Why We Have Nothing to Fear from Foreign Outsourcing

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Foreign outsourcing, or offshoring, is being blamed for joblosses in the information technology (IT) sector. Announcements ofjobs being moved to India and other low-wage countries haveprovoked criticism of "Benedict Arnold" CEOs and calls forgovernmental restrictions on the practice of outsourcing. Butcritics who scapegoat outsourcing are ignoring the realities oftoday's IT labor market.

Contrary to the popular perception, foreign outsourcing is notto blame for the deep recession that struck the informationtechnology industry beginning in early 2000. The IT recession beganin March of that year when the dot.com and telecom bubbles burst,and the tech-laden NASDAQ lost three-quarters of its value duringthe next three years. Meanwhile, business investment collapsedduring the 2001 recession, reducing domestic demand for both IThardware and services. The terrorist attacks of September 11, 2001,and the ensuing war on terrorism put a further chill on businessconfidence. Adding to the IT sector's woes were corporate scandalsand slow growth abroad among our major trading partners. Foreignoutsourcing was not an important variable in the equation.

A fundamental mistake made by the critics of outsourcing hasbeen to confuse the passing pain of the IT recession with analleged long-term decline in the sector. That mistake is compoundedwhen current output and employment levels are compared with levelsat the frenzied peak of the boom in 2000 rather than with morenormal levels from the late 1990s. A more accurate and lessalarming picture of the industry emerges if we compare the state ofthe industry a few years after the bubble burst with its state afew years before.

Beginning in the early 1990s, with the takeoff of Windows-basedcomputing and the Internet, employment in the IT industry surged.Employment in software and related services grew by one millionbetween 1993 and 2000, before dropping by 166,000 between 2000 and2002.[1] Thestory has been much the same across other IT sectors: stupendousgrowth throughout the 1990s, then a pullback in employment of 10 to20 percent during the recession. In the IT industry as a whole,employment levels even after the recession were still no lower thanin 1998. During the past decade, annual employment in the industryhas still grown at a rate twice as fast as employment in privateindustry in general.[2]

Despite the turbulence of the past four years, the U.S.information technology services sector remains a major force in theU.S. economy. The software and computer services industry accountedfor $278 billion of U.S. GDP in 1999, before the hurricane hit, andan estimated $329 billion in 2003, long after its fury had beenspent. Communications services accounted for $232 billion of GDP in1999 and an estimated $292 billion in 2003. Even as a share oftotal U.S. GDP, the IT services industries accounted for 5.6percent in 2003, slightly higher than their share before thestorm.[3] TheIT services that are moving offshore are being more than offset byincreased output here at home. Any sluggishness in employmentgrowth has been because of rising productivity, not because offalling production.

The jobs that have been lost in the IT sector tend to be thelower skilled and lower paid jobs in the industry--just as tradetheory would predict. From 1999 through 2002, total employment inthe IT industry did drop by more than a quarter of a million, from6.24 million to 5.95 million.[4] But declining employment was concentratedin those occupations requiring relatively low or moderate levels oftraining and education.

The biggest drop in employment was among data entry keyers andelectrical and electronic equipment assemblers, jobs that mayrequire vocational training but not typically a bachelor's degree.Job losses were also heavy among IT occupations requiring even lesseducation and training, such as billing and posting clerks, machineoperators, communications equipment operators, and computer andoffice machine operators. From 1999 through 2002, total jobs in thefirst category requiring moderate education and training declined14. 6 percent, and those in the second category requiring the leasteducation and training declined by 10.5 percent.[5]

In contrast, the number of jobs in the IT industry that requirea relatively high level of training and education was actuallyslightly higher in 2002 than it was in 1999. In the year before thedot.com and telecom bubbles burst, the industry employed 3.43million workers whose jobs required an associate's degree,bachelor's degree, or work experience plus a bachelor's degree ormore. After a surge of hiring in 2000, followed by a painfulshakeout, the number of such highly skilled workers stood at 3.51million in 2002, up 2.3 percent from 1999.[6]

Contrary to the popular angst that "our best jobs" are goingoverseas, the best jobs appear to be staying here. In fact, as ashare of the IT workforce, those jobs requiring relatively highskills increased from 55 percent of all jobs in 1999 to 59 percentin 2002. Just as the free traders predict, we are swapping lessskilled and lower paying jobs for relatively higher skilled andbetter paying jobs.[7]

The recovery and expansion of job creation that has alreadybegun in the IT sector should continue into the future. Accordingto the U.S. Department of Labor's biannual projections, the numberof jobs in computer and mathematical science occupations isexpected to increase from three million to four million in the nextdecade, a rate of growth twice as fast as employment in the rest ofthe private economy.[8]

"The demand for computer-related occupations should increase,despite the recent downturn, as a result of rapid advances incomputer technology and the demand for new computer applications,including those for the Internet and Intranets," the departmentreported in the February 2004 issue of its Monthly LaborReview. "Growth will not be as rapid as during the previousdecade, however, as the software industry begins to mature and asroutine work is increasingly outsourced overseas." Most of the newjobs will be in computer systems design and related services and inthe information industry, primarily in software publishing, dataprocessing and related sectors, and Internet-relatedindustries.[9]

Of course, the IT recession has been painful for hundreds ofthousands of workers who lost jobs and were forced to find newemployment. Compensation in the industry has also been underpressure because of the temporary drop in demand for services andworkers. Average wages fell 1.3 percent in IT-producing industriesin 2002 from the year before, from $68,330 to $67,440 (in contrastto a 1 percent increase for other workers.)[10] But IT jobs still remainamong the best paying in our economy, and we have solid reason tobelieve opportunities for employment in the field will expand inthe coming decade.

The United States continues to enjoy tremendous advantages inglobal IT competition. Our domestic economy is one of the mostfree, flexible, and open in the world. Our telecom, transportation,and utility systems deliver dependable service. Our talent pool ofscientists and our university research facilities are second tonone. Entrepreneurs can obtain financing for their ideas andintellectual property protection once they are developed. Relativeto many other systems of government, ours is transparent,predictable, and dedicated to the rule of law. Our domestic marketis the largest in the world. Those inherent advantages of doingbusiness in the United States cannot always be offset merely bylower labor costs elsewhere and are especially important in thoseaspects of production that require creative freedom and specializedskills.

U.S. companies are also discovering the limits to outsourcing.There are perfectly good, market-driven reasons why U.S. companieswill continue to do most of their IT work onshore if not in-house.Foreign outsourcing can generate costs of its own, such as the needfor more travel, training, and management oversight. Depending onthe type of project, those costs can eat into if not entirely erasethe costs savings from lower wages abroad. Sending work abroad canalso risk the loss of control of sensitive personal and financialdata and copyrighted material. It can mean the loss of control overtime-sensitive aspects of a project or becoming too reliant onoutside firms. As some U.S. companies have discovered, it canresult in reduced quality of service if the providers are notsensitive to cultural differences or lack specialized informationexpected by customers.

The phenomenon of foreign outsourcing creates tangible benefitsfor the U.S. economy and American workers. Whatever negative impactit has had on specific firms and workers has been limited and isfar outweighed by the benefits.

[1] U.S.Department of Commerce, Economic and Statistics Division,Digital Economy 2003, December 2003, p. 22, www.esa.doc.gov/DigitalEconomy2003.cfm.

[2] Ibid., p.20.

[3] Ibid.,Appendix Table 1.2.

[4] Ibid.,Appendix Table 2.4.

[5] Ibid.

[6] Ibid.

[7] Ibid.

[8] Daniel E.Hecker, "Occupational Employment Projections to 2012," MonthlyLabor Review 127, no. 2 (February 2004): Table 2, p. 83.

[9] Ibid., p.98.

[10] U.S.Department of Commerce, p. 23.