Outsourcing Jobs, or the Practice

Outsourcing jobs, or the practice of moving U.S. jobs overseas, is both an emotional and complex topic. Much of the concern centers around the type of jobs now going overseas -- commodity-type operations, such as insurance companies and call centers have become extremely vulnerable to outsourcing. A recent study done by Forrester Research in Cambridge, Massachusetts showed that 3.4 million U.S. office-based jobs will go overseas by 2015 (Feldman, 2005).

Only 16% of Americans agree that outsourcing is good for the economy (Jones, 2005). Many Americans are genuinely concerned and alarmed; in fact, a public opinion survey in January, 2006 showed that the issue of outsourcing jobs to other countries has reached a "tipping point" where public opinion could become strong enough to influence government policy (imposing a tax, for example, on employers who outsource jobs) because an overwhelming majority expresses concern about the issue. Yankelovich (2006) reports that 87% of those people polled recently said they are concerned about outsourcing, and 52% admitted that they "worry a lot" about it. A huge 81% gave the government poor grades (C, D. Or F) in the way it handles the issue -- although 74% did not see any way the government could stop companies from doing it.

Despite so much concern about the negative effects, there is much evidence to suggest that offshoring is actually good for the economy and that nearly everyone benefits, feasting on the unlimited bounty being served up by outsourcing jobs to foreign countries. Real evidence contradicts the notion that outsourcing will destroy this nation economically and eliminate all jobs for Americans.

This essay will explore historically what led up to outsourcing jobs to other countries, the true causes of unemployment, the benefits and positive effects of outsourcing, the downside of the picture and what needs to be addressed.

Historical Background

Malachuk (2004) suggests that international trade began to increase after the fall of the Berlin Wall. Outsourcing in the U.S. started with service companies creating jobs overseas in order to gain access to foreign markets. Companies went to where the customers were located rather than asking overseas customers to come here. Domestic markets were either saturated or mature, so it made sense to seek a broader international market.

Companies were also responding to the need for specialized workers after the U.S. placed limits on immigration. When American employers could not get workers to come here, they sent the work to them (where they were) instead. In addition, Malachuk (2004) points out that by 2010 there will be 7 million fewer working age Americans than in 2000. Companies must either export the work or import the workers. In 2004, Congress reduced the quota of technical workers who could be brought here from 200,000 to 65,0000. This forced companies to move the work to places where the skills resided.

Weidenbaum (2005) states that an advantage was lower costs as companies learned how to economically use modern technology in distant locations. A trend toward telecommuting, with employees working from home, also led the way to hiring people abroad. When it was seen that it could be done, telemarketing and customer service jobs were outsourced within the U.S. from urban to rural areas where labor costs were lower. Outsourcing abroad was a simply logical extension of these trends.

The Job Shortage

Many people believe that a major cause of unemployment is outsourcing jobs to foreign countries. An article in the Federal Reserve Bank of Boston Regional Review (2004) discusses the issue at length and states that media reports "may have exaggerated the economic impact of foreign outsourcing" (p. 2) and overlooked jobs created here because of outsourcing overseas. The article points out that outsourcing work to other countries is not new but is part of the evolution of our economy. "Historically, at each successive stage, U.S. workers have shifted to 'better,' more productive, higher-wage jobs in burgeoning industries or the high-value-added parts of mature industries" (p. 2). The authors show, in fact, that outsourcing is not the cause of our slow "job-loss" recovery.

They point out that between 2001 and 2003, 143 million workers left their jobs. 56 million were due to involuntary layoffs and discharges, while 87 million were due to quitting and other reasons. These separations were offset by 141 million hires, but because of the recession there was a net decline of 2 million jobs during that period.

According to the Bureau of Labor Statistics, only 2.4% of all mass layoffs during those two years were the result of outsourcing jobs abroad. Domestic reasons such as restructuring and slacktime demands explain most of the mass layoffs. Business and professional services had 8.5 million layoffs, but foreign outsourcing was responsible for only a small share of them. U.S. outsourcing to Asia amounted to less then 0.1%.

Statistics from the Bureau of Labor Statistics reveal that job losses from overseas relocation accounted for only 1.0%, import competition 1.4%, financial difficulty 7.3%, bankruptcy 5.7%, slackwork 14%, domestic relocation 1.1%, internal reorganization 9.3%, contract completion 8.7%, seasonal work 33.6%, and "other" 18%. "Domestic, not international, economic changes were behind most layoffs. Only 2.4% of extended mass layoffs during 2001 to 2003 were due to overseas relocation or import competition" (Federal Reserve Bank of Boston Regional Review, 2004).

Weidenbaum (2005) argues, "Groundbreaking technology, rather than international competition, is the major cause of layoffs, not the fact that companies all over the world are outsourcing. A report from the Information Technology Association states that setting up "do-not-call" list eliminated far more call center jobs than all the outsourcing of such jobs to India. And not every job that goes overseas equals an American job lost. For example, the airlines used to ignore billing discrepancies with travel agencies because it cost too much to follow up on them. However, by outsourcing to India, the airlines can now afford to correct billing errors. "For the airlines, it is a welcome savings, while the practice has also created new jobs in India," and no job losses occurred in the U.S. At all as a result.

The Positive Effects of Outsourcing study down by University of Pennsylvania emeritus economist and Nobel Laureate Lawrence Klein in cooperation with Global Insight (a research firm) looked at the overall impact of IT outsourcing on the economy. The report concludes that by 2008, IT offshoring annually "will account for roughly $125 billion in additional U.S. grow domestic product, a $9 billion jump in real U.S. exports, and most importantly, 317,000 net new jobs in the United States" (Risen, 2004). Klein believes that most of the 372,000 IT software and service jobs lost since 2000 vanished "because of the dot-com bust, the 2001 recession, and labor productivity gains -- not outsourcing" (p. 93). Klein found no negative consequences to outsourcing.

With so many computer related jobs going to India, IT is the focus of much of the outsourcing controversy. But it is important to gain some perspective. In 2003, for example, $120 billion was spent on IT in the U.S. Only 1.4% was offshored, while 98.6% of the work stayed in the U.S. (Weidenbaum, 2005). The trend for most businesses is decentralization, and overseas outsourcing is really only a minor part of that trend. Companies do not produce an entire product by themselves any more. They subcontract their activities to other companies. For example, a company might create a system of inventory management software that uses electronic product tags more effectively, but once the system has been designed, programmers in India might write the actual software code. Outsourcing as subcontracting can help a company to be more competitive in the global marketplace by cutting costs. To date, about 400,000 IT jobs have gone abroad. At the same time, U.S. employment in the service sector rose from 129 million in 1993 to 138 million in 2003. So moving services internationally has been positive for the American economy.

It should also be noted that American corporations are not the only ones to engage in outsourcing. There are reciprocal benefits to globalization. In 2003 the U.S. offshored $86.7 billion in business services to developing countries, but other nations offshored to the United States $133.5 billion in business services -- a net increase of $46.8 billion that flowed to the U.S. Moreover, many of the jobs that come to us from other countries are high-skilled jobs in engineering, management consulting, banking, and legal services, jobs that pay about 16% above the national average (Weidenbaum, 2005).

We are not the only country that sends jobs overseas. Other countries are creating jobs for us, too. Some of the most visible investors in the U.S. are Asian and European automakers that have established assembly plants for Toyota, Nissan, Mercedes-Benz, BMW, Subaru and Hyundai in the U.S. Parts suppliers are also investing and hiring locally. Even developing countries are establishing plants in the U.S. For example, Haier (a Chinese appliances manufacturer) has a production facility in North Carolina and Grupo Medalo (a Mexican brewer) has built a barley-processing plant in Idaho (Malachuk, 2004).

The U.S. Department of Commerce reports that services to foreign clients brought Americans $131 billion in 2003. This was in addition to offshore services for U.S. customers, which grew by $7 billion.

The report shows that labor-intensive production and administrative work has grown in low-cost places, while talent sensitive activities have grown in the United States (Malachuk, 2004). This is a major benefit of outsourcing.

Weidenbaum (2005) argues that many American employees are able to keep their jobs because outsourcing allows their companies to stay competitive. Companies in higher-labor-cost economies can stay competitive and thus preserve jobs that remain (Jones, 2005). Many employees as a result will get new or better jobs because the company's financial strength has been enhanced. For example, when a company outsources upgrades for its software system, the domestic demand for basic programmers may decrease, but there will be an increased need for higher-paid systems integrators (Weidenbaum, 2005).

Because of outsourcing, IT departments are placing more emphasis on managerial experience, business process knowledge, and understanding domestic customers. The result is better jobs for Americans because "these capabilities can rarely be provided effectively from an overseas location" (p. 313). New market opportunities and cost reductions can also lead to more jobs being generated and more money available for training programs and new equipment. Companies that outsource jobs help developing countries to become new markets for goods and services, and newly affluent workers are able to buy American made products. DHL chairman Uwe Doerken, who led globalization efforts for 13 years, says offshoring benefits all consumers who can buy goods and services at more affordable prices.

Unemployed Workers

The downside of outsourcing is very real people whose jobs have been lost as a result. They are truly hurting. When asked if CEOs owe any allegiance to workers in their home country, Doerken replied, "Yes. They owe them fairness when new business practices force layoffs. Social plans, outplacement assistance, transfers to other parts of the same company, etc. The same fairness is owned to all employees these companies employ in all geographies" (Jones, 2005, p. 2).

Trade Adjustment Assistance (TAA) is a government program that offers free job retraining and other benefits to workers who have lost their jobs because of foreign trade and outsourcing. For example, due to a flood of Chinese goods into the U.S. In the past ten years 827,000 American apparel and textile manufacturing jobs vanished and the remaining 489,500 workers face a bleak future. People like them can go back to school, usually to community colleges, and learn new skills, which will enable them to find rewarding employment.