The politics and economics of outsourcing
Offshore outsourcing "is a difficult issue for economists", according to Harvard's Gregory Mankiw and Phillip Swagel from the American Enterprise Institute in a newly published AEI Working Paper. In 2004 both authors were working at the Council of Economic Advisers as, respectively, chairman and chief of staff, and the outsourcing debate was in full swing. The Politics and Economics of Offshore Outsourcing (PDF) reflects that backdrop:
During the presidential campaign of 2004, no economic issue generated more heat or shed less light than the debate over offshore outsourcing. ...While the job of the CEA is to focus on the economics of current policy debates, the environment in which that job is performed is highly political, especially in an election year. To some extent, therefore, this paper is a report from inside the eye of a storm. Our goal is both to describe the heat and then to shed some light.
The first part of the paper focuses on the politics, describing the outsourcing debate of 2004. ...The second part of this paper surveys the empirical literature on offshore outsourcing, with an emphasis on outsourcing of business services.
Despite data limitations, the authors offer some relatively upbeat conclusions:
There is a lot we still do not know about outsourcing, largely because the available data do not provide the information needed to fully understand the magnitude of outsourcing, the reasons behind it, and the effects it has on the economy. What is known, however, suggests several tentative conclusions:
• So far, the extent of outsourcing to date and in the foreseeable future is and will be modest relative to any meaningful labor market indicator.
• As technology develops and global economic integration deepens, more jobs and people will be affected by actual or potential offshore outsourcing. This could affect employment relationships and alter incentives for human capital accumulation. Further development of theoretical models will help foster better understanding of the associated welfare impacts.
• Outsourcing appears to be connected to increased U.S. employment and investment rather than to overall job loss. Some U.S. jobs are certainly lost to other countries. On the whole, however, firms involved with offshore outsourcing are not shifting net jobs overseas but instead are creating jobs both in the United States and in other countries.
Outsourcing will create winners and losers, and the pain of dislocation will be real for workers and their families. Taken together, however, these conclusions suggest that offshore outsourcing is likely to be beneficial for the United States as a whole. This presents a challenge of how to best assist people affected by offshore outsourcing without retreating from international engagement and thereby giving up the economic gains that trade in services makes possible. As is the case with more familiar forms of trade, in the long run, outsourcing is likely to be a good thing for the U.S. economy.
While their conclusions are in line with most of the empirical evidence so far, it seems a little complacent to assert that the extent of outsourcing will remain modest "in the foreseeable future". It is just too early to tell.
neweconomist.blogs.com
Followups on the idea at the same blog
Offshoring America - myth and reality
In their comments on yesterday's outsourcing post, 'Lord' states a commonly held view:
Yes, outsource high paying jobs and create more low paying ones in transportation and personal services and the world will be hunky dory. Is this supposed to be the level of intellectual reasoning today?
Sorry Lord, but you are wrong: it is mostly low paid jobs that are being offshored from the United States, not high paying ones. Though I've previously mentioned the recent OECD workshop on the globalisation of production, I did not blog about a Bureau of Labor Statistics paper presented there. Obviously I should have. The paper, Labour market dynamics associated with the movement of work overseas (PDF) by Sharon Brown and James Spletzer, presents the new overseas movement of work statistics from the BLS Mass Layoff Statistics.* Since January 2004 this survey has been collecting data on movement of work. Their paper concludes, from data so far, that:
Our analysis ..suggests that the individuals who lost their jobs as a result of the overseas movement of work action are low-wage individuals within the establishment.
But to really get the point, open the PDF file and go to the last page. Figure 5 shows a huge rise in average earnings when mass layoffs occur. As the authors say on page 8:
In the quarter of the mass layoff, average wages rise substantially (the point estimate suggests a 26 percent increase, but some of this is increase is probably due to severance pay in the numerator to employees not included in the denominator of the average wage calculation). In the two quarters following the mass layoff, average wages are 17-20 percent higher than they were in the quarter prior to the mass layoff.
The low paying jobs are going offshore, the high paying ones are staying. Provided those workers displaced by offshoring manage to get jobs of similar quality and pay, the result will be higher productivity and living standards both in the US and offshore: a win-win result.
The other key finding from the paper was just how tiny a phenomenon offshoring is. In 2004, US employers took 5,010 mass layoff actions that resulted in the separation of almost one million (993,511) workers from their jobs for at least 31 days. Of those, there were 2,856 events and 641,519 workers associated with the movement of work. However very few of these events involved relocations out of the United States - only 103 actions taken by 94 establishments, resulting in the separation of 16,197 workers. That's a mere 2.5% of all job relocations. As a percentage of total jobs lost through mass layoffs, it was just 1.6% (a point also made by Daniel Drezner).
Of course, this survey will not identify all jobs lost due to offshoring - IT workers who don't have their contract renewed, for example. Even so, offshoring is hardly a major job threat.
But if offshoring is of genuine net economic benefit to the nation, then - as with NAFTA - there is still a reasonable case for compensating displaced workers for any income loss suffered. The cost would be modest compared with the likely economic gains, and it might also reduce the scare-mongering.
neweconomist.blogs.com
Indian higher education in disarray
It's hard to believe, but according to McKinsey, Indian call centres may soon run out of employable graduates for their burgeoning call centre industry. Bloomberg columnist Andy Mukherjee warns that substandard higher education may thwart India's call-center dream:
neweconomist.blogs.com
quote.bloomberg.com |
