Wednesday, February 23, 2005

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How offshore outsourcing has devastated the high tech sector

A year ago I was in the middle of writing "The Outsourcing Bogeyman" for Foreign Affairs. When it came out, I received a fair amount of static from tech workers explaining that I didn't understand the situation they faced. Since offshore outsourcing is an ever-increasing phenomenon, perhaps we should examine how offshoring devastated the tech sector over the course of the past year.

Let's see, Ed Frauenheim has some interesting reporting on this topic for CNET News:

Large-scale layoffs, prevalent in the technology industry since the dot-com implosion, are scaling back.

So indicates a fourth-quarter U.S. Department of Labor report released Wednesday. The study also suggests that offshore outsourcing--widely blamed for tech-related layoffs and other potential economic problems in recent months--accounted for just a small fraction of major, extended layoffs in the United States last year.

In the three months ended Dec. 31 of last year, 7,857 workers in the IT industry lost their jobs as part of "extended mass layoffs," down significantly from 15,318 a year earlier. That compares with 236,637 such layoffs in all sectors, down from 325,333 in the fourth quarter of 2003.

Hmmm.... well, just just means fewer tech people are losing their jobs. Surely it doesn't mean that these firms are hiring again, right? Let's check out this Kathie O'Donnell story for CBS MarketWatch:

For the first time, Yahoo Inc. is recruiting MBAs on campus at Massachusetts Institute of Technology, which is welcome news to Jeffery Sean Davis, who expects to graduate this spring owing $120,000 in student loans.

Davis, 35, worked in tech research and development for the U.S. government before enrolling in the two-year program at MIT's Sloan School of Management. The Los Angeles native said he's glad to be graduating this year rather than 2004, given the increase in recruiting he's seen.

Many technology firms that slashed jobs in leaner times are finding they must hire to position themselves for growth, Davis said. In 2004, he found recruiters sought to fill specific needs, while this year, there's more general, overall hiring.

"The war for talent really is back on," said John Challenger, chief executive of Chicago-based outplacement firm Challenger, Gray & Christmas....

The jobless rate for master's degree holders in computer and mathematical fields was 3.3 percent last year, down from 5.5 percent in 2003 and 5.3 percent in 2002, according to the U.S Bureau of Labor Statistics. While that's still nowhere near the 1.1 percent rate in 2000, it's still a marked improvement.

"After somewhat sluggish labor-market conditions following the 2001 recession, the job market for individuals in computer and mathematical occupations with master's degrees has improved recently," Bureau economist Steve Hipple said....

MIT statistics show prospects for its MBA grads are improving. In 2004, 96 percent had job offers three months after graduation and 91 percent had accepted. Tech positions accounted for 19 percent of accepted jobs. In 2003, 91 percent had job offers in that timeframe and 88 percent accepted. Tech jobs accounted for 20 percent of jobs accepted.

Well, I'm sure this doesn't translate into increased demand for white collar workers across the board or anything.

Besides, as the smarter critics point out, what matters less than the number of jobs lost or gained is the downward effect that offshoring has on wages. Surely, offshore outsourcing would have put a damper on wages in the high-tech sector, right? Let's check out this Frauenheim story for CNET:

Computer professionals of different stripes saw their wallets get fatter last year, according to government data.

From 2003 to 2004, the average weekly earnings of employed, full-time software engineers rose 8.8 percent to $1,418, according to statistics from the U.S. Labor Department. Average weekly earnings climbed 6.8 percent to $1,205 for computer scientists and systems analysts, and increased 7.7 percent to $1,194 for network systems and data communications analysts....

Electrical and electronics engineers saw their average weekly earnings increase by a more modest 3.3 percent, to $1,402. That rise amounted to treading water in the overall economy, given that the consumer price index also rose 3.3 percent for the year.

The data on rising earnings comes amid conflicting signals about the job situation for technology professionals in the United States. Reports have documented fewer layoffs for IT workers, and the average number of unemployed workers in nine high-tech categories--including computer programmers, database administrators and computer hardware engineers--fell from 210,000 in 2003 to 146,000 in 2004, according to Labor Department statistics.

To be fair, there is contradictory information on the wage issue. This Dice survey suggests that wages fell overall in the computer sector in 2004. But even this report observes that:

Salaries have improved in Washington D.C. (up 3.6 percent), Atlanta (up 2.6 percent) and Southern California (up 1.1 percent) from 2003.... These metro areas have also seen significant growth in job postings on the Dice site, up 93 percent, 140 percent and 74 percent respectively between December of 2003 and December of 2004.

This would be consistent with the homeshoring phenomenon of tech sectors doing well in lower-wage areas outside of Silicon Valley. The fact that the Dice survey does not appear to cover new tech hotspots like Oklahoma leads me to trust the Labor Department figures more.

[So things are better in 2004 than in 2003 -- but the labor market in IT has sucked for a couple of years. Why are you so giddy about one year of positive data?--ed. The downturn in the IT labor market was real, but there were a lot of reasons for that -- the end of Y2K, the dot-com crash, the recession, and, yes, offshore outsourcing. However, offshoring critics has insisted that the problem is only getting worse and will lead to devastating employment and wage effects on the IT sector. Clearly, offshoring is not going away in the IT sector -- but the 2004 data suggests that the götterdammerung assumption was, at the very least, a gross exaggeration.]

posted by Dan on 02.23.05 at 10:43 AM


Isn't this all post hoc propter hoc?

posted by: rilkefan on 02.23.05 at 10:43 AM [permalink]

$120,000 of debt for a two year graduate program?


posted by: Zathras on 02.23.05 at 10:43 AM [permalink]

Salary increases in the best markets of equal to or less than inflation does not seem like a strong indication of a strong market for sellers of tech skills. Perhaps you should re-think this data.

posted by: Dantheman on 02.23.05 at 10:43 AM [permalink]

Some people just forget that the reason the IT market busted so badly was because it boomed so highly. Extravegant salaries and $5000 office chairs are not what make a good business run in the long-term, and those companies still around today realized that. I was relatively young when the IT boom hit, but I was old enough when it busted to know to ask, "Did they really think it would all last this way forever?"

Another thing to note is that many companies are bringing their labor base on-shore because they've found many foreign workers' English skills to be so shitty that it was worth the money to keep American workers.

posted by: Robert Mayer on 02.23.05 at 10:43 AM [permalink]

New hires out of college and salaries at the top are only part of the picture. I am the high-tech equivalent of a blue collar worker. What I do can't be offshored, but I could be done without by burdening the engineers, as was the case thru much of 2002. I've just begun the third year of what was to be at least a six week contract, and I'm now getting improved tools and the hope of a raise.

posted by: triticale on 02.23.05 at 10:43 AM [permalink]

Bill Clinton and George Bush tell us free trade will make us more prosperous.

Free trade has made the friends of Bush and Clinton more prosperous, but most of the country has not seen this (yes we can buy cheap Chinese-made stuff at Wal-Mart).


posted by: save_the_rustbelt on 02.23.05 at 10:43 AM [permalink]

Offshore outsourcing is an irreversible process. If you find yourself with a job that could be outsourced, your efforts should be spent on increasing your skill sets rather than discussing the inequities of outsourcing.

I have a team of software developers in Ukraine. All have master's level equivalent degrees in CS and/or Math. All are fantastic coders. But they also lack that entrepreneurial creativity that US developers have (among other things).

The bottom line is that there will always be demand for skilled US IT professionals.



posted by: Dodd on 02.23.05 at 10:43 AM [permalink]

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