Table of Contents
THESIS. Outsourcing does not hurt the U.S. labor market as much as it may seem, and it is due to other structural changes and economic trends that the labor market in the U.S. remains in the state of crisis.
I. Outsourcing in the U.S.: the basics.
A. Defining outsourcing.
B. Outsourcing as a response to recessions in the U.S.
II. Outsourcing statistics: Does it really hurt?
A. Problems measuring outsourcing in the U.S.
B. Outsourcing forecasts.
III. Outsourcing is damaging to the U.S. labor market.
A. Impacts on IT workers.
B. Outsourcing and manufacturing.
C. China as the major threat to the U.S. job market.
IV. Outsourcing is not as damaging to the U.S. labor market as it seems.
A. Statistical information.
B. The magnitude of the job loss and its relation to outsourcing.
V. Negative trends other than outsourcing hurt the U.S. job market.
A. Complex technologies against low-skilled jobs.
B. Low incentives for workforce entry.
Outsourcing and the U.S. Job Market: A Hidden Controversy
Outsourcing is a recent phenomenon, which, nevertheless, has already become a distinguishing feature of the postmodern economic reality. In the past years, thousands of American jobs were displaced to other, mostly developing, countries. The basic intent behind outsourcing is clear – organizations seek to reduce their costs by all means. Outsourcing has already proved to be a viable instrument of effective cost management in manufacturing and service industries. In the meantime, the effects of outsourcing on the U.S. job market remain an issue of hot public concern. Some modern economists are confident that outsourcing damages the U.S. labor market – more American businesses move their jobs to the developing world, leading to huge job losses in the U.S., particularly in innovative and IT professions. Others claim that the effects of outsourcing on U.S. labor are more rhetorical than real. In reality, outsourcing does not hurt the U.S. labor market as much as it may seem, and it is due to other structural changes and economic trends that the labor market in the U.S. remains in the state of crisis.
Outsourcing is an umbrella term used by economists to describe the process of contracting out white-collar workers beyond the United States (Levine 1). According to Levine, it has become quite common for the U.S. service enterprises to contract out their white-collar jobs to firms and individual employers located beyond the U.S. (1). Today, outsourcing is no longer limited to service industries, and more manufacturing enterprises move their facilities abroad to reduce their production and operational costs. Yet, outsourcing is not a completely new phenomenon. The history of outsourcing can be traced back to the beginning of the 1980s, when American firms started contracting out their white-collar jobs to save their costs and respond to the recessionary impulses (Levine 2). At that time, many organizations chose to focus on their core missions, while delegating their peripheral tasks and jobs to other firms in the U.S. (Levine 2). It was not until the beginning of the 21st century that outsourcing became an international phenomenon. New technologies facilitated businesses’ transition onto a new quality level of performance. Geographic boundaries were no longer meaningful. The 2001 recession became a strong motivation to reduce costs while maintaining a high quality of products and services. The growing availability of high-speed communication technologies made it easier for U.S. organizations to contract out white-collar jobs in the developing world (Levine 2).
Unfortunately, the exact statistics on job outsourcing from the United States to the developing world is unavailable. “The government doesn’t keep count of jobs leaving the country, and the statistics available on outsourcing are sketchy” (Hilsenrath). Still, certain numbers need to be considered. In April, 2002, an American researcher working at Forrester Research, Inc. in Cambridge, Massachusetts, traveled to India looking for the best estimates of U.S. outsourcing to that country (Hilsenrath). Based on his calculations, he suggested that, by 2015, at least 3.3 million jobs would be outsourced, representing a total of $136 in wage loss to the U.S. job market (Hilsenrath). In reality, in 2004, the estimated number of jobs outsourced by the U.S. did not exceed 300,000 (Hilsenrath). The most disturbing was the fact that many business owners and managers claimed they were willing to outsource more jobs outside the U.S. (Hilsenrath). To many economists, outsourcing has become one of the most ominous trends affecting the U.S. labor market.
Due to the absence of vital statistics, opinions as to the scope of damage caused by outsourcing to the U.S. job market vary considerably. Some economists believe that the damage caused by outsourcing to the American labor market is enormous. According to Shao and David, IT workers are the first to suffer the tragic impacts of outsourcing on their jobs (90). Shao and David write that American IT workers are worried about losing their jobs due to being replaced and, eventually, displaced by a foreign employee who possesses the same amount of skills but is willing to work for a lower compensation (90). It is due to massive layoffs that so many IT workers in the U.S. lost their jobs, when their companies turned their heads to less costly job opportunities abroad. Today, more businesses move their IT functions beyond the U.S. and, for this reason, more IT professionals in the U.S. will lose their jobs in the future (Shao & David 91). Outsourcing negatively impacts other jobs that are only indirectly related to IT but help to sustain this profession, including human resources professionals and sales clerks (Shao & David 91). The situation in the U.S. manufacturing industries is quite similar. Burke, Epstein and Choi suggest that, since the 1990s, outsourcing had been associated with the major job losses for America (1). In those industries where the levels of outsourcing activity are the highest job losses are also the greatest; among others, these industries include computers, apparel, and transportation equipment (Burke, Epstein & Choi 2).
China represents the major threat to the U.S. labor market, as it has become a manufacturing hub for many American states, including North Carolina, California, and Massachusetts (Rapoza). Particularly in the innovative and highly technological industries, China has assumed one of the key roles. The Economic Policy Institute suggests that at least 2.4 million jobs were lost in the U.S. manufacturing between 2001 and 2008 due to China taking over the most essential manufacturing operations (Rapoza). The trade deficit resulted in the loss of 369,000 jobs in California and 193,200 jobs in Texas (Rapoza).
Still, not everyone agrees that outsourcing hurts the U.S. labor market. Several economists assert that real impacts of outsourcing on U.S. labor are minor. Bhagwati, Panagariya and Srinivasan write that “despite the heated level of rhetoric over outsourcing, the magnitude of jobs affected by outsourcing in the U.S. economy appears quite modest” (97). The 3.3 million loss prediction mentioned above is severely criticized for its inconsistency and lack of clarity and transparency. It is hardly possible that, by 2015, the U.S. economy will lose 3.3 million of jobs, because long-term predictions regarding changes in the labor market are usually made based on the natural unemployment rates, not outsourcing (Bhagwati, Panagariva & Srinivasan 97). Moreover, the recent statistics do not account for the number of workers who simply shift to new professions and occupations, due to the overall changes in the labor market. Actually, even the most serious estimates of job losses due to outsourcing are pale compared to the gross number of jobs the U.S. labor market had lost between 1994 and 2004 (Hilsenrath). Ben Bernanke, then Federal Reserve Governor, estimated that, during the 1994-2004 decade, at least 15 million jobs had been eliminated in the U.S. every year (Hilsenrath). In this situation, outsourcing represents just a tiny part of the gross employment picture in the United States. Finally, it is wrong to say that job losses due to outsourcing are unilateral; like foreign trade, job processes are bilateral. U.S. firms may shift their production and service facilities abroad, while moving their U.S. employees with them. The net job losses due to outsourcing are incomparably lower to the gross estimates used by most economists to judge the relevance and desirability of outsourcing (Grosben, Hobijn & McConnell 6). The quality of such judgments directly depends on the method of analysis used by economists, and not all these methods produce valid results.
To a large extent, the negative trends and job losses in the U.S. labor market have little to do with outsourcing. It is due to the numerous structural shifts in the American economy that the U.S. labor market experiences losses. The problem is that the principles on which the U.S. labor historically rested are no longer adequate and do not reflect the realities of the time (Mallaby). On the one hand, the growing availability of complex technologies wipes out low-skilled jobs, and US-based workers without at least a high-school diploma no longer have a chance to stay in the American workforce (Mallaby). On the other hand, the modern economy does not offer enough incentives to push yesterday’s workers back to the workforce (Mallaby). It is more cost-effective for many workers to stay on insurance benefits than to attempt another workforce entry. That outsourcing adds to the gloomy picture of labor losses in the U.S. cannot be denied, but it is not the primary factor of the damaging conditions facing U.S. workers today. Outsourcing does not hurt the U.S. labor market as much as other economic trends, including the lack of training opportunities for low-skilled workers and few financial incentives for American businesses to preserve U.S.-based jobs (Mallaby). It is not outsourcing but failure to offer favorable growth conditions to U.S.-based businesses that hurts the U.S. labor market. As a result, businesses are bound to search for better quality, cost savings, and employment conditions beyond their native country.
Outsourcing is an umbrella term used to describe the process of contracting out jobs to other firms and suppliers. With the advent of high-speed communication technologies, outsourcing has grown in scope to become a global phenomenon. The exact effects of outsourcing on the labor market in America remain unclear. Economic researchers vary in their opinions as to whether outsourcing hurts the U.S. job market. Some professionals claim that outsourcing is extremely damaging to U.S. labor and leads to the massive loss of jobs. China is claimed to be one of the primary threats to the U.S. job market, as long as it has already taken over most manufacturing operations. Others are confident that the damaging impacts of outsourcing on U.S. jobs are exaggerated. In reality, outsourcing does not hurt the U.S. labor market as much as it may seem. It is due to other negative trends that the American labor market remains in the state of crisis. New technologies displace low-skilled jobs. Individuals without at least a high-school diploma have no chance to keep their jobs. The country does not offer enough incentives for workforce re-entry. American businesses have few opportunities to reduce their costs. In these unfavorable conditions, outsourcing is just one of the many factors that damage the state of labor market in the United States.