IT Job Outsourcing: Economic Impact and the Future of U.S. Tech Workers

Introduction

The outsourcing of American jobs has been the subject of debate since the 1980s. Initially, the outsourcing of jobs was only prevalent in the manufacturing sector; however, in recent years the information technology sector has begun to rely heavily upon outsourcing. The purpose of this discussion is to examine the outsourcing of U.S. IT-related jobs to other parts of the world, such as Southeast Asia. To this end, the research investigates how long we can expect this current practice to continue and whether outsourcing of IT jobs will continue to have the same economic impact five to ten years from now. In addition, the research investigates the possibility that laws will be passed in the near future to prevent jobs from moving outside the U.S. The research also focuses on what the future holds for graduates in information technology fields and the manner in which companies and individuals can benefit the most from outsourcing, since it now appears to be common practice.

According to Dulebohn (2005), U.S. companies first outsourced manufacturing jobs. This initial outsourcing was promoted as a necessary step because the economy of the United States was transitioning from a manufacturing-based economy to a service-based economy. In addition, the disappearance of manufacturing jobs was described as economic progress because the country could then focus on high-skill service and manufacturing jobs, while low-wage, labor-intensive manufacturing jobs could be sent overseas with little if any impact on U.S. competitiveness. It was also asserted that those who had lost manufacturing jobs could train for higher-skilled positions, including computer programming. In fact, many individuals who were unemployed as a result of outsourcing in the manufacturing sector were retrained in the area of information technology.

History of Outsourcing in the United States

For some time, the information technology sector and jobs within it thrived within the United States. However, in recent years there has been a significant increase in the number of IT jobs that have been outsourced to countries where skill levels are similar but the cost of labor is lower. As Dulebohn explains:

"The Internet facilitates this strategy, and any service activity that can be done via wire and does not require face-to-face interaction with a customer may be outsourced. This trend is not limited to low-skill service jobs, such as data entry and call center jobs, but increasingly includes the use of high-skill, low-cost foreign labor for high-skill service jobs. IT jobs such as computer programming have been among the first to be moved overseas; other high-skill service sector jobs in industries such as financial services, accounting, and architecture are currently being moved overseas. Studies estimate that as many as 14 million, or 11 percent, of all U.S. jobs are currently at risk of outsourcing" (Dulebohn 46).

Dulebohn also points out that many successful businesses have very large workforces outside of the United States in countries such as India, and that their strategic plans for further expansion are also looking toward India and other countries in the same region. These expansion plans include the use of highly skilled foreign workers in place of their U.S. counterparts. Moreover, many companies are providing overseas workers with training in the use of the latest technologies. As a result, American workers now have to compete with foreign workers who have not traditionally been competitors.

Using this explanation for the use of outsourcing, Dulebohn argues that in the same way manufacturing jobs were replaced with IT jobs, it is believed that IT jobs will be replaced with newly created high-skill jobs. However, many believe this position is unfounded because many companies are beginning to hire foreign workers who already possess the high skill sets being referenced. For instance, there are many high-tech companies that are hiring software engineers from abroad who have the same level of education as their U.S. counterparts. Many of the American workers who are being passed over hold advanced degrees, and the jobs to which they could be retrained are scarce or nonexistent. The Department of Labor's reemployment statistics indicate that more than one in three downsized workers remains unemployed, and more than 50 percent of those who find jobs experience a decrease in pay.

Furthermore, the article "Outsourcing Information Technology" asserts that even though outsourcing has been practiced for centuries, the outsourcing of information technology is relatively new. As Hormozi, Hostetler, and Middleton explain:

"Companies have been outsourcing payroll and accounting functions for years, but only recently have they discovered the benefits of relinquishing control over their IT departments. To keep pace with the information technology advances of the last decade, many large organizations have chosen to outsource the departments that handle their information systems and network services. Companies embracing IT outsourcing have benefited from the expertise and technological capabilities of their vendors, but they have had to deal with decreased control as well. In spite of concerns about decreased control, more and more companies today are moving toward outsourcing departmental functions to save time and money" (Hormozi et al.).

According to the article "IT Jobs Outflow Expected to Rise," it is estimated that at least 250,000 highly skilled white-collar jobs — most of which are IT jobs — will be outsourced every year between 2005 and 2015 (Zarocostas). The article further explains that in the United States, more than 60,000 jobs will be outsourced per quarter during that period. This means that over the following decade there will be continued outsourcing of IT jobs.

Although America is greatly affected by IT outsourcing, the Organization for Economic Cooperation and Development (OECD) notes that the European Union will also be significantly impacted. Britain is expected to be the most affected, sustaining more than half of the losses, while Germany and France are projected to experience fewer job losses (Zarocostas). Research has also asserted that the impact on the American labor market is relatively small when considered in the full context of labor market activity, given that every three months approximately 7 million jobs are lost or created in the United States. "From an adjustment perspective, the number of jobs likely to migrate is small in relation to the overall movement in the U.S. labor market and to the estimated number of jobs to be created" (Zarocostas).

Economic Impact and the Future Trajectory of IT Outsourcing

Nevertheless, although the broader macroeconomic impact of outsourcing may appear limited, it is still having a significant effect on those who are losing their IT jobs. Many companies choose to outsource to India and China because worker standards are lower, which means it is less expensive to employ foreign workers. Research estimates that nearly 252,000 computer programming and computer software engineering jobs could be outsourced by 2015; however, 1.15 million new IT jobs could be produced by 2012 (Zarocostas).

Such outsourcing impacts the economy in many ways. Although many argue that outsourcing has a positive long-term effect, for many workers it means the end of well-paying jobs that are often replaced with lower-paying ones (Taylor). Proponents of outsourcing assert that the U.S. economy has experienced growth in productivity as a result. As Taylor explains, productivity growth measured by output per hour in the business sector was 4.4 percent in 2002, 4.3 percent in 2003, and 3.9 percent in 2004 — representing three of the best four years for productivity growth since 1971. Taylor further argues:

"Producing more per hour is how an economy raises the average standard of living over time. U.S. firms have generated this remarkable productivity growth in large part by taking advantage of the gains in information and communications technology — and outsourcing is one mechanism by which this has happened. The practice of outsourcing both to domestic and foreign firms allows businesses to harness dramatic innovations in communications and information technology more effectively than they could if they just gave each of their own payroll-department employees a fancy new computer."

Despite these optimistic assessments, many economists and policy makers believe that outsourcing will have a negative effect on the U.S. economy. The article "Outsourcing the American Economy" contends that many economists and policy makers are in denial about the real impact outsourcing will have if certain restrictions are not placed on the practice (Craig). According to calculations produced by the University of California, 14 million white-collar jobs may soon be outsourced. These are not limited to customer service, call-center operators, and back-office jobs, but also include information technology, architecture, accounting, advanced engineering design, and stock analysis — jobs that are vitally important to the American economy because they are performed by upwardly mobile individuals who generate the majority of the tax revenues that fund American education, infrastructure, Social Security, and health systems.

Craig further points out that most American corporations and policy makers are so focused on short-term quarterly results that they have not accounted for the long-term impact of outsourcing, including alienating their best employees and consumers:

"Employees displaced by foreigners and left unemployed or in lower-paid work have a reduced presence in the consumer market. They provide fewer retirement savings for new investment. Economists assume that new, better jobs are on the way for displaced Americans, but no economists can identify these jobs. The track record for the re-employment of displaced U.S. workers is abysmal: the Department of Labor reports that more than one in three workers who are displaced remains unemployed, and many of those who are lucky enough to find jobs take major pay cuts. Many former manufacturing workers who were displaced a decade ago because of manufacturing that went offshore took training courses and found jobs in the information technology sector. They are now facing the unenviable situation of having their second career disappear overseas."

Craig also argues that many U.S. economists fail to recognize that the exact same incentive driving the outsourcing of one tradable good or service applies equally to all tradable goods and services. Furthermore, during the 21st century the U.S. economy has been able to create jobs only in nontradable domestic services — the same type of labor force prevalent in developing nations.

Before the era of widespread outsourcing, American employees were protected against low-wage foreign labor. That protection ensured American workers had access to more capital and better technology, making their higher productivity commensurate with their higher wages. Outsourcing removes that protection, forcing Americans to compete directly with foreign workers while also equipping those foreign workers with equivalent technologies and skills training — thereby undermining the very competitive advantage American workers had historically held.

The article concludes that this mentality will create a lose-lose situation for American employees, businesses, and government alike. Outsourcing is already responsible for record unemployment in engineering fields and has resulted in a significant decline in university enrollment in both technical and scientific disciplines. In addition, many jobs that are not outsourced are being filled by lower-paid foreign workers on H-1B and L-1 visas, and in some cases American employees have been required to train the foreign workers replacing them. As Craig notes:

"US corporations justify their offshore operations as essential to gain a foothold in emerging Asian markets. There is no evidence that they will be able to outcompete local Chinese and Indian companies, who are very rapidly assimilating the technology and know-how from the local US plants. In fact, studies show that Indian IT companies have been consistently outcompeting their U.S. counterparts, even in U.S. markets."

There is considerable evidence suggesting that even fewer students will major in information technology in the future because of the decreased job security resulting from IT outsourcing. Such declines in the number of engineers and information technology professionals may have devastating long-term effects.

Conclusion

The purpose of this discussion was to examine the outsourcing of U.S. IT-related jobs to other parts of the world, such as Southeast Asia. The research found that the outsourcing of IT jobs is expected to continue until at least 2015, with millions of IT jobs projected to be lost as a result. The investigation also found differing beliefs concerning the long-term economic impact of IT outsourcing. Some experts believe that the growing number of upwardly mobile individuals losing jobs to outsourcing will have a definite impact on collectable tax revenues. On the other hand, supporters of IT outsourcing argue that it is a necessary practice that will, over the long run, be beneficial to both businesses and consumers.