• 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.

Others argue that the number of workers in China and India is so massive that integrating them into the global economy will cause persistent unemployment in the United States and Europe. Both China and India do have a large supply of productive labor, but they also have a fast-growing appetite for goods and services. The great majority of workers in China and India will produce goods and services for their own markets, because they are generating new demand about as fast as they are adding to supply. As happens elsewhere, only a small portion of the workforce of these countries produces goods for export. Provided that China and India allow exchange rates to adjust, they will not be a net drain on economic activity or jobs in the rest of the world. (For an assessment of how offshoring will affect them, see “Emerging Markets Must Do Their Part,” at the end of this article.)

Equally untenable is the notion that China and India are taking work from the United States because of their low wages. The truth is that many jobs in India today are viable only in a low-wage environment and wouldn’t exist in the United States. Thus the fact that half a million people are now employed in India’s outsourcing industry doesn’t mean that there could be 500,000 more jobs in the United States and Europe. Without offshoring, for instance, companies would scale back or withdraw services such as round-the-clock customer help. Moreover, technology is putting many US jobs at risk even without offshoring. Automated-voice-response units are replacing call-center workers, online hotel and airline booking systems are replacing live operators and travel agents, and imaging software is replacing data-entry workers.

A related myth is the notion that offshoring in the service sector has been responsible for the anemic rate of job creation during the current economic recovery. Critics point out that more than 2,000,000 US jobs have been lost since 2000. But almost all of these were in manufacturing, not services. Moreover, employment in IT — supposedly one of the sectors hardest hit by offshoring — expanded from 1999 to 2002 by 108,000 positions (out of roughly 3,000,000). (Department of Commerce, annual occupational-employment survey data.) While 71,000 computer-programming jobs disappeared (mostly after the IT bubble burst), jobs in other computer fields multiplied. The number of higher-paid positions for software engineers increased by 115,000, while the number of jobs for systems analysts and network administrators rose by 40,000 and 27,880, respectively.

The Challenge for Policy Makers

Arguments about the greater good and the long-term health of the economy do not, of course, ease the plight of people who lose their jobs or find themselves in lower-wage employment. For while free trade creates wealth and improves a nation’s standard of living, not all groups benefit, particularly in the short term. Job change is a much larger part of life than it used to be, and the challenge for policy makers is to make it less painful.

A sizable portion of the workers who lose their jobs because of free trade don’t find new ones easily or must accept jobs with lower wages. From 1979 to 1999, roughly 30 percent of the people who were unemployed as a result of cheap imports in sectors other than manufacturing hadn’t found jobs a year later. (Lori G. Kletzer, “Job Loss from Imports: Measuring the Costs,” Institute for International Economics, Washington, DC, September 2001. To assess job displacement in sectors prone to foreign competition, Kletzer matched Bureau of Labor Statistics figures on nonmanufacturing jobs with trade data.) For those who did find them, average wages were about the same as before. Within that average, however, wages varied considerably. About a quarter of these people were better paid, but 55 percent took lower-paid jobs and as many as 25 percent of this group took pay cuts of 30 percent or more.

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