Thursday, May 27, 2004

The Specter of Outsourcing

We Americans are drifting into a global labor market -- and don't like it. The latest fear is that hordes of white-collar jobs, from low-paid filing clerks to well-paid software engineers, will vanish into a giant global sinkhole of well-educated and underpaid workers, mainly from India and China. Although we knew that manufacturing jobs could be lost abroad, we imagined that service jobs -- most U.S. jobs -- were safe from international competition. The fact that they aren't could profoundly alter U.S. attitudes toward globalization, even though the danger is exaggerated and misunderstood.

Let's disentangle fact from fiction. It's true that many companies, facing relentless competition, will seize almost any approach to cut costs, including "outsourcing." The logic that applies to manufacturing is now spreading to many services as a result of trends that Americans have generally favored: (a) the ability to "digitize" information instead of using paper; (b) cheap international communications; (c) rising educational levels abroad (India now has about 9 million college students, compared with 13 million in the United States); and (d) more big countries -- China, India, Russia -- joining the world economy.

Jobs that involve collecting or analyzing information seem vulnerable, because wages abroad are so low. Compare the United States and India. For software engineers, it's $60 an hour vs. $6; for call-center workers, $10 an hour vs. $1.50; for insurance claim workers, $1,500 a month vs. $300; for accountants, $75,000 a year against $15,000. (These figures come from the Information Technology Association of America, or ITAA.) The easiest jobs to send abroad involve routine "back office" recordkeeping that's fairly labor-intensive: insurance claims, personnel and billing records.

"A lot of [insurance] claims processing is done in India," says Shailen Gupta of Renodis, a U.S. outsourcing firm. In the United States, claim forms are scanned and then zapped to India, where keypunchers read them off a screen and enter the information into databases. Easy communications means that more highly skilled jobs can also move abroad. Gupta cites a U.S. software company that plans to shift 80 percent of its workforce -- about 200 jobs -- to India. Computer programs would still be designed in the United States, but Indian workers would write the detailed software instructions and do the testing.

From India, it's possible to do market research, maintain financial databases and write patent applications. Evalueserve, a three-year-old company with 270 Indian workers, does all three. Robert Daigle, Evalueserve's U.S. vice president for marketing, describes its Indian workers as "eager and bright. Most have an MBA. We recruit from the India Institutes of Management and the India Institutes of Technology -- think of these as the Whartons, Harvards and MITs of India."

Sounds grim -- and if it's your job, it could be. But it probably won't be your job.

Like most new trends, this one inspires hype. No one knows how many service jobs have been "outsourced" abroad, but guesses cluster around 300,000 to 500,000. Harris Miller of the ITAA estimates that 2 percent of the 10 million computer-related jobs have been sent abroad. According to ITAA's surveys, 12 percent of information technology ("IT'') companies have "outsourced" work, as have 3 percent of non-IT firms. Of course, there will be more. John McCarthy of Forrester Research projects a loss of 3.3 million jobs by 2015, including 1.7 million back-office jobs and 473,000 IT jobs. But that's still a tiny fraction of today's 138 million U.S. jobs -- nevermind future growth.

The truth is that, for most Americans, the main sources of job destruction and insecurity remain domestic: Wal-Mart battering competitors; the dot-com and telecom collapses; the business cycle. More important, job losses have been offset by job gains. Manufacturing employment peaked in mid-1979 at 19.5 million; now it's 14.5 million. But over that period, total U.S. employment grew about 40 million, and manufacturing output rose more than 80 percent. American companies became more productive and shifted to more valuable products. Cheap foreign labor has threatened individual U.S. workers but not the economy as a whole.

The reason is that imports also create gains. Despite job losses, consumers or companies gain. Lower prices boost purchasing power or profits. That creates more demand at home. Consumers can spend more; businesses can invest more. As long as the economy responds by expanding production -- and offering new things to buy -- then most job losses, even if traumatic for individuals, are temporary. Similarly, what other countries earn abroad through exports they can also spend abroad. Their imports may not initially come from the United States, but if our products remain competitive, we'll get an adequate share of global trade.

In theory, service imports (the result of outsourcing abroad) shouldn't be different. Although more workers may face the unsettling global competition, job gains ought to dwarf job losses. What's unknown is whether this theory -- which has worked for 60 years -- will continue to work.

Is America's economic vitality still suffering from the technology and stock "bubbles''? If companies won't expand -- if they're glum about the future -- then lackluster job growth will choke the recovery. And what about the trading system? In Asia, some countries hoard export earnings. They accumulate huge reserves of "hard" currencies (mainly dollars) rather than spend for imports. If too many countries do this, the trading system promotes stagnation and merely shifts jobs from one country to another. In a weak job market, outsourcing -- a small threat by itself -- could become a large lightning rod for anti-globalization discontent.

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