SPECIAL COVERAGE: UNDERSTANDING OUTSOURCING

MARCH 1, 2004

Understanding Outsourcing:
An Overview

By TIM ANNETT, YU WONG and DEBORAH S. CREIGHTON
THE WALL STREET JOURNAL ONLINE

NEW YORK -- Outsourcing, once a buzzword of the New Economy, has for some U.S. workers evolved into an Orwellian totem of the jobless recovery. The white-collar knowledge work promised for those who saw their manufacturing jobs move abroad is now also vanishing, critics say, and they contend the consequences for the U.S. economy could be disastrous.

The issue recently became a political football when President Bush's top economics adviser suggested that in fact outsourcing may be healthy. N. Gregory Mankiw said that sending U.S. service jobs abroad "is probably a plus for the economy in the long run" because foreign workers can do the jobs more cheaply, reducing costs for U.S. consumers and companies. "Outsourcing is just a new way of doing international trade," he added.

Predictably, Mr. Mankiw's comments set off a firestorm. He was denounced by Democratic presidential candidates and Republican lawmakers from industrial states, and even President Bush sought to distance himself from the remarks. But was the sturm und drang warranted?

The truth is, nobody knows how widespread the outsourcing phenomenon is or will become. The Bureau of Labor Statistics doesn't yet track jobs transferred abroad and companies generally keep reliable data under wraps. Catherine Mann, a senior fellow at the Institute for International Economics in Washington, cautions that the lack of statistics could yield considerable confusion. For example, she says it's important to distinguish between jobs lost by a sector of the economy and specific occupations affected within each sector. Also, jobs perceived to be disappearing overseas may crop up in a nearby state.

Catherine Mann, a senior fellow at the Institute for International Economics, cautions that there isn't much data to support many of the current arguments about outsourcing.

"When someone loses their job in California, it may appear in Bangalore or in Wisconsin," Dr. Mann says. "Lots of jobs are moving within the U.S. economy."

Despite the dearth of hard numbers, sentiment on the issue runs high and ranges widely. For perspective on the issue, the Online Journal talked to a host of sources.

While some call outsourcing another chapter in companies' quest to reduce labor expenses at any cost, others argue that businesses are merely capitalizing on international trade flows, developing a more global focus and seeking out the most efficient ways to use their resources. Many economists posit that, in the long run, outsourcing will be a net gain for the U.S. economy, as cheaper products from overseas encourage more investment at home. They point to the outsourcing of tech hardware jobs in the 1980s and 1990s, which helped to lower the cost of computers and spur the technology boom. Others worry that outsourcing puts too much emphasis on the U.S.'s most decisive comparative advantage -- capital -- and concentrates the benefits of globalization near the very top of the economic food chain.

"Trade raises income, but it also redistributes it," says Josh Bivens of the Economic Policy Institute in Washington. "It's hard to see how that trickles down too much. The biggest consumers of these goods are other businesses."

Jobs at Risk

The loss of jobs in the U.S. to lower-paid workers overseas is nothing new: Car makers and steel producers long ago began shuttering factories and sending work abroad. Today, whom does outsourcing put at risk? Development, customer-service and back-office functions at information-technology and financial-services companies appear vulnerable.

Forrester Research projects the U.S. will lose a total of 3.3 million service jobs to outsourcing between 2000 and 2015. AMR Research estimates 20% of manufacturers and financial-services companies have outsourced some information-technology work and predicts that percentage will double in the next two years.

Forrester's Christine Ferrusi Ross says many of the information-technology jobs transferred elsewhere represent "bottom-of-the-barrel" work.

"These are jobs like low-level computer programming and call-center operators that usually have low retention and high turnover in the U.S., but in India, you can fill them with computer-science engineers who are way overqualified. Companies often can get better work from a stable, low-cost work force by going overseas," she says.

Diana Farrell of McKinsey points out that Forrester's estimate breaks down to about 220,000 jobs lost a year over 15 years, a relatively low figure compared with layoffs. "In a good year like 1999, 1.15 million workers lost their jobs through mass layoffs," she notes.

Amid growing public and political scrutiny, businesses become even more tight-lipped about outsourcing plans. No one disputes that an exodus of some jobs is afoot, but its extent and its long-term effect on the U.S. work force and economy remain unknown. According to Forrester, here is where some jobs are going:

• Software development: Oracle says it is moving around 2,000 development jobs to India.

• Call centers: Hewlett-Packard moved 1,200 customer-service jobs from Florida to India.

• Back-office accounting: Insurer AIG is establishing an office in the Philippines with about 400 workers.

• Product development: Ericsson sold its India software-development center to India's Wipro.

What's Ahead

Should the U.S. get comfortable with the idea that the jobs its businesses create will be shared with the whole world? Probably.

Anxiety about outsourcing reflects a more general concern about the pace of change, says Tyler Cowen, a professor of economics at George Mason University in Fairfax, Va. And few recent phenomena have changed the world more abruptly than globalization. Dr. Mann says that between 1995 and 2002, annual U.S. gross domestic product grew about 0.3% faster than it would have without globalization.

However, future returns may be cold comfort today to workers left behind after jobs moved. Richard Trumka of the AFL-CIO says U.S. workers need more equitable trade agreements. Dr. Mann has suggested instituting a human-capital investment tax credit, which would provide employers greater incentive to retrain workers. She also proposes that federal aid given to manufacturing workers who have been displaced should be extended to information professions.