American workers are ever vulnerable to being replaced by overseas workers.
Catherine Mann of the Institute of International Economics “If you protect and limit outsourcing, you will have a negative impact on exports of services which generate a lot of domestic jobs.”
Together with other Americans, we must determine the actual effects of outsourcing.
Senator John Kerry: “Ousourcing is a new phenomenon in which we don’t have a clue what’s going on.”
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Overseas Outsourcing: An American Perspective
As the economy tops the post-election agenda it behooves us to examine the overseas outsourcing controversy. Much of our jobless recovery is blamed on the migration of jobs offshore. According to the Information Technology Association of America (ITAA) overseas outsourcing contributed up to half a million lost jobs. But the Commerce Department continues to release economic data showing a U.S. surplus in job outsourcing trade with other countries. The Bush administration contends that outsourcing enhances the economy while Democrats lean toward protectionism. A look at outsourcing’s complexity will prepare us for a changing job market.
What is outsourcing and how did it happen? In the last generation, the U.S. economy moved from manufacturing to information age services. New service jobs replaced manufacturing jobs migrating overseas. As organized labor pursued protectionism, most workers moved into service employment.
By the turn of the millennium service employers began replicating their manufacturing counterparts in moving operations abroad. Heightened technology and communication, low cost labor, education, new markets, and taxes encouraged globalization and workforce replacement abroad. Digitalization and the internet provided cheap paperless international communication. The demise of communism and third world development opened up an educated labor pool to the West as China and Russia joined the world economy. Developing countries’ well educated and plentiful labor supply proved attractive to corporate America for lower wages. Productivity surged as labor costs plummeted with overseas offshore employment.
Heightened technology and communication encouraged globalization especially with the internet. Back office jobs involving data entry and record keeping could easily be moved abroad. In many ways time differences proved beneficial as company operations could continue around the clock enabling greater output and productivity. Rush projects could be transmitted overnight to alert workers six time zones away for next day electronic delivery.
Like manufacturers, service employers couldn’t resist replacing their high cost American workers with cheap foreign workers. Corporate experimentation with low skill job off shoring expanded into high skill professional job off shoring. India, China, and Brazil became offshore favorites for cheap, educated professionals.
India is an example of offshore labor savings. Indian software engineers earn $6 per hour, approximately one tenth of their American counterparts. Indian insurance claims workers average $300 per month, compared to American insurance claims workers averaging $1,500 per month. Indian accountants average $15,000 annually compared to American accountants averaging $75,000 annually. Call center workers in the U.S. earn approximately $10 per hour while in India they earn $1.50 per hour.
Beyond wages, Indian labor proves well educated, motivated, and dependable as more Indian call centers service the U.S. Most Indian call center workers hold college degrees while their American counterparts hold high school diplomas. Americans view call center work as “dead end” jobs compared to their Indian counterparts who view such work as well paid and professional. Averaging 80 applications per position, Indian call center positions are highly competitive with low turnover rates. American call center workers have a high turnover rate with frequent departures for better opportunities.
Evalueserve, a U.S. company, recently hired 270 employees based in India for market research, financial database maintenance, and patent application operations. The company vice president recently boasted that most of his new recruits hold MBAs from the India Institute of Management or the India Institute of Technology. “Think of these as the Whartons, Harvards, and MITs of India.”
The fall of communism created a global labor supply. Developing nations in Asia, especially overpopulated China and India produce a competitive workforce. Through education and translation technology cultural barriers decline. India and other English speaking developing countries prove attractive to corporate America.
The U.S. tax code encourages outsourcing abroad. Companies deduct taxes from interest on loans for overseas business plant while interest on loans for domestic business plant is non-deductible. Company profits from U.S. plants are taxed immediately while overseas plant profits only get taxed if repatriated to the U.S. Such taxation encourages profit reinvestment abroad. Nations to which outsourcing from the U.S. is popular offer corporate tax havens.
When a company subsidiary pays technology royalties to its parent U.S. company it receives tax credits to offset its home country royalty tax. By inflating royalty payments to itself multinationals can use foreign operations to reduce U.S. taxes. Bush’s corporate tax cuts meant for investment at home could be subsidizing jobs abroad.
The advantages of outsourcing are that in greatly reducing labor costs corporate profits increase for investment, including new jobs. The lower labor costs in producing goods and services enhances productivity and ultimately gets passed on to consumers and businesses through lower prices. The hard earned cash from developing countries’ outsource worker salaries may return to the U.S. through purchase of imported American goods and services.
Proponents of outsourcing argue that while tedious tasks move offshore new professional jobs are created at home for managing overseas operations and product development. Most Information Technology (IT) companies still demand new software design engineers for the American market even though they contract the production and testing of software abroad. Market research, insurance claims, patents, databases, and call centers still require management and training from U.S. headquarters.
But without a doubt outsourcing contributes to lost jobs. According to ITAA the estimated 300,000-500,000 jobs lost in recent years includes high paying professional positions. It is estimated that 2% of America’s 10 million computer jobs have been sent aboard. Outsourcing has been responsible for 12% of recent IT layoffs and 3% of non-IT firm layoffs. According to John McCarthy of Forester Research Project, a monitor of off shoring trends, 3.3 million American jobs will be lost to overseas outsourcing by 2015, including 1.7 million back office jobs and 473,000 IT jobs.
But job losses attributed to outsourcing are a tiny fraction of today’s 138 million job market. The main sources of job destruction and insecurity remain fierce competition, the IT and communications busts, and business cycles. In a changing economy job losses are usually offset by productivity and job gains elsewhere as demonstrated by the transitioning from manufacturing to services. Manufacturing jobs peaked at 19.5 million in 1979, dropping to today’s 14.5 million, but with 80% more output. Despite the 5 million lost jobs the economy created jobs elsewhere, producing 40 million service jobs. Lower prices generated by labor cost savings produces more purchasing power and profits for employment investment.
With the shoe on the other foot as illustrated by the latest export figures giving the U.S. an outsourcing trade advantage protectionism needs reconsideration. The trade data backs N. Gregory Mankiw, Bush’s Chief Economic Advisor’s recent assertion that outsourcing enhances the economy. Catherine Mann of the Institute of International Economics, a Washington, DC research organization warned that protectionist measures against job off shoring will backfire against U.S. workers “If you protect and limit outsourcing, you will have a negative impact on exports of services which generate a lot of domestic jobs.”
Approximately 6.4 million Americans are employed by foreign corporations in the U.S. Besides hiring U.S. workers, foreigners last year doubled their U.S. investment from $40 billion in 2002 to over $80 billion in 2003.
Where do Americans stand with outsourcing? Given that many educated Americans are disproportionably employed in key outsourcing sectors, including IT, insurance, and healthcare, we are concerned. Americans are ever vulnerable to being replaced by overseas workers. Many professionals have experienced layoffs, downsizing, and work reductions due to outsourcing. Unemployed workers struggle to find new jobs with similar salaries and benefits. With skyrocketing costs of healthcare, education, and stagnant wages, underemployed and unemployed citizens can be financially devastated from losing jobs to outsourcing.
But outsourcing advantages may outweigh disadvantages for many enterprises and consumers. As consumers and entrepreneurs, we pay less for goods and services produced abroad. Businesses save from assigning recordkeeping, customer service, and information management tasks abroad.
The outsourcing job market can promote new employment, especially for the well educated. American workers may benefit from new job opportunities in training and management of overseas staff. Americans with immigrant backgrounds are attractive for employers from their ancestral or native countries which may outsource to the U.S. Many of the outsourced jobs to the U.S. are frequented expanding professions in law, accounting, and information technology.
We, as concerned citizens, must also realize that overseas outsourcing is reversible. Cultural gaps, miscommunication, weak intellectual property and patent protections, compromised security, cost overruns, scams, and geography could eventually outpace savings. Lost customers, unforeseen legalities, and tax expenses could lead corporate America back home for their workforce.
Given international connections outsourcing may emerge into lucrative commercial exchanges in which land, labor, and capital are maximized for global prosperity. If Americans can use outsourcing to assist poorer nations and improve their economies then outsourcing may prove beneficial in reducing our foreign aid bill and enhance world economic stability.
With other Americans, we must determine the actual effects of outsourcing. Presidential candidates argued their outsourcing position in the recent election. The President believes slashing taxes creates investment opportunities for U.S. business in the global economy. A more protectionist Senator Kerry embraces legislation to encourage home hiring. He calls for a government outsourcing study and legislation requiring companies to document jobs sent abroad. But beyond politics, Kerry’s uncertainty with off shoring speaks for everyone, including his Bush rival, when he says “Ousourcing is a new phenomenon in which we don’t have a clue what’s going on.” (outsourcing - outsourcing directory- A great recommended site for outsourcing resources)
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