The silver lining of outsourcing overseas

Bruce Bartlett
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Posted: Dec 30, 2003 12:00 AM

Just before Christmas, workers at IBM got an early lump of coal in their stockings. The company announced plans to ship some 5,000 software-programming jobs to India.

Although the trend toward outsourcing or offshoring has been going on for some time, the IBM announcement got people's attention. New York Times columnist Bob Herbert complained that globalization is now forcing white-collar service workers to follow "the well-trodden path of their factory brethren to lower-wage work, or the unemployment line."

Ironically, much of the move toward offshoring is the result of ill-considered efforts to keep software jobs in the United States. Previously, companies had brought Indian programmers to this country to do their work under a program established in 1990. It provided these foreign workers with H-1B visas that allowed them to work here temporarily. But under pressure to save such jobs for the native-born, the number of visas allowed under this program was reduced from 195,000 to 65,000 in October.

So now, instead of having Indian workers come here, where they spent much of their earnings, companies are contracting with them to work in India, which is where they now spend their earnings. Rather than admit that they were wrong in the first place, the same people who demanded restrictions on foreign workers are trying to get new limits placed on outsourcing, as well. A new report from the National Foundation for American Policy (nfap.net) details this effort and the likely costs. These include higher taxes when laws are passed preventing state and local governments from utilizing cheaper foreign sources for information technology (IT) services.

Pressure is being placed on private companies, as well. Dell Computer and Lehman Brothers both recently announced that they were closing some of their Indian operations and bringing back jobs that were previously outsourced. Reuters reports that many big companies now resist admitting that they are even looking into outsourcing for fear of a political backlash. As a result, these companies may now be depriving investors of important information on their cost-cutting efforts.

The truth is that outsourcing is far less of a threat to American workers than they imagine, and there are significant benefits for the U.S. economy. For starters, there is not a one-for-one relationship between jobs lost here and those gained elsewhere from outsourcing. Boston University researcher Nitin Joglekar has found that outsourcing of IT services typically leads to domestic job losses of less than 20 percent. In other words, for every 100 jobs outsourced to India, only 20 are lost here.

A study by the McKinsey Global Institute found that workers freed up from routine tasks that have been outsourced are often redeployed within the company in projects generating greater value-added and jobs paying higher wages. It also found that companies engaging in outsourcing often established foreign subsidiaries that generate sales and profits for the home company. Adding it all up, McKinsey concluded that every $1 outsourced led to a gain for the United States as a whole of $1.12 to $1.14. The country where the outsourcing takes place captures just 33 cents of the total gain from outsourcing.

Even this greatly underestimates the gain to the United States from outsourcing because it doesn't fully account for the ways in which businesses will be able to improve the quality of their products and take advantage of new opportunities presented by outsourcing. A new study by Catherine Mann of the Institute for International Economics (iie.com) looks at some of these dynamic effects. She notes that globalization of computer hardware manufacturing led to a 10 percent to 30 percent decline in prices. This made such equipment more affordable and led to a far greater increase in jobs in the long run than were lost initially when production went abroad.

Mann believes that lower costs resulting from outsourcing of services will lead to comparable dynamic gains in the United States. She says globalization of IT services "will yield even stronger job demand in the United States for workers with IT proficiency and skills." Indeed, she notes that overall employment in job classifications most impacted by IT service outsourcing is in fact rising, not falling.

Other studies also find domestic benefits from outsourcing. For example, companies are able to provide round-the-clock service for their customers globally. They have also found that small firms and new startups gain more from outsourcing than large corporations. The latter have managerial structures that make it hard for them to take full advantage of outsourcing's benefits. Smaller companies and those just established can organize themselves more easily to utilize outsourcing and thereby gain sales and better compete in today's global marketplace.

I don't expect the protectionists and nativists to stop complaining about outsourcing. Nevertheless, the benefits to U.S. workers and the U.S. economy greatly outweigh the costs.