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Why We Have Nothing to Fear from Foreign Outsourcing
Free Trade Bulletin, Center for Trade Policy Studies, CATO Institute ^ | March 30, 2004 | Daniel T. Griswold

Posted on 04/26/2004 10:31:13 AM PDT by CSM

Foreign outsourcing, or offshoring, is being blamed for job losses in the information technology (IT) sector. Announcements of jobs being moved to India and other low-wage countries have provoked criticism of "Benedict Arnold" CEOs and calls for governmental restrictions on the practice of outsourcing. But critics who scapegoat outsourcing are ignoring the realities of today's IT labor market.

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

A fundamental mistake made by the critics of outsourcing has been to confuse the passing pain of the IT recession with an alleged long-term decline in the sector. That mistake is compounded when current output and employment levels are compared with levels at the frenzied peak of the boom in 2000 rather than with more normal levels from the late 1990s. A more accurate and less alarming picture of the industry emerges if we compare the state of the industry a few years after the bubble burst with its state a few years before.

Beginning in the early 1990s, with the takeoff of Windows-based computing and the Internet, employment in the IT industry surged. Employment in software and related services grew by one million between 1993 and 2000, before dropping by 166,000 between 2000 and 2002.[1] The story has been much the same across other IT sectors: stupendous growth throughout the 1990s, then a pullback in employment of 10 to 20 percent during the recession. In the IT industry as a whole, employment levels even after the recession were still no lower than in 1998. During the past decade, annual employment in the industry has still grown at a rate twice as fast as employment in private industry in general.[2]

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

The jobs that have been lost in the IT sector tend to be the lower skilled and lower paid jobs in the industry—just as trade theory would predict. From 1999 through 2002, total employment in the IT industry did drop by more than a quarter of a million, from 6.24 million to 5.95 million.[4] But declining employment was concentrated in those occupations requiring relatively low or moderate levels of training and education.

The biggest drop in employment was among data entry keyers and electrical and electronic equipment assemblers, jobs that may require vocational training but not typically a bachelor's degree. Job losses were also heavy among IT occupations requiring even less education and training, such as billing and posting clerks, machine operators, communications equipment operators, and computer and office machine operators. From 1999 through 2002, total jobs in the first category requiring moderate education and training declined 14. 6 percent, and those in the second category requiring the least education and training declined by 10.5 percent.[5]

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

Contrary to the popular angst that "our best jobs" are going overseas, the best jobs appear to be staying here. In fact, as a share of the IT workforce, those jobs requiring relatively high skills increased from 55 percent of all jobs in 1999 to 59 percent in 2002. Just as the free traders predict, we are swapping less skilled and lower paying jobs for relatively higher skilled and better paying jobs.[7]

The recovery and expansion of job creation that has already begun in the IT sector should continue into the future. According to the U.S. Department of Labor's biannual projections, the number of jobs in computer and mathematical science occupations is expected to increase from three million to four million in the next decade, a rate of growth twice as fast as employment in the rest of the private economy.[8]

"The demand for computer-related occupations should increase, despite the recent downturn, as a result of rapid advances in computer technology and the demand for new computer applications, including those for the Internet and Intranets," the department reported in the February 2004 issue of its Monthly Labor Review. "Growth will not be as rapid as during the previous decade, however, as the software industry begins to mature and as routine work is increasingly outsourced overseas." Most of the new jobs will be in computer systems design and related services and in the information industry, primarily in software publishing, data processing and related sectors, and Internet-related industries.[9]

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

The United States continues to enjoy tremendous advantages in global IT competition. Our domestic economy is one of the most free, flexible, and open in the world. Our telecom, transportation, and utility systems deliver dependable service. Our talent pool of scientists and our university research facilities are second to none. Entrepreneurs can obtain financing for their ideas and intellectual property protection once they are developed. Relative to many other systems of government, ours is transparent, predictable, and dedicated to the rule of law. Our domestic market is the largest in the world. Those inherent advantages of doing business in the United States cannot always be offset merely by lower labor costs elsewhere and are especially important in those aspects of production that require creative freedom and specialized skills.

U.S. companies are also discovering the limits to outsourcing. There are perfectly good, market-driven reasons why U.S. companies will continue to do most of their IT work onshore if not in-house. Foreign outsourcing can generate costs of its own, such as the need for more travel, training, and management oversight. Depending on the type of project, those costs can eat into if not entirely erase the costs savings from lower wages abroad. Sending work abroad can also risk the loss of control of sensitive personal and financial data and copyrighted material. It can mean the loss of control over time-sensitive aspects of a project or becoming too reliant on outside firms. As some U.S. companies have discovered, it can result in reduced quality of service if the providers are not sensitive to cultural differences or lack specialized information expected by customers.

The phenomenon of foreign outsourcing creates tangible benefits for the U.S. economy and American workers. Whatever negative impact it has had on specific firms and workers has been limited and is far 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," Monthly Labor Review 127, no. 2 (February 2004): Table 2, p. 83.

[9]Ibid., p. 98.

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


TOPICS: Business/Economy; News/Current Events
KEYWORDS: cato; economy; freetrade; leftwingactivists; outsourcing; trade
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To: cyborg
Again HOW can American career people compete with someone in another country who has a lower pay standard than here?

You didn't read the article, did you?

The crash in IT jobs was a direct result of the dot-bomb scams of the late 1990s, where companies would acquire some venture capital, hire a bunch of people, issue an IPO and cash out filthy rich before the company had ever generated one penny of profit.

We have been paying for these scams ever since.

The IT industry has finally reached the point where sustainable employment levels are going to rise.

IT has ALWAYS been cyclical. There is nothing new here except to people short in memory or years.

41 posted on 04/26/2004 11:48:09 AM PDT by E. Pluribus Unum (Drug prohibition laws help fund terrorism.)
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To: TXBSAFH
Interesting. The price remained constant, while the continual cost increases drove these companies to look for a way to reduce cost. Must have been a profitability thing, just think, they could have been heroes if they stayed in the US and went bankrupt!
42 posted on 04/26/2004 11:48:52 AM PDT by CSM (Vote Kerry! Boil the Frog! Speed up the 2nd Revolution! (Be like Spain! At least they're honest))
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To: Wolfie; cyborg
Please read post # 34. Your comments? Thank you.
43 posted on 04/26/2004 11:49:03 AM PDT by TXBSAFH (KILL-9 needs no justification.)
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To: mommybain
There is no displaced worker as a result of these actions. Instead, poor management of a process will result in job losses.
44 posted on 04/26/2004 11:50:24 AM PDT by CSM (Vote Kerry! Boil the Frog! Speed up the 2nd Revolution! (Be like Spain! At least they're honest))
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To: CSM
I did some research this morning. The company that makes dewats were profitable in the US. They were not in danger of going out of business if they did not move.
45 posted on 04/26/2004 11:50:37 AM PDT by TXBSAFH (KILL-9 needs no justification.)
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To: TXBSAFH
Sounds like a quality of workmanship issue. Of course, you get what you pay for!
46 posted on 04/26/2004 11:52:06 AM PDT by Wolfie
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To: CSM
Whatever. I'm just telling you the world I'm living in right now.

On the bright side, it's now taking 2 people (1 American / 1 Indian) to do what 1 person (American) used to do, so I guess that helps our economy in the long run, doesn't it?
47 posted on 04/26/2004 11:52:42 AM PDT by mommybain (not Walmart greeter material)
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To: TXBSAFH
My mother remarked that cheaper goods end up being more expensive than a high quality product (American made). She remembers coming to this country when Ideal Toys was still in business. How many toys are still made in this country? Not many I'm sure.
48 posted on 04/26/2004 11:53:22 AM PDT by cyborg
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To: cyborg
Because of all the crying by the protectionists. They want the government to take further actions to make sure that they have a job, in the field they want, for as long as they want and for a high wage. At the same time they want to buy cheap goods.

The government will do nothing but grow, otherwise they would cease to exist.......

S-OX is a direct result of the government protecting the "common" worker from further Enron scandals. It just adds compliance costs and still doesn't ensure anyone's 401K against bankruptcy. But the poeple feel safe!
49 posted on 04/26/2004 11:54:19 AM PDT by CSM (Vote Kerry! Boil the Frog! Speed up the 2nd Revolution! (Be like Spain! At least they're honest))
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To: cyborg
I am in IT, but I am the son of a carpenter and in my younger days worked in the building trades. I will only buy tools that or of top quality. I was laid off for 4 months in 2002 and had to hassle some fences and decks until I found a new position. You may pay a little more up front but they last longer and work better in the long run. I have switched my buying to Milwakki(SP?) and porter cable.
50 posted on 04/26/2004 11:57:09 AM PDT by TXBSAFH (KILL-9 needs no justification.)
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To: Wolfie
Jobs go to a foreign country, quality of goods go down the toilet, price to the consumer stays the same. Free trade is shaping up to be a total pants downer for the middle class.
51 posted on 04/26/2004 11:59:11 AM PDT by TXBSAFH (KILL-9 needs no justification.)
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To: TXBSAFH
Look, quit your whining. Free Trade is working just fine for the people its supposed to work for: Namely, our political masters and their big campaign contributors.
52 posted on 04/26/2004 12:00:54 PM PDT by Wolfie
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To: Wolfie
That is why I am against it.
53 posted on 04/26/2004 12:02:51 PM PDT by TXBSAFH (KILL-9 needs no justification.)
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To: TXBSAFH
Let me guess, they moved operations in 2001, when they had a 2% ROS and the next year they ended up with a 4% ROS. Neither is all that great, but I am looking for more financial information.
54 posted on 04/26/2004 12:04:32 PM PDT by CSM (Vote Kerry! Boil the Frog! Speed up the 2nd Revolution! (Be like Spain! At least they're honest))
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To: TXBSAFH
"Jobs go to a foreign country, quality of goods go down the toilet, price to the consumer stays the same."

Tell that to anyone buying a car today. Off shore competition is the main reason we have relatively good quality cars to chose from.
55 posted on 04/26/2004 12:06:27 PM PDT by CSM (Vote Kerry! Boil the Frog! Speed up the 2nd Revolution! (Be like Spain! At least they're honest))
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To: CSM
In this case the quality is way down and they by their act have lost a customer.
56 posted on 04/26/2004 12:08:57 PM PDT by TXBSAFH (KILL-9 needs no justification.)
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To: Mears
Remember what Benjamin Disraeli said:

"There's Lies, Damned Lies, and then there's Statistics".

I don't think you are wrong in your opinion about out-sourcing, either.

Just how many times is a person supposed to go back to school to start over?

I know white males in their 50's who have started over three or four times now. Their standards of living have declined rapidly as well.

I'm not talking call-center jobs either. I'm talking white collar, upper-middle class positions that require a Master's Degree at least, and possibly a doctorate.

Corporations demand loyalty and 60 hours or more per week, and yet corporations are awfully quick to bolt if they think they can get some guy overseas for 700 bucks a month. Whether the quality is there or NOT.

Most of the time, it's NOT



Out-sourcing is hurting us and anyone who says it isn't is living in a dream-world. ( Or worse. I try to think the best of people)



If Americans have the skills , Americans ought to be first in line for the jobs.

Some people here are awfully smug and think it CAN'T happen to THEM...



57 posted on 04/26/2004 12:12:02 PM PDT by tiamat ("Just a Bronze-Age Gal, Trapped in a Techno World!")
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To: TXBSAFH
It's a bit rough to be in IT right now. I think the IT industry is very different from the manufacturing industry. I could be wrong though.
58 posted on 04/26/2004 12:19:03 PM PDT by cyborg
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To: tiamat
Hear, Hear!!!
59 posted on 04/26/2004 12:27:58 PM PDT by TXBSAFH (KILL-9 needs no justification.)
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To: cyborg
It is rough, I knowof soem who are making 60, 70 cents on the dollar of what they were making two years ago. And they feel lucky to have gotten it.
60 posted on 04/26/2004 12:29:17 PM PDT by TXBSAFH (KILL-9 needs no justification.)
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