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Saturday, December 27, 2003

Offshoring: don't break the links

In The New York Times (free registration required), Bob Herbert writes:

""Offshoring" and "outsourcing" are two of the favored euphemisms for shipping work overseas. I.B.M. prefers the term "global sourcing." Whatever you call it, the expansion of this practice from manufacturing to the higher-paying technical and white-collar levels is the latest big threat to employment in the U.S."


"Most of the millions of white-collar workers who could be affected by this phenomenon over the next several years are clueless as to what they can do about it. They do not have organized representation in the workplace. And government policies overwhelmingly favor the corporations. Like the employees at I.B.M. whose holiday cheer has been dampened by uncertainty, these hard-working men and women and their families have little protection against the powerful forces of the global economy."

Matthew Iglesias and Brad DeLong already have made some valid points against Herbert’s view. In essence they say that many groups are better of thanks to outsourcing: consumers (lower prices for software and thus higher real incomes), Indian software engineers (who gets jobs for higher wages), Americans working in export industries and in construction or capital goods industries (thanks to capital inflows coming from countries like India). On the other hand we have indeed hard working people at I.B.M. but who are nevertheless very well paid. Why should they be protected to the detriment of those large groups of Indians, American workers and American consumers who benefit by offshoring?

The outsourcing of white-collar jobs is not "the latest big threat to employment in the U.S.". In the past, the offshoring of manufacturing jobs, did not lead to a net loss of employment in the American economy as a whole. Neither did NAFTA, a treaty that did unleash those powerfull forces of globalization. Indeed, in the nineties the U.S. created millions of new jobs, offshoring and Nafta notwithstanding (or maybe thanks to...). And there is no reason why this should be different now or in the future:

"When some production of software and services is done abroad, some jobs will be done abroad too. Recent efforts to quantify IT-related and other white collar job loss "offshore" frequently use the peak of the economic and technology boom as the base for analysis, thus ignoring the business cycle, trend decline in manufacturing employment, dollar overvaluation, and technology bust. Cutting through the technology boom and peak of the business cycle and comparing end-1999 with October 2003, employment in architecture and engineering occupations is stable, that in computer and mathematical occupations is 6 percent higher and in business and financial occupations, 9 percent higher. Going forward, broader diffusion of IT throughout the economy points to even greater demand for workers with IT skills and proficiency. In the 1990s, investment in IT propelled job growth for workers with IT skills to twice the rate of job growth in the overall economy. Over the next decade, the Bureau of Labor Statistics (BLS) projects that job growth to 2010 in occupations requiring IT skills will be more than three times the rate of job growth in the overall economy."

As Chatherine L. Mann explains, the "globalization of IT Services and white collar jobs" will be "the next wave of productivity growth" and so very beneficial to the American economy, American consumers and American workers (and for the world economy as a whole). Indeed, productivity growth is the basis of wealth and welfare:

"Although technological change is the most important driver of IT price declines, globalized production and international trade made IT hardware some 10 to 30 percent less expensive than it otherwise would have been. These lower prices translated into higher productivity growth and an accumulated $230 billion in additional GDP (1995–2002). Real GDP growth might have averaged 0.3 percentage points less per year from 1995 to 2002, if globalized production of IT hardware (and the globalization of jobs in IT hardware, IJ) had not occurred.(...)Just as for IT hardware, globally integrated production of IT software and services will reduce these prices and make tailoring of business-specific packages affordable, which will promote further diffusion of IT use and transformation throughout the US economy."

Mann concludes:

"Globalization of software and services, enhanced IT use and transformation of activities in new sectors, and job creation are mutually dependent. Breaking the links, by limiting globalization of software and services or by restricting IT investment and transformation of activities or by having insufficient skilled workers at home, puts robust and sustainable US economic performance at risk."

Fransis also right however: we should be thinking about real policies to cushion the blow to those white-collar workers who will lose their jobs. But his view of Herbert is, i think, a little naïve. Herbert at least is implying that those white-collar workers should be protected against the forces of globalization. Let’s just hope that people like Herbert are not giving to much credit to the view that we should "break the links", for instance by restricting the globalization or offshoring of software-industries. That we should not do.

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