Who’s Outsourcing Whom?

March 18, 2004 • Commentary

Airwaves and newspapers are abuzz of late with talk about the loss of manufacturing jobs, the offshoring of tech jobs, immigration, and general alarmism about the “outsourcing” of the American worker.

We hear lots of talk about exactly why (and if) this is happening, but rarely do pundits and commentators look at the relationship between companies moving plants overseas, and the kinds of tax and regulatory policies employed by the states they’re moving away from. As it turns out, states with business‐​friendly public policies attract and retain jobs. States with policies hostile to business tend to lose them.

According to the Economic Policy Institute, for example, the five states losing the most jobs between 1993 and 2000 were, in order, California, New York, Michigan, Texas and Ohio. According to figures from the Bureau of Labor Statistics, the states of New Jersey, Pennsylvania, Illinois, and Massachusetts also rank near the bottom, particularly when you take jobs as a percentage of population.

Every year, CFO magazine asks financial executives to assess the business‐​friendliness tax policy of their respective states, which the magazine then compiles and ranks. Ranking in the bottom 10? California, New York, Michigan, Texas, Ohio, New Jersey, Pennsylvania, Illinois and Massachusetts — the very states that seem to be bleeding jobs. The most recent unemployment figures from the Labor Department put California, Texas, Ohio, Illinois and Michigan all in the bottom 10, too, all with unemployment rates at 7.0 percent or higher.

The Small Business Survival Committee also puts out a report ranking the states on business‐​friendly public policy. In the SBSC report, Ohio ranks 39th, New York 45th and California 46th. Oregon, also with one of the country’s highest unemployment rates, ranks 41st.

A 2003 ranking by the Tax Foundation, focusing mainly on tax policy and business, tells the same story. It puts California 49th, Ohio 47th, and New York 44th.

Only Texas and Michigan score relatively well on the Tax Foundation and SBSC reports suggesting that, at least in these two states, free trade may have played a more significant role in job loss than bad public policy (and when you think about what Michigan manufactures, and where Texas is located, that makes some sense).

The Buckeye Institute, an Ohio free market think tank, reports that Ohio’s aggressive pro‐​labor policies cost the state jobs even during the relatively strong economic period 1982–1998. Zeroing in on the effect of mandatory union memberships on state economies, the Institute emphasizes that during that 16‐​year period, states that mandated union membership in the manufacturing sector lost a net 996,000 jobs, while “right to work states” gained 493,000.

Let’s look at the flip side. How well are states with business‐​friendly public policy doing at attracting and retaining jobs? The evidence suggests they’re doing well. According to the Bureau of Labor statistics, the only state that actually gain net manufacturing jobs from 2000 to 2003 was Nevada. Nevada ranks 2nd on the SBSC’s business‐​friendly list. It ranks 3rd on the Tax Foundation list. It ranks in the top four of CFO’s list. Alaska lost only 900 manufacturing jobs over those same four years, which is likely due in large part to its population. Still, Alaska also ranked in the top four on the CFO list. Virginia made a big push in the late 1990s to attract tech firms to its D.C. suburbs and the Dulles corridor. Despite the tech bust, Virginia still has one of the lowest state unemployment rates in the country and, perhaps not coincidentally, ranks 14th on the SBSC list (and would likely rank higher were it not for Gov. Mark Warner’s recent promise to raise taxes). South Dakota, which ranks number one on the SBSC list, also has one of the four lowest unemployment rates in the country (as of December 2003).

On its face, this cursory look at the data makes a lot of sense. For all the talk of offshoring, the cost of packing up a domestic plant and moving it overseas is significant. Even outsourcing tech support and programming doesn’t always make economic sense. American workers are still far more productive than, for example, Indian workers — even when you factor in the lower wages. It’s only when the onus of complying with federal, state and local tax laws and regulations becomes overly burdensome that it makes economic sense for a corporation to shop jurisdictions for a better deal.

So the next time a local politician blasts NAFTA or greedy corporatism for the loss of local jobs, it might not hurt to take a look at just how friendly that politician’s state or city tax, and regulatory and labor policies are toward business. It’s likely that same politician’s policies are a big reason those jobs left.

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