Sunday, September 11, 2005

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The New York Fed tackles offshore outsourcing

The following is excerpted from Erica L. Groshen, Bart Hobijn, and Margaret M. McConnell, "U.S. Jobs Gained and Lost through Trade: A Net Measure" in the August 2005 edition of the Federal Reserve Bank of New York’s Current Issues in Economics and Finance:

In the aftermath of the 2001 recession, the perception has grown that vast numbers of U.S. services jobs are being relocated to India, China, and other developing countries. Anecdotes abound of companies using overseas call centers, computer programmers, help desk workers, and accountants while closing down whole departments here. The alleged surge in relocations after 2001 coincided for some years with a sluggish job recovery, prompting many to conclude that the “offshoring” of jobs accounted for much of the persistent weakness in the U.S. labor market. While concerns about job relocations were fueled by the slow job growth during the recovery, the belief that U.S. workers are losing jobs to foreign competition has a much longer history: Indeed, the current concerns echo those voiced in many earlier periods about the impact of international trade on domestic workers.

In this edition of Current Issues, we explore the relationship between trade and job creation in the United States....

[W]e find no evidence to support the claims that a surge in offshoring played a large role in the jobless recovery. Jobs embodied in net imports did not grow at an accelerated pace after the 2001 recession. In fact, the increase in U.S. jobs sent abroad has averaged about 30,000 per month since 2001—a deceleration from the monthly average increase of 45,000 jobs during the period from 1997 to 2001.

More broadly, our results show no clear or necessary relationship between a pickup in jobs lost to trade and weakness in the U.S. labor market. A case in point is the 1997-2001 acceleration in offshoring, which occurred when U.S. payrolls were expanding steadily.

This is the part I found of particular interest:

[One common] assumption is that sectors that are heavily or increasingly exposed to trade suffered disproportionate job losses during the recession and recovery. To test this assumption, we examine job growth rates in this period relative to growth rates during the 1990s expansion for both trade-sensitive and trade-insensitive industries. Starting with goods-producing industries, we find that manufacturing—one of the sectors most exposed to trade—did indeed lose a disproportionate share of jobs during the downturn and subsequent recovery. However, mining and natural resources, another heavily traded industry, performed better in this period than in the preceding expansion, while the nontraded construction industry experienced disproportionate job losses.

Turning to services, we find that the results are even more mixed. Business services—an industry in which outsourcing is believed to have taken a large toll on domestic jobs—saw above-average job losses during the recession and recovery. However, finance, insurance, wholesale trade, and management and engineering jobs did relatively well, despite often-voiced concerns about outsourcing. Moreover, a number of services industries that are not exposed to trade incurred above-average employment losses; the leisure and hospitality trades, for example, do not transfer jobs to overseas workers but still experienced heavy payroll shortfalls relative to the preceding period.

The absence of any consistent pattern in the fortunes of individual industries suggests that while trade-related competition may have driven job losses in some sectors, layoffs in many other sectors occurred for reasons unrelated to trade. Indeed, in a number of industries, forces such as technological change, investment overhangs, and changing consumption behavior are much more likely to have caused job losses.

posted by Dan on 09.11.05 at 12:27 PM


I'm always encouraged when people with very secure jobs (government and academia largely) conclude that destroying American jobs is not such a big deal.

I'm really stunned that these folks don't understand that extractive jobs cannot be outsourced, and therefore are not really a valid item for comparison with manufacturing (sure, we could import extracted resources to some extent I suppose).

At least they admit the recovery was slow.

posted by: save_the_rustbelt on 09.11.05 at 12:27 PM [permalink]

To that I'll add that the unemployment rate dropped to 4.9% last month, well below what it was during the length of the 1990s. Having lower unemployment rate on an ongoing basis also means that job gains will be lower; if the unemployment rate were 7%, then an equal number of job gains per month would not be considered as good. In a healthy economy jobs are constantly created and destroyed ("job churning"), but the bottom line is that there is no job problem to begin with.

posted by: Kirk H. Sowell on 09.11.05 at 12:27 PM [permalink]

It is the lack of innovation among American business that is the problem. More jobs would be created but for lack of this. As it is, most of jobs created are in construction, real estate, finance, and healthcare. With low interest rates going away, many of these will as well. When the job statistics are as phony as they are these days, any problem can be made to go away.

posted by: Lord on 09.11.05 at 12:27 PM [permalink]


You probably don't want to hear this, but destroying jobs is the ONLY way for the economy to grow.

Think about it, if mechanized, GMO-usin' farmers hadn't found a way to put 98% of other farmers out of business, we'd still be living an agrarian lifestyle just to feed ourselves.

Producing more with fewer people means (1) wealth, and (2) Joe doesn't need to come back tomorrrow. Joe better find something else to do with his time.

posted by: Brock on 09.11.05 at 12:27 PM [permalink]

Oh, what baloney.

Let's see, our incomes are going down and the middle class is shrinking just as manufacturing and IT jobs are going overseas. Coincidence - must be! Gosh darn it, our country wouldn't let the middle class shrivel up, now would it?

On the other hand, people with some sense might be interested in the Ritholtz post over at Big Picture, link:
He pulls some interesting stuff from the Census Bureau:

"Median income fell most sharply in the Midwest, where it dropped 2.8% to $44,700, though it remains $300 higher than the national average. The drop -- accompanied by a rise in poverty in the Midwest -- partly reflects the disappearance of high-wage manufacturing jobs.

Across the country, the Census Bureau said, median earnings for full-time workers employed year-round dropped significantly last year. Men's earnings declined by 2.3% to $40,798 and women's 1.0% to $31,223. The data, which don't reflect employer-provided health benefits, measure pretax income.

The fraction of Americans living below the official poverty line -- $19,307 for a family of four last year -- rose for the fourth consecutive year to 12.7% in 2004 from 12.5% the year before, the bureau said. Last year, 37 million Americans were living in poverty, about 1 million more than the year before and 5.4 million more than in 2000 when poverty bottomed out as the economy peaked.


If it walks like a duck, and quacks like a duck, it must be an outsourcing apologist economisty Republican.

posted by: camille roy on 09.11.05 at 12:27 PM [permalink]

The unemployment rate is down because a few millions people seem to have disappeared from the job market, I'm a GOP and I don't believe that for a moment. Something is smelly about the labor force participation rate. I don't trust Bush or his toadies.

No one is advocating that we return to making buggy whips, but the people who live secure on the government dole are quite cavalier about destroying someone else's job (why don't we do away with tenure and civil service and let everyone enjoy the free market?).

Bill Clinton and George Bush have both promised that trade would cause this country to be flooded with new high-value service jobs. What a crock.

"Fries with that?"

"Do you need a cart today?"

posted by: save_the_rustbelt on 09.11.05 at 12:27 PM [permalink]

> To that I'll add that the unemployment rate
> dropped to 4.9% last month, well below what
> it was during the length of the 1990s.

Anecdotal evidence from my middle-class neighborhood is that a very high percentage of those who lost their jobs during the 2001-2003 time period have either left the workforce (early forced retirement; suicical levels of depression preventing continued job search) or are counted as employed becuase they are now working at Wal-Mart (a dozen or so ex-mainline pilots I know). That doesn't give me a lot of comfort, Schumpter or no.


posted by: Cranky Observer on 09.11.05 at 12:27 PM [permalink]

SaveTheRustbelt, even as a card-carrying Democrat, I admire your attempt to craft a stance as an honorable Republican, though I'm sure we would disagree on the basic policy components of such a stance.

I find it unfortunate -- for the country -- that your party has been taken over by incompetents and cronies. I trully do not think people who wish the best for this country can now find a home in the Republican party.

Back to oursourcing, Roach at Morgan Stanley had this to say today:

Despite sharply higher energy prices that will most assuredly boost headline inflation in the months ahead, the upside to core inflation should remain limited by the ever-powerful forces of globalization. That’s especially the case on the labor cost front -- the dominant component of business cost structures. In fact, barring an outbreak of protectionism, I remain convinced that the global labor arbitrage will continue to exert a powerful restraint on wage pressures.

posted by: camille roy on 09.11.05 at 12:27 PM [permalink]

While Bill Gates publicly laments young Americans' lack of interest in computer science careers, Microsoft hired only 500 net new U.S. workers between June 2003 and 2004. During the same period, Infosys hired 11,000 new workers, most of them in India. The thousand or so positions Infosys filled in the U.S. went mostly to foreigners on H-1B visas. And according to a press release and leaked internal documents, IBM is reducing headcount in Western Europe
and North America by 13,000 while increasing it
by 14,000 in India.

posted by: bhaim on 09.11.05 at 12:27 PM [permalink]

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