• Technology
  • McKinsey & Co.

Exploding the Myths of Offshoring

Far from damaging the economy of the United States, offshoring should enable its companies to direct resources to next-generation technologies and ideas -- if public policy doesn't get in the way.

Indeed, this is exactly the pattern that developed over the past two decades as manufacturing jobs moved offshore. US manufacturing employment shrank by 2 million jobs over 20 years — but net employment increased by 43 million jobs in other areas, such as educational and health services, professional and business services, trade and transport, government, leisure and hospitality, and financial services. Over the same period, manufacturing output increased despite the decline in the number of manufacturing workers, because factories became more productive. Higher productivity means a higher national income and a higher standard of living.

As jobs in call centers, back-office operations, and some IT functions move offshore, the same thing is likely to happen again. Opportunities to generate higher-value-added jobs by redeploying labor and investing capital will appear, though we can’t predict exactly where. The Bureau of Labor Statistics estimates that 22 million new US jobs, mostly in business services, health care, social services, transportation, and communications, will be created in the period from 2000 to 2010. It also predicts that computer-related occupations — often thought to be at high risk of moving offshore — will be among the fastest-growing job categories in the country, for while code can be written abroad, many IT functions, such as systems integration, can’t be exported. And there will undoubtedly be jobs we can’t even fathom today. Twenty years ago, for example, no one could have imagined the ubiquity of the cellular phone, yet it spawned an industry that now employs almost 200,000 workers in the United States.

That new jobs will be created as old ones disappear is not an article of faith; it is based on experience. Most recently, in the 1990s, trade expanded rapidly, and the offshoring of manufacturing and service jobs increased. At the same time, overall employment soared, unemployment fell to 4 percent, and real wages rose.

Even on conservative estimates, for every dollar offshored, an extra 45 to 47 cents of value will be created in the US economy as labor is redeployed. (Lori Kletzer, of the University of California-Santa Cruz (and formerly of the Bureau of Labor Statistics), reports that from 1979 to 1999, 69 percent of nonmanufacturing workers who lost their jobs because of free trade found new ones within a year, and on average they earned 96.2 percent of their previous wages. These figures, combined with the fact that 72 cents of every dollar offshored had previously been spent on US wages, mean that the additional value to the US economy from redeploying workers would be 45 to 47 cents.) White-collar employees who hold the types of jobs now being moved offshore are generally more highly educated and tend to find jobs faster than do workers in the service sector as a whole. Far from being bad for the United States, offshoring creates net value for its economy — to the tune of $1.12 to $1.14 for every dollar that goes abroad.

Putting Offshoring in Perspective

Offshoring’s impact on employment calls for a rational assessment. Forrester Research predicts that, by 2015, roughly 3.3 million US business-processing jobs will be performed abroad. (John C. McCarthy, “3.3 Million US Services Jobs to Go Offshore,” Forrester Brief, November 11, 2002.) Although this number might seem startlingly large, it is only a small piece of a much larger picture.

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