• 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.

The United States today has more than 150 million employed workers. Technological change, economic recessions, shifts in consumer demand, and other changes make jobs turn over constantly, so that each month roughly two million people in the United States change them. Even the gloomiest predictions suggest that the number of jobs lost to offshoring will be far lower. It will also be small compared with the mass layoffs prompted by corporate mergers and restructuring when the economy grows. (The Bureau of Labor Statistics defines a mass layoff as 50 or more worker claims against an establishment’s unemployment-insurance account during a five-week period.) In 1999 alone — at the peak of the economic bubble — 1.15 million workers lost their jobs through mass layoffs as companies restructured operations. Job churn is part of life, even in a growing economy.

Liberalized, competitive economies that have flexible labor markets can cope with the natural process of job creation and destruction, and the US economy, the world’s most dynamic, is arguably in the best position to do so. According to the Organisation for Economic Cooperation and Development, the United States has the highest rate of reemployment of any OECD country by a factor of almost two. Over the past ten years, 35 million new jobs have been created, and, according to the OECD, job growth was fastest in high-wage occupations.

A flexible job market and the mobility of US workers, along with the entrepreneurial and innovative spirit of US businesses, will enable the United States to generate new jobs faster than offshoring eliminates them. Consider the way the US semiconductor industry reinvented itself after losing out to Japanese competitors, in the late 1980s. The Japanese quickly dominated many segments, including memory chips, and spurred a public outcry over unfair competition and the loss of high-paying white-collar US jobs. The big US players — Intel, Motorola, and Texas Instruments — abandoned the dynamic-random-access-memory (DRAM) business. But this exit prompted them to invest more heavily in the production of microprocessors and logic products — the next growth wave in semiconductors. Intel and Texas Instruments became the significant global forces in microprocessors and digital-signal processors (the “brain” in mobile telephones), respectively. Motorola gained a strong position in microcontrollers and automotive semiconductors. Throughout this shift toward higher-value-added activities, the total number of US jobs in semiconductors and closely related electronics fields held constant, at around half a million. (Employment data from the Semiconductor Industry Association and the Bureau of Labor Statistics.)

Exploding the Myths

A number of myths and half-truths are muddling the public debate over white-collar offshoring. Most troubling is the argument that trade in services is somehow different from trade in goods — less beneficial to the US economy. Given the strength of US services, however, increased trade in them is actually more likely to be a substantial plus for the country.

The United States has always run a trade surplus in services, even with India. It has the world’s most productive and developed service sector and continues to hold a comparative advantage in these knowledge-based industries, unlike those based on manufacturing. US banks, law firms, accounting firms, IT integrators, and consultants, to name just a few, are global competitors, and US trade policy has consistently demanded more openness on the part of other countries in these fields.

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