Posted on 11/04/2003 2:36:53 PM PST by AZLiberty
By moving service industry work to countries with lower labor costs, US companies can focus on creating higher-value jobs.
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Vivek Agrawal and Diana Farrell | ||
The McKinsey Quarterly, 2003 Number 4 Global directions | ||
Widely cited figures predict that by 2015, roughly 3.3 million US business-processing jobs will have moved abroad.1 As of July 2003, around 400,000 jobs already had. Other research suggests that the number of US service jobs lost to offshoring will accelerate at a rate of 30 to 40 percent annually during the next five years.2 Vast wage differentials are prompting companies to move their labor-intensive service jobs to countries with low labor costs: for instance, software developers, who cost $60 an hour in the United States, the worlds biggest offshorer, cost only $6 an hour in India, the biggest market for offshored services (see Vivek Agrawal, Diana Farrell, and Jaana K. Remes, "Offshoring and beyond," to be published on mckinseyquarterly.com on October 30, 2003). Such projections have caused alarm in the United States. In February 2003, the cover of Business Week asked, "Is your job next?" In June, the US House of Representatives Committee on Small Business held a hearing on "The globalization of white-collar jobs: Can America lose these jobs and still prosper?" Several US states are considering legislation to prohibit or severely restrict their state governments from contracting with companies that move jobs to low-wage developing countries,3 and labor unions, notably the Communications Workers of America, are lobbying Congress to prevent offshoring. Yet pandering to protectionism would be wrong. Many people believe that money spent to buy services abroad is lost to the US economy, but such views are easily disproved. Companies move their business services offshore because they can make more moneywhich means that wealth is created for the United States as well as for the country receiving the jobs. A McKinsey Global Institute (MGI) study reveals the extent of the mutual benefits.4 As the study shows, for every dollar that was previously spent on business processes in the United States and now goes to India, India earns a net benefit of at least 33 cents, in the form of government taxes,5 wages paid by US companies, and revenues earned by Indian vendors of business-process services and their suppliers (Exhibit 1). What of the impact on the US economy? First, it is important to put the figures in context, since fear of job losses makes many people overstate the effects of offshoring. Some 70 percent of jobs in the United States are in service industries such as retailing, catering, and personal care. This work, by its very nature, cannot be moved abroad. In addition, any job losses must be seen as part of an ongoing process of economic restructuring, with which the US economy is well acquainted. Technological change, economic recessions, shifts in consumer demand, business restructuring, and public policy (including trade liberalization and environmental regulation) can and frequently do result in job losses. Even when the economy is growing, mass layoffsusually from restructuringare much higher than the job losses predicted from offshoring.6 In 1999, for instance, 1.15 million workers lost jobs through mass layoffs, out of a total of 2.5 million lost. Liberalized, competitive economies with flexible labor markets can usually cope with such restructuring; the US economy, the worlds most dynamic, certainly should be able to do so. Indeed, history suggests that, over the medium to long term, a flexible job market and the mobility of US workers will make it possible for the United States to create new jobs faster than offshoring eliminates them. The United States today has more than 130 million employed workers. According to the Organisation for Economic Co-operation and Development, it has the highest rate of reemployment of any OECD country by a factor of almost two. Over the past ten years, 3.5 million private-sector jobs a year have been created, on average, for a total of 35 million new jobs, so most workers who lose their positions find another within six months. Jobs lost to low-cost foreign competitors are not so easy to replace. Nonetheless, from 1979 to 1999, 69 percent of the people who lost jobs as a result of cheap imports in sectors other than manufacturing were reemployed.7 The mean wage of those reemployed was 96.2 percent of their previous wage. Finally, remember that the population of the United States is aging. At current productivity levels, the country will need 5 percent, or 15.6 million, more workers by 2015 to maintain both its current ratio of workers to the total population and its living standards. By 2015, despite current fears about job losses as a result of offshoring, the US economy will need more, not fewer, workers. Offshoring is one way to meet that need. But focusing the offshoring debate on job losses misses the most important point: offshoring creates value for the US economy by creating value for US companies and freeing US resources for activities with more value added. It creates value in four ways:
How much value will be created in this way depends on the countrys future economic performance. Historical trends can serve as a guide. If we use the statistics on reemployment and wage levels already noted69 percent of nonmanufacturing workers are reemployed at 96.2 percent of their previous wagesand bear in mind that 72 cents of every dollar offshored had previously been spent on US wages,8 the indirect benefit to the US economy would come to an additional 45 to 47 cents for every dollar spent on offshoring. That is a conservative estimate, since workers in IT and business services tend to find jobs more quickly than do workers in the service sector as a whole, and the demographic shift will increase the demand for workers. In this way, offshoring, far from being bad for the United States, creates net value for the economy. It directly recaptures 67 cents of every dollar of spending that goes abroad and indirectly might capture an additional 45 to 47 centsproducing a net gain of 12 to 14 cents for every dollar of costs moved offshore (Exhibit 2). The total possible wealth creation does not, of course, ease the plight of people who lose their jobs or find lower-wage ones. The statistics showing that 69 percent of those who lost jobs in the nonmanufacturing sector were reemployed also show that 31 percent were not fully reemployed. And while, on average, those who found new jobs secured similar wages (96.2 percent of their previous wage), 55 percent took lower-paid jobs. As many as 25 percent took pay cuts of 30 percent or more. These issues must be addressed. Training programs and generous severance packages, perhaps accompanied by innovative insurance programs (see sidebar, "Easing the pain for workers"), are among the measures that could mitigate the effects of the transition without great cost to the economy. And while many people will undoubtedly suffer short-term disruption, it should be set against the consequences of resisting change: if US companies cant move work abroad they will become less competitiveweakening the economy and endangering more jobsand miss the chance to raise their productivity by focusing on the creation of jobs with higher value added. The openness of the US economy and its inherent flexibilityparticularly that of its labor marketare two of its great recognized strengths. The current danger is that public policy will make its economy less flexible. To do so would endanger the economic well-being of the United States.
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Only the executive who cuts costs and takes a bonus then is gone to another company by the time this off-shore move drives customers away.
'Off-shoring' is about executives looting their companies, pure and simple. Short-term gain for long term pain. But these executives are gone by the time the chickens come home to roost.
In practice, in the high-tech world, off-shoring doesn't save any money in the vast majority of cases, as is finally becoming widely proven.
This is yet another scam by the same executives that gave us the Dot Com bubble and the Y2K "emergency".
Unlikely.
But,...But...they're going to "focus" on "creating" "higher-value" jobs!
Don't you see it everywhere around you?
CEOs forfeiting in their so-called "performance" bonuses for the "higher-value" wage rates of new employees?
Even if you say no, the CEOs are "focusing" on helping us.
Because this article says so.
< /sarcasm>
They don't care.
They cash in lucrative options and retire early. Or move to the next company in order to remove its long term strategies.
That's the new upper-management economy.
The problem with this line of reasoning is that we can't all be cutting each other's hair. Somebody has to be making the exportable products that pay for the imported goods.
Yes, catering cannot be off-shored. But if the middle class starts to disappear, people will not be able to afford catering, and the jobs will simply disappear rather than get offshored
True, it cannot be moved abroad. What's a cost-cutter to do? Flood the wage market with immigrants, especially illegal immigrants.
If the illegals were CEOs and journalists you'll see immigration laws enforced in a flash.
Yep. As a Mac guy, I'm familiar with Quark's incompetence; the repeated delays in version 6 were a major problem for users who wanted to upgrade to Mac OS X. Stuff like this is why I'm not too worried about offshoring as a developer; eventually business owners will figure out that the supposed cost savings just aren't there in most cases. A bigger problem is H1B and L1 visas, which are nothing more than indentured servitude.
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