sector - including those services considered most at risk of being outsourced to developing nations - has not done too badly compared with the rest of the job market.
The United States has lost many jobs of late. But that's basically because the economy fell into recession. From 1999 to 2003, as the economy peaked and went bust, 1.3 million nonfarm jobs vanished. Manufacturing lost 2.8 million jobs; 800,000 management positions disappeared - including C.E.O.'s and other executive jobs that are not easily outsourced to Bangladesh.
But business and financial service occupations - at risk of the kind of outsourcing that Forrester Research warns of - added more than 600,000 jobs during the period. Another sector that is supposed to be vulnerable, what the Commerce Department calls computer and mathematical occupations, added 150,000 jobs. Moreover, many jobs that are outsourced today - like call-center operators or data-entry staff - could just as easily be lost to automation.
"Productivity growth, however it occurs, has a disruptive side to it," Ms. Yellen said. "In the short term most things that contribute to productivity growth are very painful." Fast productivity growth is one reason that employment hasn't picked up despite fast economic growth.
What to do? Labor unions would support legislation that slowed globalization down. Others, like Mr. Reich, want more comprehensive employment insurance. Ms. Yellen supports better education and job training. But ending sources of productivity growth, she said, is not a good idea. "You could end up with an economy that does not show progress and doesn't improve living standards," she said. |
