June 2004
By ROBERT PEGG
Globalization and technology are amplifying the impact of the outsourcing of U.S. jobs to lower-cost countries such as China and India. For decades, American policy has urged developing nations and former Communist countries to join the global economy. Now that many have, large numbers of skilled workers have joined the world labor force, bringing with them their technical specialties. Countries such as China, India and Russia educate large numbers of skilled workers, particularly in science and engineering. At low cost and with nearly instantaneous communication offered by the Internet, an Indian computer programmer, for example, earning $20,000 a year can very easily replace an American counterpart earning $80,000 a year and save the company thousands of dollars.
Thus, the argument for outsourcing is straightforward and compelling. If an Indian software programmer is paid a fraction of an American salary, a company that develops software in India will stand to save a considerable amount of money and be more competitive. If competitors do the same, productivity will rise, new technologies will spread, and even new jobs will be created to adapt to and improve the new technologies.
Global outsourcing played a big role in the information technology boom of the late 1990s. Chip companies shipped production to foreign countries. Personal computers were shipped to the U.S. from abroad. The combination prompted the creation of new jobs here, particularly at the higher end of the technological spectrum.
Does this mean that American jobs will be disappearing from the domestic landscape? The answer is a qualified yes. Some studies have predicted that 3.3 million service jobs in America will be outsourced by 2015, about half a million in white-collar computer software and services. Trends such as these have been happening for decades in blue-collar factory jobs. However, this trend is now being extended to higher-paying technical and managerial occupations. Many Americans are worried that outsourcing is just the beginning. The fear is that in an information economy, all kinds of jobs are potentially at risk.
For all the alarm generated by outsourcing, however, a shift of three million workers over 11 years is still small. The American labor force has more than 130 million workers and normally creates and destroys millions of jobs every few months. Moreover, researchers following this issue calculate that lower costs due to globalized production accounted for between 10 percent and 30 percent of the decline in computer hardware prices during the technology boom of the latter half of the 1990s, when computer prices fell 10 percent a year. Lower prices also helped keep inflation down, allowing interest rates to be lower than they otherwise would have been. This situation boosted investment and growth. The impact of cheap computer hardware has been felt throughout the economy. One study found that outsourcing boosted productivity growth from 2.5 percent to 2.8 percent a year from 1995 to 2002, a gain that added about $230 billion to the nation's output of goods and services.
The bottom line is that outsourcing with the Internet and other technologies has enabled personal computer manufacturers to open customer support centers in India and allowed airline companies to send reservations jobs to the Philippines. The trend seems to be moving up the white-collar ladder. Software companies and telecommunications equipment manufacturers all have moved product and software development jobs to India. Most economists believe that the impact on productivity, economic growth and jobs should be positive. Prices of technology services will fall, technology will become more pervasive and new jobs will be created as businesses find new and productive things to do with technology.
Yet these trends, while good for productivity and inflation, may harm the labor market. People are afraid that the U.S. will be left with low-paying jobs in low-level retailing and service industries. No doubt, productivity growth has a disruptive side to it. In the short term, people lose their jobs. Outsourcing is an important reason why the U.S. labor market has not picked up as strongly as it did after previous recessions. Moreover, beyond the jobs shifted, the broader impact may be to put downward pressure on the wages of many technical workers, who increasingly live under the shadow of foreign competition.
State and federal bills have been cropping up to limit the flow of jobs abroad. However, these bills may only slow down an inevitable trend. In the early 1900's, most Americans worked on farms. When the farms became more productive, workers left in droves to work in factories or in cities. The dislocation was painful. But in the end, the U.S. developed the most productive and efficient agricultural system in the world.
About the author: Mr. Pegg is managing director of Tocqueville Asset
Management LP, the New York City-based investment advisory firm which serves
businesses, institutions and private individuals.