The New York Times' Anand Giridharads loooks at how India's outsourcing sector is maturing. He finds that -- gasp! -- Indian firms are outsourcing their outsourcing to other countries.... including, among others, the United States:

Thousands of Indians report to Infosys Technologies’ campus here to learn the finer points of programming. Lately, though, packs of foreigners have been roaming the manicured lawns, too.

Many of them are recent American college graduates, and some have even turned down job offers from coveted employers like Google. Instead, they accepted a novel assignment from Infosys, the Indian technology giant: fly here for six months of training, then return home to work in the company’s American back offices.

India is outsourcing outsourcing.

One of the constants of the global economy has been companies moving their tasks — and jobs — to India. But rising wages and a stronger currency here, demands for workers who speak languages other than English, and competition from countries looking to emulate India’s success as a back office — including China, Morocco and Mexico — are challenging that model....

In May, Tata Consultancy Service, Infosys’s Indian rival, announced a new back office in Guadalajara, Mexico; Tata already has 5,000 workers in Brazil, Chile and Uruguay. Cognizant Technology Solutions, with most of its operations in India, has now opened back offices in Phoenix and Shanghai.

Wipro, another Indian technology services company, has outsourcing offices in Canada, China, Portugal, Romania and Saudi Arabia, among other locations.

And last month, Wipro said it was opening a software development center in Atlanta that would hire 500 programmers in three years.

In a poetic reflection of outsourcing’s new face, Wipro’s chairman, Azim Premji, told Wall Street analysts this year that he was considering hubs in Idaho and Virginia, in addition to Georgia, to take advantage of American “states which are less developed.” (India’s per capita income is less than $1,000 a year.)

Three years ago, I argued in Foreign Affairs that the growth projections about offshore outsourcing were wildly overstated. Others have suggested that growth projections about offshore outsourcing are wildly understated.

This Economist story provides a point for me and against the Blinder-Friedman hypothesis:

The latest quarterly report on the state of global outsourcing from TPI, a consultancy, was published earlier this month. It showed that both the number and value of contracts awarded during the first half of this year had declined in comparison with the same period in 2006. In 2007 the total value of contracts awarded in the first six months was the lowest since 2001....

As growth slows it is clear that making money is becoming more difficult for outsourcing firms. Competing on price is getting ever harder. Established vendors are hiring workers in the same low-cost locations as their offshore rivals—the likes of Accenture and IBM have been furiously ramping up their operations in India, for example. One response is to keep searching for ever-cheaper locations, both within India and outside it, but a race to the bottom on price threatens both the quality of service and profit margins. For the top-tier providers, the way to stand apart from the crowd is to deliver more valuable services....

Outsourcing firms are moving into more countries in order to deliver the right mix of cost, risk and quality. As Western providers concentrate on beefing up their presence in low-wage centres, Indian vendors are focusing on the markets where the buying decisions are made. Physical and cultural proximity is important for building closer client relationships, for delivering certain types of services (such as unscripted selling) and for soothing concerns about data security and confidentiality. Hiring locals also has the effect of cutting down on visa hassles.

Wipro, one of the big three Indian providers (along with Infosys and Tata Consultancy Services), is close to reaching an agreement with the authorities in Atlanta, Georgia, to set up its first software-development centre in America. The three other cities shortlisted during the selection process—Austin, Texas; Raleigh, North Carolina; and Richmond, Virginia—stand a good chance of hosting other centres. Azim Premji, Wipro's chairman, says that the proportion of local employees (as opposed to visiting Indians) in the company's overseas locations will rise from 10% to one-third over the next three years.

Few providers expect the topic of offshoring to lose its political sting—despite plenty of evidence, including a recent OECD report on the subject, showing that it is not a big cause of job losses and has an overall positive effect. But the maturing of the outsourcing industry ought to mean that scaremongering about jobs flowing from rich countries to poor ones will sound less and less convincing.

Your humble blogger has been unusually consistent in his position on offshore outsourcing:

1) The initial offshoring of tasks will slow as a) mistakes are made and as b) labor markets begin to equilibrate;

2) Offshoring will be limited to tasks that can be segmented into simpler jobs.

The Influence Peddler reports that some Silicon Valley firms are now engaged in "reverse offshoring":

No Joke:

The rising cost of paying engineers in Bangalore has prompted at least one Silicon Valley start-up to save money by closing its Indian engineering centre and moving the jobs back to California.

While this “reverse offshoring” remains unusual, it points to a broader belief in the US technology industry that the savings that drove software engineering jobs to India’s technology capital are quickly eroding.

Like.com, a search engine company that uses image recognition software to find pictures on the web, took the step of closing in India after seeing the wages of top-level engineers in some cases rise close to US levels.

“Bangalore wages have just been growing like crazy,” Munjal Shah, chief executive, complained in a blog post. In the next few months, Like.com would have had to lift the salary of one of its Bangalore engineers to 75 per cent of the US level, even though the same engineer earned only 20 per cent as much as an equivalent US-based worker two years ago, Mr Shah said.

It's almost as if there's this crazy... international labor market -- and higher value skills and greater value added lead to higher wages. And then when companies no longer save money by locating jobs abroad, the potential actually exists for them to return to the US.

The other problem is local knowledge, as this New York Times story by Steve Lohr suggests:

“Once you start moving up the occupational chains, the work is not as rules-based,” said Frank Levy, a labor economist at the Massachusetts Institute of Technology. “People are doing more custom work that varies case by case.”

In the field of technology services, Mr. Levy said, the essential skill is “often a lot more about business knowledge than it is about software technology — and it’s a lot harder to ship that kind of work overseas.”

The offshore specialists in India are learning that lesson. As they increasingly compete for higher-end work, the Indian companies are hiring thousands of workers this year in the United States, adding an odd twist to the offshoring trend. Tata alone plans to recruit 1,000 workers in America, said Surya Kant, president of the company’s American unit, for “the near-shore work that requires regular contact with clients in person.”

Lohr demonstrates the need for hands-on workers by profiling an IBM project for a Texas utility. IBM is using both domestic and international units to complete the assignment. For the domestic employees, the skill set required would be difficult, at best, to outsource offshore: The utility project I.B.M. is doing in Texas offers a glimpse of the global formula. The far-flung work team includes research scientists in Yorktown Heights, N.Y., and Austin, Tex.; software developers in Pune and Bangalore, India; engineering equipment and quality-control specialists in Miami and New York; and utility experts and software designers like Mr. Taft that have come from Philadelphia, San Francisco, Los Angeles, Chicago, Raleigh, N.C., and elsewhere.

I.B.M. plans to use the skills learned and software written for the smart-grid project in work with utility clients around the world. In the services field, these are deemed “reusable assets,” reducing costs in the future.

Ron Ambrosio, a senior I.B.M. researcher, has been down to Houston a few times, attaching sensors to power lines and collecting gigabytes of data on electricity flows. He and others at I.B.M. are studying how to predict and prevent power failures, optimize performance, reduce costs and conserve energy. “We’re looking at this as part of a worldwide opportunity,” he said.

Dennis Hendon, an account executive, and Rob Calvo, a senior services consultant, lead the I.B.M. team in Houston. Mr. Hendon is an engineer by training, while Mr. Calvo has a business degree, but their real skills lie in years of on-the-job training — what labor experts call “passive knowledge” and “complex communications,” observing, listening, coordinating, negotiating and persuading. The two men say they think of themselves as orchestra conductors, getting all the human parts working smoothly together, inside and outside I.B.M. “We aren’t mounting the poles, but our subcontractors are,” Mr. Hendon said.

One of the difficulties with the Blinder-Friedman hypothesis is that it can't really be tested right now (though perhaps this is where Blinder and Friedman disagree. Friedman already thinks the world is flat, whereas Blinder just thinks it will be much, much flatter over the next few decades).

Nevertheless, one would expect the industrial organization of call centers to closely resemble the future according to Blinder and Friedman. These were the jobs that everyone was yammering about disappearing a half-decade ago. Does this sector look flat?

Thanks to Cornell University's Industrial and Labor Relations school, we now have some data... and most of it does not support the Blinder-Friedman hypothesis. From the press release:

Contrary to what many people think, most call centers serving U.S. customers -- service centers in remote locations that handle telephone and Web-based inquiries -- are operated in the United States, not in India or other overseas locations.

So said Rosemary Batt, the Alice H. Cook Professor of Women and Work and professor of human resource studies at Cornell's ILR School (industrial and labor relations) and a lead author of a report on the largest-scale study to examine call center management and employment practices in Asia, Africa, South America, North America and Europe, covering almost 2,500 centers in 17 countries.

The study, "The Global Call Center Report: International Perspectives on Management and Employment," was a collaborative effort involving more than 40 scholars from 20 countries....

The large majority of centers around the world -- except India -- serve their own domestic markets and consumers. There is no common global face to call centers, since they tend to take on the character of their respective countries and regions based on that country's or region's laws, customs and norms....

Two-thirds of all call centers are in-house operations, serving a firm's own customers. Subcontractors operate the remaining one-third of centers. In-house centers across all countries have lower turnover rates and higher quality jobs than subcontracted ones.

The mobility of call center operations has led many to view this sector as a paradigmatic case of the globalization of service work. And we find that the call center sector looks quite similar across countries in terms of its markets, service offerings, and organizational features. But beyond these similarities, we find that call center workplaces take on the character of their own countries and regions, based on distinct laws, customs, institutions, and norms. The ‘globalization’ of call center activities has a remarkably national face....

Call centers typically serve national rather than international markets. Eighty-six percent serve their local, regional, or national market.

Let it be noted that Anand Giridharadas had a story in yesterday's New York Times that offers some support for the Alan Blinder-Thomas Friedman view of offshore outsourcing:

Outsourcing is breaking out of the back office.

For years, most service industry jobs that were moved to countries like India were considered relatively low-skill tasks like answering customer inquiries. But that has been changing in recent years, and increasingly the jobs of Western white-collar elites in fields as diverse as investment banking, aircraft engineering and pharmaceutical research have begun flowing to India and a few other developing countries.

In the view of most specialists on the phenomenon, the kinds of jobs that cannot be outsourced are slowly evaporating.

Boeing and Airbus now employ hundreds of Indians in challenging tasks like writing software for next-generation cockpits and building systems to prevent airborne collisions. Investment banks like Morgan Stanley are hiring Indians to analyze American stocks, jobs that commonly pay six-figure salaries on Wall Street.

The drug maker Eli Lilly recently handed over a molecule it discovered to an Indian company, which will be paid $500,000 to $1.5 million a year per scientist to ready the drug for commercial use — work that would be significantly more costly if carried out by Americans.

With multinationals employing tens of thousands of Indians, some are beginning to treat the country like a second headquarters, sending senior executives with global responsibilities to work there. For example, Cisco Systems, the leading maker of communications equipment, has decided that 20 percent of its top talent should be in India within five years; it recently moved one of its highest-ranking executives, Wim Elfrink, to Bangalore, the center of the Indian industry, as chief globalization officer.

Accenture, the global consulting giant, has its worldwide head of business-process outsourcing in Bangalore; by December it expects to have more employees in India than in the United States.

This is not a zero-sum game, in which every job added in India comes at the expense of an American or European one.

In many ways, the shift reflects a changing view at multinational companies as they find it easier to meet growing demand by taking advantage of the improved skills of newly educated people in the developing world. And some companies are returning certain jobs to the United States, finding that the work in India and elsewhere is not up to snuff.

But there are trade-offs as well. As Indian back offices become more sophisticated, Western companies are finding that large parts of their work, even high-end tasks, can also be done from India. From the consumer perspective, India has emerged as a pool of 1.1 billion potential customers for companies seeking faster growth. And so many companies are shifting their energy to where they see their futures being written.

“India is at the epicenter of the flat world,” said Michael J. Cannon-Brookes, vice president for business development in India and China at I.B.M., which has reduced its American work force by 31,000 since 1992 even as its Indian staff mushroomed to 52,000 from zero....

Still, specialists warned that a continued flow of work to India required drastic improvements in its educational system and basic facilities. Water and power shortages are endemic, and industry experts predict that India could lack 500,000 engineers by 2010. Yet the country has already tapped a deep well of English-speaking engineers, attracting more outsourced work than any other country.

UPDATE: Friedman's column prompts a bizarre comment from Matthew Yglesias:

The reason KenCall works is that its wages are so low. Its wages, in turn, are low because in Kenya at the moment the IT infrastructure necessary to operate a call center is very scarce relative to the level of English competency necessary to work in one. If an undersea cable makes it significantly easier to start up call centers, that may change. It all depends on how large Kenya's "large pool of educated, English-speaking talent" really is.

What would be more accurate to say is that if the education picture remained constant, the returns to being an offshoring magnet are a) limited to the upper tier of the popilation, and b) decline over time as wages would go up for (relatively) skilled labor.

On the latter point -- so what? Offshoring flows would decline as wages rise -- and rising wages are a good thing. On the former point, here's the question you have to ask -- what's better, a society that has a relatively even distribution of income or a society where the poorest are not made worse off but the educated earn much higher returns for their education?

I suspect Matt would say the latter but not be happy about it. Over the long haul, however, market signals about the increasing returns to education would encourage an expansion of educated individuals -- which counters the effect that concerns Yglesias, and happens to be a good thing in and of itself.

UPDATE: Yglesias clarifies his position here:

Friedman is portraying the issue as one in which Kenya needs to build better broadband access, and then the IT jobs would come. The counterpoint I meant to make was that the real chokepoint here seemed to me to be the Kenyan education system. Only a very small proportion of Kenyans are qualified for KenCall-style jobs. At the moment, only a small proportion of the qualified people can get KenCall-style jobs precisely because the physical infrastructure to easily set up competing firms isn't there, which makes wages low by world standards which makes Kenya an attractive outsourcing destination. Build more infrastructure, you'll get more firms, the labor market will tighten, wages will go up, and then growth will slow down as future outsourcers look to other, cheaper countries.

That's all fine as far as it goes. My only observation was that insofar as only a very small proportion of Kenyans are qualified for these sort of jobs, it won't actually go very far. Kenya not only needs more infrastructure, it needs more workers qualified for these sort of jobs. Dan Drezner writes that "market signals about the increasing returns to education would encourage an expansion of educated individuals."

This, to me, seems slightly backwards. As I see it, improving school systems is hard and education levels often don't improve even when market incentives to do so exist. Increasing internet connectivity is, by contrast, relatively easy to accomplish and relatively more responsive to market signals. I have no doubt that countries that produce large pools of workers well-suited to IT work that market signals will cause companies to invest in expanding the IT infrastructure necessary to employ those workers profitably. I'm not by any means certain that the mere existence of remunerative labor market opportunities for well-educated Kenyans will cause the number of such Kenyans to spontaneously increase.

Robert Weisman reports today in the Boston Globe on how the local IT job market is doing three years after offshore outsourcing devastated the tech sector:

Five years after the dot-com bust ravaged the technology industry, erasing tens of thousands of jobs in Massachusetts, the "Help Wanted" signs have been pulled out of storage. State figures released Thursday show several high-tech job categories growing at more than triple the rate of overall employment over the past 13 months.

The job market hasn't returned to the feverish state of the 1990s, and fields such as telecommunications have been slower to recover. But multiple job offers are no longer rare for managers and consultants, software developers, researchers, website designers, marketing and sales professionals -- even newly minted college graduates -- knocking on the doors of resurgent high-tech companies. Especially hot are Internet businesses riding the new wave of digital commerce.

And, on the flip side, employers are struggling for the first time in years to hire technology talent. Many are paying signing bonuses ranging from $15,000 to $40,000, often structured as tuition forgiveness, to lure masters in business administration graduates from top schools.

More junior employees are finding themselves in demand, too. Internet consulting firm Molecular Inc. offered a job to a woman who interviewed at its offices in the Arsenal on the Charles River last month. She is a software engineer relocating to Boston from Alabama.

"She flew up for a few days, interviewed with three companies, all referrals from friends, and had job offers from all three the next week," Molecular managing director Patrick Heath reported in an e-mail last month to Ralph Folz , chief executive officer of the Watertown company. Heath concluded the e-mail, which Folz shared with the Globe, by observing, "The market is crazy right now." (Late last week, the coveted software engineer accepted Molecular's offer.)

New data from the Massachusetts Department of Workforce Development show the number of non-farm jobs in the state increased 1.2 percent since the start of 2006. At the same time, employment grew 3.7 percent in computer systems design, 4.5 percent in technology management and consulting, and 4.9 percent in research and development, fields encompassing many of the employees being snapped up by Internet companies. "The hiring market is tougher than it's been since 1999 or 2000," said Folz, recalling the last boom.

Via Greg Mankiw, I find this Andrew Cassel column in the Philadelphia Inquirer pointing out that, around or about three years ago, everyone was freaking out about offshore outsourcing. Yeah, what happened there?

[T]his month marks the third year since the Great Offshoring Scare of 2004.

Remember? It was this month three years ago that Americans woke up to the shocking realization that many of the voices on the other end of the tech-support help line were in India, or Ukraine, or the Philippines. The news hit like a rock, and life was never the same again.

OK, I'm exaggerating. A lot of us actually knew about offshoring before then. And as for life never being the same... well, you decide.

That month, Wired magazine, which keeps its finger on the pulse of the information-technology community, published a cover article about the spreading revolt of American tech workers against firms that filled programming and other jobs overseas.

One of Wired's key interviews was with Scott Kirwin of Wilmington, who had lost his job doing back-office tech work for a bank in Delaware. The experience had shaken Kirwin's faith in American business and prompted him to start a grassroots activist group to lobby for protection against offshoring....

And what happened next? Nothing.

Nothing, that is, like the massive outflow of jobs that many feared. Employment growth, which had been notably slow after the 2001 recession, picked up in the United States. (We've gained more than five million jobs since early 2004.) Recruiters who specialize in information-technology workers say they have more openings than they can fill.

And as a hot-button headline issue, offshoring appears to have gone the way of Y2K and the Red Menace. File it under N, for Not as Big a Deal as We Thought.

Yes, some still see offshoring as a threat, sort of. A Brookings Institution report last week said some metropolitan regions with lots of high-tech employment could see as many as 4.3 percent of their jobs go overseas. (Philadelphia isn't so vulnerable - the Brookings report estimates our potential losses at 2.5 percent at the most.)

But most economists who've looked at the issue rate the long-run economic impact of offshoring as either (1) minimal, or (2) positive. Using overseas workers to save money or boost productivity generally results in better or cheaper services, which in turn leads to more competition, more innovation, and growth.

But you don't have to take my word for it. Listen to Scott Kirwin, who made a return appearance in December to Wired magazine. Things have changed. He shut down his anti-offshoring Web site in 2006 and has since found himself a better job in the software business. "I don't view outsourcing as the big threat it was," he told the magazine. "In the end, America may be stronger for it." (emphasis added)

UPDATE: Whoops!! The original title to this post read "anti-offhoring" rather than "anti-offshoring," which takes the conversation to places I do not want to go.

Fixed now.

The demand for trained IT workers is having some interesting effects in both India and Massachusetts.

India first -- Somini Sengupta reports in the New York Times that skills shortages could act as a bottleneck for the Indian service sector:

As its technology companies soar to the outsourcing skies, India is bumping up against an improbable challenge. In a country once regarded as a bottomless well of low-cost, ready-to-work, English-speaking engineers, a shortage looms.

India still produces plenty of engineers, nearly 400,000 a year at last count. But their competence has become the issue.

A study commissioned by a trade group, the National Association of Software and Service Companies, or Nasscom, found only one in four engineering graduates to be employable. The rest were deficient in the required technical skills, fluency in English or ability to work in a team or deliver basic oral presentations.

The skills gap reflects the narrow availability of high-quality college education in India and the galloping pace of the country’s service-driven economy, which is growing faster than nearly all but China’s. The software and service companies provide technology services to foreign companies, many of them based in the United States. Software exports alone expanded by 33 percent in the last year.

The university systems of few countries would be able to keep up with such demand, and India is certainly having trouble. The best and most selective universities generate too few graduates, and new private colleges are producing graduates of uneven quality.

Many fear that the labor pinch may signal bottlenecks in other parts of the economy. It is already being felt in the information technology sector....

Demand is beginning to be felt on the bottom line. Entry-level salaries in the software industry have risen by an average of 10 to 15 percent in recent years. And Nasscom, which helps companies wanting to outsource find workers, forecasts a shortage of 500,000 professional employees in the technology sector by 2010....

Higher education is still available only to a tiny slice of India’s young. No more than 10 percent of Indians ages 18 to 25 are enrolled in college, according to official figures. Nearly 40 percent of Indians over the age of 15 are illiterate.

The industry is lobbying hard to allow private investment in Indian higher education. Right now the government allows only nonprofit ventures, and often they are of varying quality or are the brainchildren of politically connected entrepreneurs.

The Commerce Ministry has recently floated the idea of private foreign investment in higher education. Indians account for among the largest groups of foreign students in the United States, and India increasingly sends students to other countries, like Australia and Canada.

Massachusetts' economic recovery has gathered momentum in recent months, and there's a good reason: The technology sector is back....

Employment in professional and business services, comprising a variety of tech firms, has grown a healthy 2 percent in the last year, twice the rate of overall employment growth in Massachusetts, according to the state Department of Workforce Development. Makers of technology products are bucking the trend of job losses in manufacturing and adding jobs -- more than 3,000 in the last year. Massachusetts tech exports are surging; foreign sales of semiconductor manufacturing and testing equipment nearly doubled in the past year.

Technology has long driven the state's economy. The two technology-dominated employment sectors, professional and business services and manufacturing, account for about one-fourth of state employment, but they capture only a small part of the industry's impact because it increasingly reaches into areas from pharmaceuticals to financial services. High-tech machinery, instruments, components, and similar products account for nearly 60 percent of the state's exports.

Demand for technology workers, meanwhile, is growing. The state's most recent survey of job vacancies, at the end of 2005, showed openings for information technology occupations jumping 13 percent from a year earlier. Monster Worldwide Inc. , which operates the job-matching web site Monster.com, reported last month that on line job postings for IT workers grew 10 percent in Greater Boston over the year.

The Federal Reserve found in a recent survey of businesses that the supply of technical workers in the Boston region is shrinking to the point of companies boosting wages as much as 15 percent.

"It's not 2000, but it's also not 2001," said Larissa Duzhansky, regional economist at Global Insight of Waltham, referring to the tech boom and bust years. ``The sector has grown at a healthy pace and it's continuing to recover well."

Certainly, the state's technology sector faces a long road to recovery. Professional and business services so far have regained only about half the nearly 70,000 jobs the sector lost in the last recession. Tech manufacturing, which also shed about 70,000 jobs, has recovered only about 5 percent.

But analysts and industry officials add that today's technology industry is different from that of the dot-com craze, when it seemed any company with an Internet domain could attract millions of dollars from investors, regardless of whether they had profits or even products. Today's sector is more diverse and better grounded financially, reaching across an array of markets and technologies....

Global demand for technology products, from cell phones to MP3 players, also is boosting Massachusetts tech firms, which make the equipment for manufacturing such products. Booming electronics companies in China, for example, need the advanced manufacturing and testing equipment designed and made in Massachusetts. Those equipment sales have helped make China the state's sixth largest foreign market, as well as one of its fastest growing.

Sales to China and other Asian nations account for at least 70 percent of sales for Axcelis Technologies Inc., of Beverly, a maker of semiconductor manufacturing equipment, according to Mark Namaroff, senior vice president of strategic marketing. The company, which employs about 1,000 in Massachusetts, has reported double-digit revenue growth this year, while adding about 50 manufacturing jobs.

"Asia, particularly China, is hot," said Namaroff. ``Their growth has meant opportunities for us."

The tech rebound also means more opportunities for tech workers....

Greg Netland, chief executive of Sapphire's parent, Vedior North America of Wakefield, expects the market for tech workers to only get tighter. "The war for talent is back," he said.

The Financial Times' Francesco Guerrera and Alan Beattie report on a new trend in offshoring:

Multinational companies are favouring Europe over Asia when expanding abroad – a sign that they want to be close to customers and suppliers rather than simply tap into cheap labour and plants, according to a new study of outward investment.

The surprising findings of the survey by IBM’s consulting arm, to be released on Monday, suggest that the recent boom in outsourcing of manufacturing and services to emerging markets such as China and India may be abating.

At the same time, western Europe, led by the UK and France, is regaining an edge in high-value areas such as research and development, putting pressure on developing economies to raise the skills and education levels of their workforce.

“The recent recovery in the global economy has made companies more interested in being close to their markets, suppliers and decision-makers rather than just looking for a low-cost base,” said Roel Spee, Europe’s leader for IBM’s global location unit.

The survey – the only study that looks at all announced foreign direct investment (FDI) by companies around the world – found that Europe attracted 39 per cent of all new plants and projects in 2005, with Asia-Pacific receiving 31 per cent and North America 18 per cent. In 2004, Europe and Asia were tied at 35 per cent each.

The results show that globalisation and the increase in capital and trade flows are enabling companies to exploit the competition between regions to reap the biggest rewards for their investments....

The UK was Europe’s biggest recipient of inward investment, especially in the research and development field, where it accounted for more than a quarter of all projects launched in the region last year, followed by France with 19 per cent.

I've debated a lot of people on the whole offshore outsourcing issue, and regardless of the position one takes, there has been unanimity on one subject: if the Labor Department provides Trade Adjustment Assistance to manufacturing workers displaced by trade, the program should be extended to include service-sector workers affected by offshore outsourcing.

According to this Paul McDougall story in Information Week, it appears that the Department of Labor has finally recognized this fact as well:

The federal government appears to have reversed a long standing policy that prevented thousands of "outsourced" computer programmers from collecting the same employment benefits routinely extended to factory workers who've seen their jobs disappear amid a flood of cheap, manufactured imports.

In a turnabout from earlier decisions, the Department of Labor—in a note published this month in the Federal Register—said that four employees of IT services vendor Computer Sciences Corp. that were laid off in 2003 from a facility in East Hartford, Conn., are eligible to apply for benefits under the Trade Adjustment Act. The act provides a number of relief measures for workers who've lost their jobs to cut-rate foreign competition, including extended unemployment payments, federally funded retraining, and relocation allowances.

The department has long held that programmers who've lost jobs to cheaper, foreign workers aren't eligible for the TAA program because their employers, or employer's customers, are not importing a physical good in the same way as, say, steel manufacturers. A number of federal and state lawmakers have introduced bills that would automatically grant eligibility under the act to IT workers and other white collar professionals, but none has become law.

The labor department initially said that although CSC moved production of its Vantage-One insurance software from East Hartford to CSC India, the software was not an imported "article" as defined by the act. In a lawsuit, the workers asked the U.S. Court of International Trade to overturn the department's ruling. In January, trade court judge Nicholas Tsoucalas ordered the department to revisit the case, noting that, "Labor's interpretation of the law, that software code must be embodied on a physical medium to be an article under the Trade Act, is arbitrary and capricious."

In a Federal Register note published April 11, the Labor Department conceded the point and ruled that the four CSC workers would be eligible to apply for TAA assistance. In ruling, the department said it would henceforth look upon software, whether shipped into the U.S. on a disc or transmitted into the country via telecommunications networks, as a physical product.

"Software and similar intangible goods that would have been considered articles for the purposes of the Trade Act if embodied in a physical medium will now be considered articles regardless of their method of transfer," the department wrote.

The Department stresses that it will continue to implement the
longstanding precedent that firms must produce an article to be certified under the Act. This determination is not altered by the fact the provision of a service may result in the incidental creation of an article. For example, accountants provide services for the purposes of the Act even though, in the course of providing those services, they may generate audit reports or similar financial documents that might be articles on the Harmonized Tariff Schedule of the United States. Because the new policy may have ramifications beyond this case of which the Department is not fully cognizant, the new policy will be further developed in rulemaking.

As part of its cover package on India, Newsweek's Keith Naughton writes about the interesting fact that offshore outsourcing to India is not the political hot potato it used to be:

Not long ago, what seemed most possible was that India would steal the jobs of American workers. But as George W. Bush visits there this week, he'll find a maturing economy that is no longer all about call centers and basic tech support. Now big American investment banks and drugmakers are joining tech firms on the passage to India. R&D centers are springing up so fast that there's now a shortage of Indian engineers. And the stigma of outsourcing jobs to India is disappearing. American companies once afraid to put their names on the doors of their Indian offices now issue press releases touting their latest investments there. "American firms have gotten over their anxiety about India," says financial-services consultant Harrell Smith of Celent Communications. "Now the new anxiety is if you're not in India."

What happened to the outsourcing backlash? It has been muted by the fact that India didn't suck Silicon Valley dry after all. Actually, U.S. tech employment is growing. There are 17 percent more tech workers in the United States today than back in the bubble days of 1999, says a new study by the Association for Computing Machinery. And the Bureau of Labor Statistics predicts that the U.S. economy will add 1 million tech jobs over the next decade, a 30 percent increase. "Everyone was worried about the offshoring bogeyman," says Moshe Vardi, an author of the ACM study. "But the big whoosh of jobs to India never happened.'' Indeed, that gush slowed to a steady stream once American companies realized it's tough to set up shop in a country with bad roads and a patchy power grid. Lately, American consulting firms that once predicted runaway growth in outsourcing to India have been slashing their estimates by half or more. Now American companies are hanging on to the high-skilled work that requires face-to-face interaction, while everything that can be done "over the wire" gets shipped offshore.

Last year there was a lot of hysteria among the business press over the fact that China and India were allegedly graduating hundreds of thousands of engineers a year, while the U.S. could only muster around 70,000 or so.

I blogged last October about how even outsourcing critics were skeptical of these numbers. Now, courtesy of Duke University's Engineering Management Program, there are some harder numbers on this subject -- and it turns out there's not much reason to panic (link via the Wall Street Journal's Carl Bialik). Here's the report abstract:

The effect of the dynamics of engineering outsourcing on the global economy is a discussion of keen interest in both business and public circles. Varying, inconsistent reporting of problematic engineering graduation data has been used to fuel fears that America is losing its technological edge. Typical articles have stated that in 2004 the United States graduated roughly 70,000 undergraduate engineers, while China graduated 600,000 and India 350,000. Our study has determined that these are inappropriate comparisons. These massive numbers of Indian and Chinese engineering graduates include not only four-year degrees, but also three-year training programs and diploma holders. These numbers have been compared against the annual production of accredited four-year engineering degrees in the United States. In addition to the lack of nuanced analysis around the type of graduates (transactional or dynamic) and quality of degrees being awarded, these articles also tend not to ground the numbers in the larger demographics of each country. A comparison of like-to-like data suggests that the U.S. produces a highly significant number of engineers, computer scientists and information technology specialists, and remains competitive in global markets.

The outsourcing debate has been complicated due to conflicting definitions of the engineering profession....

Through our research, we have identified two main groups of engineering graduates: dynamic engineers and transactional engineers. Dynamic engineers are individuals capable of abstract thinking and high-level problem solving using scientific knowledge. These engineers thrive in teams, work well across international borders, have strong interpersonal skills, and are capable of translating technical engineering jargon into common diction. Dynamic engineers lead innovation. The majority of dynamic engineers have a minimum of a four year engineering degree from nationally accredited or highly regarded institutions.

Transactional engineers may possess engineering fundamentals, but not the experience or expertise to apply this knowledge to larger problems. These individuals are typically responsible for rote and repetitive tasks in the workforce. Transactional engineers often receive associate, technician or diploma awards rather than a bachelor’s degree....

Graph 2 depicts the annual production of bachelor’s and subbaccalaureate degrees in Engineering, CS and IT awarded per million citizens. These data imply that per every one million citizens, the United States is producing roughly 750 technology specialists, compared with 500 in China and 200 in India....

Outsourcing creates a clear threat to certain professions and it is likely that this trend will continue. It seems that the jobs of transactional engineers are easily outsourced and are routinely being taken by relatively low paid engineers in countries like India and China. However, the outsourcing of high-level engineering and IT professions is another story. These jobs often require specialized dynamic engineers: individuals with strong interpersonal skills, technical knowledge and the ability to communicate across borders....

The great majority of engineers involved in outsourced professions hold a minimum of a four-year degree. As a result, one could argue that approximately half of China’s and India’s annual engineering and IT graduates are capable of competing in the global outsourcing environment. However, a recent McKinsey global labor market study
argues that this estimate is far too generous. McKinsey concluded that only 10% of Chinese engineers and 25% of Indian engineers can compete in the global outsourcing arena.

Damn, that sounds familiar.

David Barboza of the New York Times wins my Outsourcing Outrage of the Year award with, "Ogre to Slay? Outsource It to Chinese" :

One of China's newest factories operates here in the basement of an old warehouse. Posters of World of Warcraft and Magic Land hang above a corps of young people glued to their computer screens, pounding away at their keyboards in the latest hustle for money.

The people working at this clandestine locale are "gold farmers." Every day, in 12-hour shifts, they "play" computer games by killing onscreen monsters and winning battles, harvesting artificial gold coins and other virtual goods as rewards that, as it turns out, can be transformed into real cash.

That is because, from Seoul to San Francisco, affluent online gamers who lack the time and patience to work their way up to the higher levels of gamedom are willing to pay the young Chinese here to play the early rounds for them.

1) The story highlights the apparent sloth and excessive affluence of Americans that inflames the passiuons of the puritanical left and right;

2) The transaction -- Chinese gamers taking care of drudge levels of computer games -- has that whiff of cheating that will spark the ire of social conservatives (not to mention hard-core gamers);

3) The idea that sums of money are being paid for what appears to be an unproductive economic activity will cheese off traditionalists who believe that unless a job is located in an industrial factory, it serves no good purpose;

4) The Chinese benefit, which will annoy the realists;

5) In the process of the transaction, the U.S. is outsourcing its decadent Western culture to the Orient, which will annoy those uncomfortable with American power.

Writing about offshore outsourcing for a public audience carries many, many perks. One of them is getting e-mails like this one:

Since you seem to be a proponent of outsourcing, perhaps you would care to explain the national deficit and the fact that the United States in now the single biggest debtor nation in history. Your facts or lack of same simply do not wash.

OK, I'm confused -- are my facts wrong, or is it that I don't have any of them? Really, it's very hard to keep track.

Seriously, I also get more interesting anecdotes about those who experience outsourcing first hand. Consider this e-mail from a colleage who is in the middle of getting a book published:

I'm doing a book with Palgrave, and it turns out they've moved their entire production back-office operation to India. What I found interesting about this is that we generally think of the U.S. as high-tech and professional, and poor developing countries as more cottage-industry-ish. The opposite is true in this case. Copyediting here tends (in my experience) to be done in cottage-industry fashion, with the manuscript sent out to an individual who works for the publisher on a piecework basis. The Indian copyediting operation is high-tech (our interaction involves no paper, and they've taught me about all sorts of things that I had no idea one could do with Microsoft Word), corporate (there were no fewer that six people working on my manuscript, with a clear division of labour - an endnote person, a bibliography person, a grammar person, a 'sense and meaning' person, and one person whose sole job seemed to be to take out extra spaces after periods [I have a habit of double-spacing after periods]), and highly professional (they're really a pleasure to work with). Also, their English appears to be better than that of the average American copyeditor. So, in this case, not only has offshoring resulted (presumably) in lower costs for Palgrave, it's also likely to result (and I'm typing this with crossed fingers, because the process isn't finished yet) in a better book.

This is pretty interesting, in that the process that's described is not only about offshore outsourcing -- it's also about the fact that what used to be considered a complex task (the cottage industry of copyediting) has been segmented into a lot of very simple tasks (the person whose sole job it is to shorten the spaces after a sentence, for example). It's both high-tech AND low-tech.

This reminds me of something.... oh, yes, Karl Marx's Wage Labour and Capital (1849):

The greater division of labor enables one laborer to accomplish the work of five, 10, or 20 laborers; it therefore increases competition among the laborers fivefold, tenfold, or twentyfold. The laborers compete not only by selling themselves one cheaper than the other, but also by one doing the work of five, 10, or 20; and they are forced to compete in this manner by the division of labor, which is introduced and steadily improved by capital.

Furthermore, to the same degree in which the division of labor increases, is the labor simplified. The special skill of the laborer becomes worthless. He becomes transformed into a simple monotonous force of production, with neither physical nor mental elasticity. His work becomes accessible to all; therefore competitors press upon him from all sides. Moreover, it must be remembered that the more simple, the more easily learned the work is, so much the less is its cost to production, the expense of its acquisition, and so much the lower must the wages sink — for, like the price of any other commodity, they are determined by the cost of production. Therefore, in the same manner in which labor becomes more unsatisfactory, more repulsive, do competition increase and wages decrease....

The economists tell us, to be sure, that those laborers who have been rendered superfluous by machinery find new venues of employment. They dare not assert directly that the same laborers that have been discharged find situations in new branches of labor. Facts cry out too loudly against this lie. Strictly speaking, they only maintain that new means of employment will be found for other sections of the working class; for example, for that portion of the young generation of laborers who were about to enter upon that branch of industry which had just been abolished. Of course, this is a great satisfaction to the disabled laborers. There will be no lack of fresh exploitable blood and muscle for the Messrs. Capitalists — the dead may bury their dead. This consolation seems to be intended more for the comfort of the capitalists themselves than their laborers. If the whole class of the wage-laborer were to be annihilated by machinery, how terrible that would be for capital, which, without wage-labor, ceases to be capital!

But even if we assume that all who are directly forced out of employment by machinery, as well as all of the rising generation who were waiting for a chance of employment in the same branch of industry, do actually find some new employment — are we to believe that this new employment will pay as high wages as did the one they have lost? If it did, it would be in contradiction to the laws of political economy. We have seen how modern industry always tends to the substitution of the simpler and more subordinate employments for the higher and more complex ones. How, then, could a mass of workers thrown out of one branch of industry by machinery find refuge in another branch, unless they were to be paid more poorly?

Sounds very dire.... except that Marx, for all of his understanding of the forces behind technological innovation, never really got the idea that such innovation also creates entirely new categories of complex, high-skill jobs. It took Schumpeter to figure that one out.

[Er.... what about the demise of copyediting jobs? Doesn't that mean that offshoring leads to a net loss of employment?--ed.] Not according to AFP:

The outsourcing of technology jobs to low-wage countries will provide a $68.7-billion (U.S.) benefit to the U.S. economy in 2005, said a study released yesterday, challenging key assumptions about shifting work offshore.

The study, updating a report released in 2004 drawing the same conclusion, was commissioned by the Information Technology Association of America, a high-tech industry group, and conducted by research firm Global Insight.

The report concluded that despite the loss of some jobs to low-wage countries such as India, that worldwide sourcing of IT services and software generated 257,042 new U.S. jobs in 2005.

"No one is denying that there are job losses, but the net effect is that you create more jobs than you lose" in the overall economy, said Nariman Behravesh, chief economist at Global Insight and lead author of the report.

The benefits come from lower inflation, higher productivity and lower interest rates that boost economic activity, the report concludes.

The researchers calculated this provided a net benefit to real U.S. gross domestic product of $68.7-billion in 2005, and that this would rise by 2010 to $147.4-billion compared with a situation without any offshore outsourcing.

"The main thing is cost savings which radiate out in the form of lower prices for high-tech goods, and higher profit margins for the companies," Mr. Behravesh said.

"So you have lower inflation, which means higher real income; you have higher profits. Companies use higher profits to invest more; consumers use higher incomes to purchase more . . . all these produce a much stronger economy and produce more jobs than the offshoring destroys."

In terms of jobs, the report concluded that offshore outsourcing led to the creation of more than 419,000 jobs, more than offsetting the 162,000 technology jobs displaced by the shift.

[That's the number of jobs; what about wages?--ed.] The Global Insight page offers this tidbit on wages:

Workers enjoy higher real wages. Global sourcing adds to the take-home pay of the average U.S. worker. With inflation kept low and productivity high, worldwide sourcing will increase real hourly wages in the U.S. by $0.06 in 2005, climbing to $0.12 in 2010.

Click here to read the executive summary of the Global Insight report -- and click here to read my take on the 2004 version of the report.

A common lament among those who like to prognosticate about America's future is that China and India are churning out more and better engineering students than the U.S., which presages their rise to superpowerdom.

For example, Geoffrey Colvin wrote the following in Fortune earlier this year:

China will produce about 3.3 million college graduates this year, India 3.1 million (all of them English-speaking), the U.S. just 1.3 million. In engineering, China’s graduates will number over 600,000, India’s 350,000, America’s only about 70,000.

Sounds ominous -- those figures were cited in a National Academy of Sciences study warning that, "In a world where advanced knowledge is widespread and low-cost labor is readily available, U.S. advantages in the marketplace and in science and technology have begun to erode." (link via Glenn Reynolds)

The thing is, those numbers don't hold up. Back in August, Carl Bialik of the Wall Street Journal's "Numbers Guy" column deconstructed Colvin's claim in Fortune and found some problems:

[T]his is one of those cases where big numbers take on a life of their own through repetition. The lofty estimates have been repeated for years, often without evidence to back them up, and it turns out they vary considerably from figures reported by official sources.

Bialik follows up in a WSJ column today (link again via Glenn Reynolds):

Ron Hira, professor of public policy at the Rochester Institute of Technology and a reviewer of a draft version of the report that didn't contain the figures, brought them to my attention when he spotted them in the press release. "The fact that the Academies has perpetuated the stats is very significant because [they are] viewed as a purveyor of truth," Dr. Hira wrote me in an email. He added, "[The stats] will be perpetuated by every science and technology lobbyist in D.C. from now until who knows when."

The statistics' repetition prompted me to dig deeper into the original source of Fortune's numbers. For my initial column, the author of the Fortune piece, Geoff Colvin, told me he was traveling and couldn't review his notes to find his sources in time for my deadline. Last week, he told me the numbers came from the Chinese government's China Statistical Yearbook 2004, which reported more than 644,000 graduates in engineering from the country's institutions of higher education in 2003.

"This includes graduates of the regular college program as well as graduates of a three-year program focused on engineering, which would appear to be somewhat more advanced than a U.S. engineering technician program while not quite the full bachelor's degree," Mr. Colvin wrote in an email. "Comparability is of course a large issue not just here but in general when comparing degrees across countries." (The India numbers, as I wrote earlier, are also questionable; Mr. Colvin said Monday that he is still looking for his source for those figures and will get back to me.)

But others told me that the 600,000 figure for China in 2003 included engineering graduates who had received less training than their U.S. counterparts. Richard Freeman, a professor of economics at Harvard University who has studied the issue, told me in an email that the Chinese numbers include graduates of two-to-three-year programs who would be comparable to engineering technicians in the U.S. (recipients of an associate's degree). "The number getting full course degrees is around 350,000, which is what we would compare to U.S. graduates in a year," Dr. Freeman said.

Kudos to Hira and Freeman for their intellectual honesty -- both of them are generally concerned about the effects in the U.S. of widening the global supply of educated labor.

[OK, so the number isn't as big as previously thought. It's still pretty big, right?--ed. This gets to the question of quality. Diana Farrell and Andrew J. Grant write in the latest McKinsey Quarterly that the quality problem could lead to a talent shortage in China:

[F]ew of China's vast number of university graduates are capable of working successfully in the services export sector, and the fast-growing domestic economy absorbs most of those who could. Indeed, far from presaging a thriving offshore services sector, our research points to a looming shortage of homegrown talent, with serious implications for the multinationals now in China and for the growing number of Chinese companies with global ambitions....

China's pool of potential talent is enormous. In 2003 China had roughly 8.5 million young professional graduates with up to seven years' work experience and an additional 97 million people that would qualify for support-staff positions.

Despite this apparently vast supply, multinational companies are finding that few graduates have the necessary skills for service occupations. According to interviews with 83 human-resources professionals involved with hiring local graduates in low-wage countries, fewer than 10 percent of Chinese job candidates, on average, would be suitable for work in a foreign company in the nine occupations we studied: engineers, finance workers, accountants, quantitative analysts, generalists, life science researchers, doctors, nurses, and support staff.

Consider engineers. China has 1.6 million young ones, more than any other country we examined. Indeed, 33 percent of the university students in China study engineering, compared with 20 percent in Germany and just 4 percent in India. But the main drawback of Chinese applicants for engineering jobs, our interviewees said, is the educational system's bias toward theory. Compared with engineering graduates in Europe and North America, who work in teams to achieve practical solutions, Chinese students get little practical experience in projects or teamwork. The result of these differences is that China's pool of young engineers considered suitable for work in multinationals is just 160,000—no larger than the United Kingdom's. Hence the paradox of shortages amid plenty.]

UPDATE: Howard French has a nicely balanced account in the New York Times of China's effort to upgrade its top universities in order to attract top-drawer talent. The highlights:

China is focusing on science and technology, areas that reflect the country's development needs but also reflect the preferences of an authoritarian system that restricts speech. The liberal arts often involve critical thinking about politics, economics and history, and China's government, which strictly limits public debate, has placed relatively little emphasis on achieving international status in those subjects.

In fact, Chinese say - most often euphemistically and indirectly - that those very restrictions on academic debate could hamper efforts to create world-class universities.

"Right now, I don't think any university in China has an atmosphere comparable to the older Western universities - Harvard or Oxford - in terms of freedom of expression," said Lin Jianhua, Beijing University's executive vice president. "We are trying to give the students a better environment, but in order to do these things we need time. Not 10 years, but maybe one or two generations."

French also provides his own engineering numbers: "In engineering alone, China is producing 442,000 new undergraduates a year, along with 48,000 graduates with masters' degrees and 8,000 Ph.D's."

LAST UPDATE: More on the overhyping of India and China from Pranab Bardhan and Brad DeLong.

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.

On of the common laments about offshore outsourcing is that it is causing a decline of interest in computer science and related engineering tasks.

Via Slashdot, I see that Steve Lohr had an interesting piece in the New York Times earlier this week that provides some support for this lament -- but the market is doing interesting things to the study of computers:

Jamika Burge is heading back to Virginia Tech this fall to pursue a Ph.D. in computer science, but her research is spiced with anthropology, sociology, psychology, psycholinguistics - as well as observing cranky couples trade barbs in computer instant messages.

"It's so not programming," Ms. Burge said. "If I had to sit down and code all day, I never would have continued. This is not traditional computer science."

For students like Ms. Burge, expanding their expertise beyond computer programming is crucial to future job security as advances in the Internet and low-cost computers make it easier to shift some technology jobs to nations with well-educated engineers and lower wages, like India and China.

"If you have only technical knowledge, you are vulnerable," said Thomas W. Malone, a professor at the Sloan School of Management at Massachusetts Institute of Technology and the author of "The Future of Work" (Harvard Business School Press, 2004). "But if you can combine business or scientific knowledge with technical savvy, there are a lot of opportunities. And it's a lot harder to move that kind of work offshore."

Read the whole thing.

Meanwhile, in India, the returns to offshoring are declining because of rising wages, according to CNN's Parija Bhatnagar:

A new report from market research firm Gartner, Inc. warns that a labor crunch and rising wages could erode as much as 45 percent of India's market share by 2007.

Indian industry watchers acknowledge that the country's outsourcing industry -- its golden goose of the moment -- is indeed facing a "serious" problem.

In an interview with CNN/Money from New Delhi, Kiran Karnick, president of the National Association of Software and Service companies (NASSCOM), said he's concerned that these challenges could stymie India's strong double-digit growth in outsourcing services....

India can't afford to rest on its laurels, said Sujay Chohan, one of the authors of the Gartner report and vice president and research director of offshore business process outsourcing with Gartner in New Delhi.

Unless India devises a long-term roadmap to improve infrastructure and consistently grow its skilled labor force, he said India will see some of its offshore BPO clients shift business elsewhere.

"Although India's infrastructure is improving, it is not keeping pace with the rapid growth of the industry," the report said.

See Ed Frauenheim's reaction on CNET's Workplace Blog

Six months ago I posted on how the IT sector seemed to be thriving as of late despite the rise of offshore outsourcing.

Here's some more evidence from Thomas Hoffman at ComputerWorld:

A strengthening U.S. economy that's fueling increased IT spending and creating a tighter labor market has led to moderate pay gains for technical workers such as application developers and database administrators, according to new research and interviews with IT executives last week.

"There is a noticeable wage increase" for technical skills, said David Myers, director of project management at Solo Cup Co. in Highland Park, Ill.

Myers said he believes that the pay gains are the result of a general rise in IT capital spending, which has resulted in more projects being launched and a decreasing supply of available domestic IT labor....

A report released last week by Foote Partners LLC, a New Canaan, Conn.-based market research firm, found that pay for noncertified and certified technical skills has risen 3.8% and 1.3%, respectively, through the first six months of this year.

Pay raises this year have been particularly strong for people with skills in operating systems (up 8.2%), networking and internetworking (up 5.1%), and databases (up 4.3%), the report said.

The results, which are based on a survey of 1,800 North American and European organizations from April to July 1, suggest that the notion that lower-cost offshore outsourcing led to wage deflation for IT workers may have been overblown, said David Foote, president of Foote Partners.

Here's a link to the Foote Partners press release that's discussed above.

It's also worth noting that beyond offshore outsourcing, there was an excellent reason for the drop in wages that did take place among IT services between 2000-2003: reduced demand. According to the WTO's report on offshore outsourcing, the annual percentage change in the U.S. IT market in the early part of this decade was as follows:

2001: -4.5%
2002: -6.3%
2003: 0.4%

So it's a funny thing -- as demand has picked up in the US, the number of IT jobs and the level of IT wages has increased.

Oh, and for those IT readers of danieldrezner.com who complain about no jobs, I'll close with some anecdotal want-ads from the ComputerWorld story:

A tighter job market is making it particularly tough for Harrah's Entertainment Inc. to find experienced IT project managers, business systems analysts, data warehousing managers and other specialists, said Tim Stanley, senior vice president and CIO at the Las Vegas-based gaming and hospitality company. Harrah's is looking to fill 25 to 35 IT positions, he said.

Allan McLaughlin, senior vice president and chief technology officer at LexisNexis Group, a research provider in Dayton, Ohio, said hiring requests for IT workers are getting more specific -- another factor contributing to competition for technical skills.

LexisNexis has an increased need for networking specialists and plans to expand its five-person IT security team to nine or 10 people over the next six months, said McLaughlin.

Bo Cowgill was kind enough to e-mail me a link to this Computerworld story by Patrick Thibodeau about an entirely novel outsourcing venture:

What San Diego-based start-up SeaCode Inc. plans to do is nothing if not novel: anchor a cruise ship three miles off the coast of Los Angeles, fill it with up to 600 programmers from around the world, eliminate visa restrictions and make it easy for customers to visit the site via water taxi. The two men behind the venture -- Roger Green, who describes himself as an IT and outsourcing veteran, and IT consultant David Cook, whose job history includes a stint as a ship captain -- recently discussed their plan in an interview with Computerworld.

What is the business model? Green: The promise of the benefits of outsourcing in distant lands doesn't come free. Most of the gotchas are related to the geography and to the cultural difference....

Green: The model is based on making a platform, if you will, to house these engineers, this workforce, which is very close to the U.S. but which is in fact not in the U.S. We can pull programmers and engineers from anywhere in the world. A fact of life is there are different skills that are stronger in one country versus another....

Does U.S. labor law apply? Cook: U.S. labor law does not apply except on a U.S. flagship. The flag of the ship will provide the labor law -- more than likely [the ship will be registered in] Vanuatu, the Bahamas or Marshall Islands. Their intellectual property laws, as well as the laws governing seamen, are very similar to the United States'.

What will life be like for your employees? Cook: The pay is about three times what they earn in India today....

What is the salary? Cook: Approximately $1,800 a month.

What is your pricing going to be relative to India? Green: We will be approximately the same price as the distant-shore companies. We will take a little less margin than they do.

Do you expect U.S. residents to apply? Cook: Absolutely. Approximately 50% of the resumes that we've received are from U.S. residents.

There are a lot of things that don't make sense to me about this business model:

1) How can they pay three times the Indian wage but maintain similar pricing levels?

2) How are cultural differences eliminated by moving developing country programmers from their country of origin to a ship three miles off the U.S.?

3) Is evading U.S. regulatory strictures (payroll taxes, health insurance, labor standards) the only thing that makes this venture even close to profitable? If so, what does that say about U.S. regulations?

Suketu Mehta has an op-ed in the New York Times on the rise of offshoring to India. Mehtu comes at this from an interesting angle, as he and his family "came to America in 1977 not for its political freedoms or its way of life, but for the hope of a better economic future." While acknowledging the anxiety caused in the tech sector by offshoring, Mehta's conclusions are straightforward:

The rich countries can't have it both ways. They can't provide huge subsidies for their agricultural conglomerates and complain when Indians who can't make a living on their farms then go to the cities and study computers and take away their jobs. Why are Indians willing to write code for a tenth of what Americans make for the same work? It's not by choice; it's because they're still struggling to stand on their feet after 200 years of colonial rule. The day will soon come when Indian companies will find that it's cheaper to hire computer programmers in Sri Lanka, and then it's there that the Indian jobs will go.

Of course, it's heart-wrenching to see American programmers - many of whom are of Indian origin - lose their jobs and have to worry about how they'll pay the mortgage. But they are ill served by politicians who promise to bring their jobs back by the facile tactic of banning them from leaving. This strategy will ensure only that our schools stay terrible; it'll be an entire country run like the dairy industry, feasible only because of price controls and subsidies.

Indeed.

Peter Marsh writes in the Financial Times about what the global market for service jobs will look like with the rise in offshore outsourcing:

Growth in outsourcing of service jobs from rich countries is likely to be constrained because only one in seven workers in low-wage nations has the skills needed to work for multinationals, according to a McKinsey study published on Thursday.

“Offshore employment [in services] will grow gradually, making no sudden impact on labour markets overall in developed countries,” says the report by the McKinsey Global Institute, a research arm of the strategy consultancy.

It says the trend will have “little effect” on wages in rich countries, scotching the idea that offshoring could help hold down inflation in those nations....

One reason for [the slow pace of offshoring] is multinationals' attitudes to recruitment, McKinsey says. The consultancy conducted 83 interviews with human resources managers working for multinationals and found that, presented with workers from emerging economies with appropriate academic qualifications, they were likely to reject 87 per cent on other grounds.

The main reasons for the low likely take-up were poor language skills, “the low quality of significant portions of the educational system [in developing nations]” and cultural differences. Diana Farrell, director of the institute, said multinationals often failed to take up offshoring because of initial costs and other hurdles.

Marsh has another story about the MGI report here. One interesting bit:

Even though the supply of young people in low-wage economies with good educational qualifications is likely to increase substantially in the next decade, demand for employing them in their own nations in jobs transferred from rich countries is likely to be muted, the report says.

On top of this, many young professionals in the 28 low-wage countries studied by the institute even though they may have university degrees lack the work-related experience and aptitude that foreign companies are looking for.

“A lot of developing countries are churning out new graduates but not giving enough thought to the practical skills they will need if they are to work for multinational companies,” says Diana Farrell, director of the institute.

The report indicates that even though many manufacturing jobs have migrated from rich countries to emerging economies over the past 10 years, due to cost-cutting pressure, the service sector is unlikely to see the same trend.

This last point is stressed in the executive summary of the McKinsey report:

At a country level, our observation is that labor markets in developed economies are experiencing and will continue to experience the trend toward offshoring as a slow, evolutionary change. It will have less impact on patterns of employment than the decline in manufacturing employment developed economies have experienced recently. In the United States, for example, the share of manufacturing jobs in overall employment fell by 11 percentage points to 21 percent in the 30 years to 2002. By contrast, the total number of service jobs in the United States that could in theory be filled remotely represents 9 percent of total current employment.

The moderate impact and generally slow pace of offshoring will not soften the blow for those individuals in developed countries who do lose their jobs as a result. However, most are college graduates, and therefore likely to be more amenable to retraining than manufacturing workers. And in the United States, growth rates in both wages and jobs in the computer and data processing services sector, where offshoring is prevalent, are higher than in the economy as a whole.

This jibes with data and analysis of the U.S. economy in recent years. In terms of employment, a glance at Bureau of Labor Statistics data shows that manufacturing has suffered far more than services (though in both cases the extent to which offshore outsourcing has been blamed has been much greater than its actual causal effect). Similarly, the figures for which service sector jobs are theoretically likely to be outsourced match up with Ashok Bardham and Cynthia Kroll's study from 2003.

Click here to access McKinsery's three-part series of reports on the issue.

Thanks to George Adair for the link.

Ted Balaker and Adrian Moore have written a lengthy report for the Reason Foundation entitled "Offshoring and Public Fear: Assessing the Real Threat to Jobs." Click here or a more concise summary of the report. Nut sentence: "Outsourcing is not a newly created threat to jobs. It is merely a version of trade, and like previous versions of trade it brings some pain—but it brings even more promise."

One anecdote that's given as an example of how offshoring saves and even creates jobs:

Offshore outsouring also helped Donaldson Co. Inc., a Minnestota-based technology components company. Facing competition from overseas manufacturers with much lower prices, Donaldson shifted production to China. The design work stayed with its American team of engineers, chemists, and designers. Offshoring production helped increase Donaldson’s U.S.-based employment by 400 employees since 1990. What if the company had refused to go offshore? “We’d be out of business,” says an executive.

[Sure, but what about the jobs that will be destroyed in, say, the financial sector?--ed. Hmmm.... let's check out this Silicon.com report by Andy McCue:

Two-thirds of financial services firms still have no plans to outsource any operations to low-cost overseas countries such as India, according to a new report.

But the worldwide study of 400 IT directors by analyst Datamonitor found those banking firms which have already used offshore outsourcing are planning to increase the scope of it and extend it to more complex and core financial services processes.

Anders Maehre, financial services technology analyst at Datamonitor and author of the study, told silicon.com there is an increasing polarisation in the banking industry between firms which choose to offshore and those that don't.

"The vast majority of companies will not consider offshore for anything. But two-thirds to three-quarters of those who already do offshore plan to increase it, so the logical conclusion is that some of the fears these firms have don't materialise and they do experience benefits," he said.

Only about a fifth of financial services firms are currently using offshore outsourcing and another 15 per cent said they are likely to go down that route in the near future, while the rest said they are "completely unlikely" to use overseas resources, according to Datamonitor's figures.

But the figures can be slightly misleading if not put into context: most of the big global financial institutions make up that small number of firms which are offshoring.

So there's a complex trend going on -- some big firms are increasing activity, but almost all small firms are not. My hunch is that the overall effect on employment is a wash.]

Meanwhile, a new book coming out suggests that estimates of jobs lost from offshoring are both exaggerated and reversible:

Douglas Brown and Scott Wilson, authors of "The Black Book of Outsourcing," say many executives they've interviewed are reconsidering offshoring because of the high price of fuel and airfare, management challenges, customer complaints and the increasing cost of labor in foreign technology hubs such as Bangalore, India, and a simultaneous lowering of some white-collar salaries in the United States.

By 2015, Brown and Wilson say, the United States will likely rank as the No. 3 destination for outsourced work, behind only China and India.

"Offshoring undoubtedly offers significant financial benefits for companies across a wide range of fields and sizes," Wilson said. "Undertaking such a venture, however, requires a cost-benefit analysis that includes downsides such as political instability, language and cultural barriers and time-zone differences."

Instead of farming out work to countries a dozen time zones away, Wilson said, many U.S. companies are looking for relatively low-cost destinations closer to home, including Canada, Mexico and South America. He terms it "nearshoring."

Click on this paper by Scott Noble to see some reasons why offshoring fails.

I'll be at Boston University today as part of "The Great Debate" series at Boston University's College of Communications:

The Great Debate: Does Overseas Outsourcing Hurt the U.S. Economy? 6:30 p.m. Tsai Performance Center Paneilsts include Thea Lee, Chief International Economist, Public Policy Department, AFL-CIO; Jerry Jasinowski, President, Manufacturing Institute, National Associational of Manufacturers; Lori Wallach, Director, Public Citizen's Global Trade Watch; and Daniel Drezner, University of Chicago. Students panelists are Nick Barber, COM Broadcast Journalism, COM'06; and Ida Ziniti, COM Journalism, COM'06. Admission: free. Open to the public. Info: 617-353-5015.

They'll also be webcasting the event -- click here to see.

One of my favorite economics articles of all time is by Nathan Rosenberg, "Economic Experiments." Industrial and Corporate Change , volume 1 (1992). In that essay, Rosenberg pointed out that any dynamic economy had to let firms engage in experimentation to find out new ways to innovate and generate profits. Many of these experiments would fail, of course, but the successes would lead to massive economic gains. It was crucial that these experiments be permitted to fail, otherwise no useful information could be gleaned.

I bring this up because looking at economic enterprises as a rolling series of experiments is a great analytical lens to think about offshore outsourcing. Specifically, a lot of firms outsourced offshore as an experiment to boost profits. And, not surprisingly, a lot of experiments fail: Gartner recently predicted that 80% of customer service outsourcing projects aimed to cut costs will fail. That cannot and should not stop other firms from trying -- like MacDonald's outsourcing its drive-thru windows to remote call centers (if you click on the story, note that they're thinking of outsourcing to Norh Dakota and not Bangalore).

The great thing about experimentation is that the people conducting the experiments learn more from failure as success. As firms gain more experience from offshoring, they are starting to recalibrate what is outsourced and what is kept in-house. Kelly Shermach makes this point in CRM Buyer:

By farming out only bits of business, U.S. organizations can more easily grasp the risks they take as well as the efficiencies they gain. "It's easier to see you're getting a better price, easier to get a benchmark when you're selective for better process manageability," said Robert McNeill of Forrester Research.

Even when companies outsource some functions, they often keep control over far more than their core competencies. Unless outsourcing will deliver a cost savings with equal or better service quality, they keep it in-house....

And by farming out only bits of business , U.S. organizations can more easily grasp the risks they take as well as the efficiencies they gain. "It's easier to see you're getting a better price, easier to get a benchmark when you're selective for better process manageability," McNeill said.

U.S. firms are also starting shifting the location of offshoring activities. Some firms are relocating their offshoring activities to the Philippines because of increasing costs of Indian offshoring. Cultural familiarity is also causing firms to switch some of their activities to nearshoring -- i.e., farming out operations to Canada (or, for western European firms, to eastern Europe).

These trends worry some Indian analysts. Sonia Chopra frets in India Daily:

In recent days the escalating cost of employment in India, lack of qualified work force and deflation service prices have made outsourcing a tough business. The Western companies in India are running around to save even one cent. The escalating cost of living and shortage of qualified workforce is putting a solid pressure on wage increase. On top of that the companies have to keep 20% excess work force to accommodate turn over and other issues. The clients in the West are always threatening to stop business, not pay etc. based on quality and delivery of services on schedule. All these have made outsourcing a painful business. On top of those countries like Poland, Philippines, South Africa and so on are competing heavily lowering the prices and providing additional incentive to the clients....

Some Indian companies have tried to branch out into premium pricing environments – the vertical markets in IT. That is where India is failing. It was a easy honey moon for Indian companies to offer cheap services with less than par alary in the country and Indian rupees trading at a lower value than then the fair market values. But when these factors are taken out, Indian companies find they are nowhere.

It's with this kind of experimetation in mind that one should read Pete Engardio and Bruce Einhorn's excellent article in Business Week about the offshore outsourcing of R&D activities. The outsourcing of R&D is often considered the "line of death" for economic analysts. If that happens, the thinking goes, so does American technological leadership. Parts of the article sound ominous:

When Western corporations began selling their factories and farming out manufacturing in the '80s and '90s to boost efficiency and focus their energies, most insisted all the important research and development would remain in-house.

But that pledge is now passé. Today, the likes of Dell, Motorola, and Philips are buying complete designs of some digital devices from Asian developers, tweaking them to their own specifications, and slapping on their own brand names. It's not just cell phones. Asian contract manufacturers and independent design houses have become forces in nearly every tech device, from laptops and high-definition TVs to MP3 music players and digital cameras. "Customers used to participate in design two or three years back," says Jack Hsieh, vice-president for finance at Taiwan's Premier Imaging Technology Corp., a major supplier of digital cameras to leading U.S. and Japanese brands. "But starting last year, many just take our product. Because of price competition, they have to."

While the electronics sector is furthest down this road, the search for offshore help with innovation is spreading to nearly every corner of the economy....

However, a closer read reveals that what's going on is experimentation:

[There is] a rethinking of the structure of the modern corporation. What, specifically, has to be done in-house anymore? At a minimum, most leading Western companies are turning toward a new model of innovation, one that employs global networks of partners. These can include U.S. chipmakers, Taiwanese engineers, Indian software developers, and Chinese factories. IBM is even offering the smarts of its famed research labs and a new global team of 1,200 engineers to help customers develop future products using next-generation technologies. When the whole chain works in sync, there can be a dramatic leap in the speed and efficiency of product development....

[D]ifferent companies are adopting widely varying approaches to this new paradigm. Dell, for example, does little of its own design for notebook PCs, digital TVs, or other products. Hewlett-Packard Co. says it contributes key technology and at least some design input to all its products but relies on outside partners to co-develop everything from servers to printers. Motorola buys complete designs for its cheapest phones but controls all of the development of high-end handsets like its hot-selling Razr. The key, execs say, is to guard some sustainable competitive advantage, whether it's control over the latest technologies, the look and feel of new products, or the customer relationship. "You have to draw a line," says Motorola CEO Edward J. Zander. At Motorola, "core intellectual property is above it, and commodity technology is below."

Wherever companies draw the line, there's no question that the demarcation between mission-critical R&D and commodity work is sliding year by year. The implications for the global economy are immense. Countries such as India and China, where wages remain low and new engineering graduates are abundant, likely will continue to be the biggest gainers in tech employment and become increasingly important suppliers of intellectual property. Some analysts even see a new global division of labor emerging: The rich West will focus on the highest levels of product creation, and all the jobs of turning concepts into actual products or services can be shipped out. Consultant Daniel H. Pink, author of the new book A Whole New Mind, argues that the "left brain" intellectual tasks that "are routine, computer-like, and can be boiled down to a spec sheet are migrating to where it is cheaper, thanks to Asia's rising economies and the miracle of cyberspace." The U.S. will remain strong in "right brain" work that entails "artistry, creativity, and empathy with the customer that requires being physically close to the market."

....Still, most companies insist they will continue to do most of the critical design work -- and have no plans to take a meat ax to R&D. A Motorola spokesman says it plans to keep R&D spending at around 10% for the long term. Lucent says its R&D staff should remain at about 9,000, after several years of deep cuts. And while many Western companies are downsizing at home, they are boosting hiring at their own labs in India, China, and Eastern Europe. "Companies realize if they want a sustainable competitive advantage, they will not get it from outsourcing," says President Frank M. Armbrecht of the Industrial Research Institute, which tracks corporate R&D spending.

Companies also worry about the message they send investors. Outsourcing manufacturing, tech support, and back-office work makes clear financial sense. But ownership of design strikes close to the heart of a corporation's intrinsic value. If a company depends on outsiders for design, investors might ask, how much intellectual property does it really own, and how much of the profit from a hit product flows back into its own coffers, rather than being paid out in licensing fees? That's one reason Apple Computer lets the world know it develops its hit products in-house, to the point of etching "Designed by Apple in California" on the back of each iPod....

Companies are still figuring out exactly what to outsource.

Let the experimentation continue....

UPDATE: The EU, on the other hand, seems to disapprove of both outsourcing as experimentation and any report that signals that these experiments can be successful:

Outsourcing isn't as bad for European jobs as some have feared, says an unpublished European Union study. On the contrary, the study suggests it can help create high-skilled jobs and boost Europe's flagging economy.

But the study was pulled from the agenda of European finance ministers meeting here yesterday to be rewritten, EU diplomats said. It was too inflammatory for countries such as Germany and France, which fear deindustrialization and falling investment from companies exporting jobs to lower-cost countries, they said. "The report says there's nothing wrong with outsourcing, and that's absolutely not politically sensitive," an EU diplomat said. "That's why it could not be discussed."

The 16-page report, commissioned by the EU's economic affairs department and reviewed by Dow Jones Newswires, said "there is no evidence that a deindustrialization process is underway." Developed economies consistently see increases in manufacturing output, the report found. Though some manufacturing jobs are lost, "One should not lose sight of the overall positive developments of net job creation throughout the EU," the report concluded, "especially for the high skilled."

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.]

One of the mantras of critics of offshore outsourcing is that countries like China and India have such large pools of low-cost, high-skilled labor that their wages will never rise enough to stop the flow of outsourced activity to those locales.

Siddharth Srivastava files a story that suggests otherwise:

India has shown the highest average salary increase in the Asia-Pacific region during 2004, beating China, Korea and Japan, according to a survey by global human resources firm Hewitt Associates. Analysts are worried, however, that such high increases in wage costs may result in the exit of business that is sought in this country for the very same reason — low overheads. What is particularly worrying is that the highest rise in wages has occurred in the Information Technology sector where India bids to be the number one player in the world due to a combined advantage of low cost and high quality manpower at its disposal. Combined with the news that the rupee has appreciated in the face of a depreciating dollar, IT firms that rely heavily on export revenue fear a resource crunch.

According to the report, India showed the highest average salary increase in Asia followed by China, Philippines and Korea. While India reported an 11.6 percent overall pay hike, in China salaries grew by 6.4-8.4 percent, 7.4-7.7 percent in Philippines and 6.4-6.8 percent in Korea for the year 2004, the survey said....

What is worrying analysts in India is that the IT industry in India witnessed the highest average salary increase at 14.5 percent though as many as 89 percent of participating companies linked salary hike to performance ratings. The rising wages coupled with an appreciating rupee in the face of high U.S. fiscal deficit and the no-tax promise by President George Bush to plug it, will end up eroding the basic comparative advantage that India enjoys vis-à-vis other low cost centers of the world such a Vietnam, China and the Philippines, which are beginning to focus on the software sector. In an interview, Vivek Paul, vice-chairman and president at Wipro’s global IT arm, has warned of an end to the low-wage culture that has been at the heart of India’s software boom.

Following the "homeshoring" meme, there are lots of reports this month about American firms souring on offshore outsourcing and reverting to onshore outsourcing instead. CNET's Ed Frauenheim has one story about tech companies outsourcing to a firm with operations in Oklahoma City. Another story takes a longer look at one homeshoring firm, Decisions Design:

Decision Design knows first-hand about the potential pitfalls of shipping tasks to India. The company launched Indian operations in 2001 but closed them down two years later. "Our offshore experience wasn't what we anticipated," Davis said in a statement. "The quality of work was lower than required, which caused rework and actually created higher costs than if we had done the work here."

The botched experiment led the company to the notion of "homeshoring centers" in the United States that nonetheless offer low costs to customers. In part by locating offices on the fringe of Silicon Valley and Chicago, the company claims that it can deliver savings of 30 percent to 60 percent below typical onshore development costs.

Decision Design, whose clients include Lehman Brothers and JPMorgan Chase, was brought in several times last year when a customer's offshore project wasn't panning out properly, O'Neill said. Offshore operations face problems, including low quality and slow project completion times, she said.

Here's a link to a press release from Housteau, third homeshoring firm, opening up a new development center in Columbus.

With rising wages in India and other offshoring magnets, expect to see more stories about this trend.

[Hold on a sec; how can you simultaneously defend the practice of offshore outsourcing but still celebrate homeshoring?--ed. Ah, but remember what I actually wrote in "The Outsourcing Bogeyman":

It is also worth remembering that many predictions [about the growth of offshore outsourcing] come from management consultants who are eager to push the latest business fad. Many of these consulting firms are themselves reaping commissions from outsourcing contracts. Much of the perceived boom in outsourcing stems from companies' eagerness to latch onto the latest management trends; like Dell and Lehman, many will partially reverse course once the hidden costs of offshore outsourcing become apparent.

I still think that offshoring, when done correctly, benefits the U.S. economy. But what we're seeing in the links above is the reversing of course.]

If 2004 was the Year of Offshoring, 2005 might be the Year of Homeshoring. CNET's indefatigable Ed Frauenheim reports that, "a number of companies are turning to a new method to meet call center challenges: getting workers to handle calls from their homes." That story was based on an IDC report, An Alternative to Offshore Outsourcing: The Emergence of the Home-Based Agent -- a bargain at $3500.00 for just seven pages!! Or, you could look at the summary in this press release. Key paragraph:

[A] number of companies are turning to a new sourcing model called "home-shoring" or "home-sourcing" to address call center challenges that sometimes arise, such as the need for superior agent quality, frequent turnover, and the seasonal nature of the business. IDC believes that in certain situations, by moving some work stations into agents' residences, companies can boost productivity and efficiency while continuing to reduce costs.

Similarly, Kamil Z. Skawinski reports for CCN Magazine that "several companies have recently sprung up in rural areas of the U.S. offering a variety of onshore outsourcing services." Click here for one example, Rural Sourcing.

Finally, Adam Kolawa offers advice to IT professionals about whether their jobs could be outsourced offshore in Information Week. Apparently, "although outsourcing may seem widespread, the jobs of many IT professionals are difficult to outsource and essentially immune to it."

Great, just great. Bruce Bartlett says in the Washington Times that yours truly is "an indispensable blogger" on matters of international trade, "especially outstanding on the so-called outsourcing issue and excels in staying on top of the research in this area."

So now I've got expectations to meet. How do I satisfy my expectant readership? [Sex up the topic!!--ed.]

With that suggestion, it's worth highlighting a McKinsey Quarterly analysis which concludes that even in a world where offshore outsourcing is possible, location still matters a great deal. This is especially true when trendy undergarments are involved:

We found compelling evidence that in a number of cases, offshore manufacturing isn't all it's cracked up to be. One reason is that for many manufacturers, the importance of direct labor is declining rapidly. Since it often accounts for just 7 to 15 percent of the cost of goods sold, hard-goods and high-tech manufacturers often say that wage rates are hardly the most critical determinants of their overall economic performance.

Consider the case of one fashion apparel company based in Los Angeles. Its 1,500 workers, paid at rates well above the minimum wage, make casual wear in an old, multistory downtown brick warehouse. The executives view labor costs, currently 3 percent of the retail price of these goods and heading lower, as a secondary concern to the company. If it were to move its operations offshore, logistics costs might well swallow up any savings from lower wages. Another example: A consumer electronics manufacturer we interviewed has stripped away roughly 60 percent of its labor costs from production and reduced lead times from weeks to days. Even if an offshore competitor drove down its own labor costs close to zero, this manufacturer would still have an insurmountable advantage in logistics—a fact that has emboldened the company to reverse-engineer low-end Chinese goods for manufacture in California.

Since keeping plants near customers shortens lead times, it facilitates greater responsiveness to changing market conditions. The Los Angeles apparel maker can fill orders for up to 160,000 units in 24 hours, since the entire supply chain--including weaving, dyeing, and sewing—is located downtown. The company carries less than 30 days' worth of inventory and could even become a build-to-order producer. Another Los Angeles garment maker produces hand-sewn fashion accessories with a lead time of less than five days.

This kind of speed can be a competitive weapon--and its absence a trap. In the fashion apparel industry, with its spiky, unpredictable demand, the five-month lead times that accompany offshore production can leave manufacturers with excess inventories of fading styles or shortages of hot items. When a brief fashion craze ended before one California designer's shipment of goods had arrived from China, for instance, the company was left with a boatload of velvet knickers that could be sold only at a high discount. And with mass retailers penalizing suppliers for late orders by as much as 2 percent a day, the cost of miscalculation can be high....

Not that all U.S. manufacturers should make their goods at home; offshoring will always be a valuable component of manufacturing strategies. And for companies that make goods such as socks or spark plugs--for which demand is stable, inventory-holding costs low and labor a high proportion of total costs--overseas production in low-wage countries is a very attractive idea.

Nonetheless, offshoring often isn't the right strategy for companies whose competitive advantage comes from speed and a track record of reliability. And with buyers in advanced markets like California becoming more sophisticated--demanding shorter product life cycles, quicker delivery, and lower inventory costs--slow, unreliable manufacturers forgo valuable opportunities to gain market share or revenues. (emphasis added)

Read the whole thing.

UPDATE: Gary Rivlin penned a less-sexy but similar-themed piece on Dell's decision not to engage in much offshoring in a New York Times piece behind their archive wall. Fortunately, the Charlotte News Observer republished it. Key paragraph:

Dell's decision to expand its U.S. manufacturing presence, however, has nothing to do with patriotism. Executives here say their decisions are based on the bottom line as well as on geography; it is simply more efficient to stamp out computer equipment closer to the customer. "The reason we continue to manufacture in the United States is that it's the optimal place to do so, and we can do it most cost effectively," said John Hamlin, who oversees Dell's consumer line.

Whenever I talk to critics about offshore outsourcing, they tell me that the claim by proponents that offshoring addresses the problem of a skills shortage in the U.S. is bogus, that there are more than enough tech workers here to perform the necessary tasks. I don't think that holds for the late 1990's, when offshoring and the H1-B visa craze started, but that's neither here nor there. The point is, they argue that firms have no compelling need to to outsource offshore since the set of necessary skills resides in the United States.

Beyond the IT sector, however, there do appear to be instances where offshoring is a necessary and effective means of accessing a labor supply of specialty skills for which there is a shortage in the United States. Lindsey Tanner reports in the Associated Press of one example in radiology. The highlights:

When a patient in Altoona, Pa., needs an emergency brain scan in the middle of the night, a doctor in Bangalore, India, is asked to interpret the results.

Spurred by a shortage of radiologists in the United States and an exploding demand for more sophisticated scans to diagnose scores of ailments, physicians at Altoona Hospital and dozens of others are outsourcing work.

Over the past few years, the number of nighttime emergency cases was swamping Altoona's seven radiologists.

"Somebody was waking up all night to cover all this extra work," said Dr. Richard Wertz, a radiologist. And while that doctor was groggy, "we didn't have the luxury of that guy taking the next day off."

Using radiologists halfway around the world where it is daytime, "solves that problem for us," Wertz said.

Such moves are part of the telemedicine trend, with technology enabling the speedy transfer of medical data over the Internet to a compatible computer anywhere in the world. That means radiologists in Australia, India, Israel and Lebanon are reading scans on U.S. patients.

Despite fears of some doctors, advocates insist offshore radiology is not stealing U.S. jobs and replacing them with unqualified cheap labor. Most of the doctors are U.S.-trained and licensed, though Indian radiologists generally earn about a tenth of the estimated $350,000 median salary for those in the United States.

More typical is the Altoona situation, which involves doctors such as Arjun Kalyanpur. A U.S.-licensed and credentialed radiologist, Kalyanpur got his postgraduate training at Yale University and runs a two-man service in southern India.

The Pennsylvania hospital is among 40 that use Teleradiology Solutions....

In recent years, demand has far exceeded the supply of radiologists in the United States. A trade journal reported this year that an average of four vacancies existed for each radiology department at American academic centers since 2002.

Two questions on this:

1) I know nothing about the supply and demand of different medical specialties -- is the statement about there being a drastic shortage ofradiologists an accurate one?

2) Assuming that the answer to the first question is "yes," would traditional opponents of outsourcing concede that this case looks like a standard trade story that clearly provides value added to the United States?

UPDATE: This might be the most bizarre twist on outsourcing I've seen yet -- Europeans emigrating to India to work in offshored call centers (thanks to N.D. for the link)

Keen readers of danieldrezner.com may have noticed that I haven't blogged much about offshore outsourcing since my NYT op-ed in late September. This has been for several reasons:

a) I had a book manuscript to finish;
b) There was an election occupying my attention;
c) I was a bit burned out on the topic.

Well, the election is over, the book manuscript is off my desk, and a few months have passed since I've blogged about the topic. So... I'm back, baby!!

So what's been written that's worth reading on the topic since I've been away?

A couple of selections:

1) Mary Amiti and Shang-Jin Wei, "Fear of Service Outsourcing: Is It Justified?" Their answer would appear to be no:

The recent media and political attention on service outsourcing from developed to developing countries gives the impression that outsourcing is exploding. As a result, workers in industrial countries are anxious about job losses. This paper aims to establish what are the hypes and what are the facts. The results show that although service outsourcing has been steadily increasing it is still very low, and that in the United States and many other industrial countries “insourcing� is greater than outsourcing. Using the United Kingdom as a case study, we find that job growth at a sectoral level is not negatively related to service outsourcing.

Here's a link to a more accessible precis, which closes with the following:

Although service outsourcing is growing rapidly, it still remains a small fraction of industrial countries’ GDP. And it is not dominated by lopsided, one-way outsourcing from developed to developing countries. In fact, most industrial countries do not outsource more (when adjusted for economic size) than many developing countries. The United States, for example, which is a large importer of business services, is also a large exporter of these services and, as has been noted, has a growing net surplus in business service trade.

As for fears about job loss, our studies show that jobs are not being exported, on net, from industrial countries to developing countries as a result of outsourcing. In fact, the evidence suggests that job losses in one industry often are offset by jobs created in other growing industries. (emphasis added)

One problem with this study is that the data stop in 2002 -- and, to be fair, most opponents of offshore outsourcing argue that the phenomenon didn't really heat up until the last two years.

2) Kate Bronfenbrenner and Stephanie Luce, "The Changing Nature of Corporate Global Restructuring." This report was prepared for the US-China Economic and Security Review Commission (USCC) and argues that existing estimates of job losses due to offshoring have been underestimated. From the executive summary:

Despite the increasing amount of trade between China and the US, and the increase in foreign direct investment from the US into China, there is no government body that collects information detailing the incidence of production shifts out of the US to China or any other country.... In order to conduct this research we developed a methodology that involves a combination of online media tracking and corporate research and the creation of a database including information on all production shifts announced or confirmed in the media during that period. In July 2004 the USCC asked us to update that research, starting with an initial period of January 1 through March 31, 2004....

Altogether we found announcements or confirmations for shifts of 48,417 jobs out of the US to other countries in January-March including 23,396 to Mexico, 8,283 to China, 3,895 to India, 5,511 to other Latin American countries, 4,419 to other Asian countries, and 2,933 to all other countries. Based on our estimates that media tracking captures approximately two-thirds of production shifts to Mexico and about a third of production estimates to other countries, these data suggest that in 2004 as many as 406,000 jobs will be shifted from the US to other countries compared to 204,000 jobs in 2001.

This is a serious study, and does a good job of suggesting that the Bureau of Labor Statistics has underestimated the raw number (though not necessarily the percentage) of jobs lost through offshoring in the first quarter of this year. However, that topline number seems based on some dodgy assumptions and serious guesstimation. And be sure to read pages 8-16 to get a sense of their methodology -- it's still unclear to me whether their count includes all actual and announced plant closings/layoffs during that time period, or just one or the other.

3) The University of South Florida's Globalization Research center commissioned Innovation Insight to produce a report, "Baseline Analysis of Offshoring in the Tampa Bay Region." From the executive summary:

The Tampa Bay region is estimated to have imported approximately $627 million in “other� private services from the US and abroad in 2002, including $33 million in fi nancial services, $97 million in business and professional services, and approximately $12 million in information technology (database plus computer services). However, the Tampa Bay has a signifi cant import/export surplus when it comes to private services; for all “other� private services combined, the region exported $478 million more than it imported in 2002.

Offshoring practices are increasing the demand for selected “soft skills� in US employees, in particular project management and defi nition skills, fl exibility, cultural sensitivity and facility, training, creativity, and organization skills.

Take those numbers with a small grain of salt. This paragraph best expresses the sentiment of the report:

We explored analysis, statistics, and relations between a number of other data sources for evidence of employment shifts caused by offshore outsourcing. Unfortunately, the US economy has demonstrated some large employment shifts away from agriculture, mining, and manufacturing into service and professional industries, and has also has seen its unemployment levels rise and fall during recent recessions. Tampa Bay’s economy refl ects national economic trends; our findings suggest that if an intra-sector shift (from one occupation or industry category to another) due to offshoring exists, it is so small compared to ongoing large scale (macro) employment shifts that it is effectively obscured. In other words, given existing data sources, it is difficult to tell which occupations are changing specifically due to offshoring or just the evolution of the national economic structure.

4) Finally, do check out Corante's new blog on outsourcing, which takes a critical view of the phenomenon (link via Tyler Cowen).

Thanks to Bruce Bartlett and Amardeep Singh for being good enough to help keep me up to speed.

The good economist's assessment of the capital of offshore outsourcing:

Apparently production costs are rising out of control in a city that accounts for a third of India's software exports. The major culprit is congestion; a seven-kilometer commute can now take ninety minutes. Population has grown by a third since 1995, and the new metro and airport are badly behind schedule. Bombay has had similar problems.

The remedy? Madras (Chennai) is rising in popularity as is Calcutta, despite its propensity to elect communist governments.

The bottom line: Indian infrastructure is chaos. This economy has only a limited ability to absord outsourcing ventures.

Megan McArdle has further thoughts on this. Key line: "Trendline extrapolation is a silly business in almost any economic situation, but never more so than where trade is concerned."

Wondering whether my New York Times op-ed was based primarily on memos from the seventies that mysteriously reappeared this month? Relax, I have some footnotes for you.

The principal source for the op-ed was the GAO's report on the offshoring of services -- about which I've previously blogged. And a big thank you to the GAO staff for their professional and courteous responses to the myriad e-mails queries I sent them (not that they necessarily endorse anything I said in the op-ed)

This post also has some relevant material in terms of discussing the relative importance of different factors contributing to job losses.

Four other sources -- IBM's adventures with offshoring are summarized in this Industry Week story by Tonya Vinas. The Kodak anecdote came from a paper by Daniel T. Griswold and Dale Buss for the Mackinac Center for Public Policy. Kerry's quote was widely reported -- here's one link. Here's a link to the full .pdf version of their report, "Outsourcing Benefits Michigan Economy And Taxpayers." The polling data comes from this Foreign Policy Association report on public attitudes towards foreign policy. Alas, this also reveals the one error of fact in the op-ed -- Zogby's polling was conducted in August and not September.

Finally, readers who want to read more of what I've written on the topic should this June 2004 piece from The New Republic online, and my Foreign Affairs article from May/June of this year, "The Outsourcing Bogeyman."

For a dissenting view, read this report sponsored by WashTech and conducted by the the Center for Urban Economic Development at the University of Illinois, Chicago (I commented on it here)

Those poor souls with enough time on their hands to click on this blog's "about me" page may recall one reason I gave for blogging:

I love the academic side of my job, i.e., the researching and writing about international relations theory. But I’m also a policy wonk. And since the New York Times op-ed page mysteriously refuses to solicit my views, the blog lets me scratch that itch.

Well, today I have an op-ed in the New York Times on offshore outsourcing. Here's the opening paragraph:

John Kerry is making the outsourcing of jobs by American companies a centerpiece of his campaign, telling audiences that "because of George Bush's wrong choices, this country is continuing to ship good jobs overseas." President Bush's team has in turn accused the senator of hypocrisy, noting that many of Mr. Kerry's supporters in the business world run companies that are sending jobs offshore. Yet as each side angles for votes, neither is addressing the real issue: is the outsourcing of jobs a problem? The answer, surprisingly, is no.

I'm less than thrilled with the title, "Where Did All the Jobs Go? Nowhere" because I'm not claiming that the employment situation is hunky-dory -- it's not. I'm claiming that the contribution of offshore outsourcing to that employment picture is prett minimal -- contrary to popular belief.

Anyway, I have every confidence that this will be the topic of discussion among policy cognoscenti for today!

[Ahem, did you see who wrote the other op-ed for the Times today?--ed. Hey, who are Americans going to listen to -- an untenured professor located somewhere in flyover country, or the guy who won the popular vote for President in 2000? Besides, the last time a prominent big shot shared a prominent piece of publishing real estate with me was when Sandy Berger had a Foreign Affairs essay in the same issue as me. And look at what happened to him!]

Anyway, an awkward question arises -- if I can publish in places like the New York Times op-ed page.... do I still need the blog for itch-scratching?

An internal debate worthy of only the most pure of egomaniacs.....

Over a year ago, U.S. Representative Adam Smith (D., Wash.) asked the GAO (which used to be called the General Accounting Office, but has since been renamed the Government Accountability Office) to study "issues related to offshore IT services outsourcing." As the offshore outsourcing brouhaha heated up, more and more congressman dogpiled on top of this request, expanding the GAO's mandate beyond just the IT sector.

The first part of that report has been released today. It's essentially a literature review of available government data on the magnitude and impact of offshore outsourcing. There are two themes that come out from this: 1) the government data on this phenomenon is incomplete and imperfect; 2) what data exists suggests that offshore outsourcing is not quite the tsunami it's been made out to be.

This is from the Results in Brief (p. 3):

Federal statistics provide limited information about the effects of offshoring IT and other services on the U.S. labor force and the economy overall. The Department of Labor’s Mass Layoff Survey (MLS) shows that layoffs attributable to overseas relocation have increased since 1999, but these layoffs represent a small fraction of workers laid off—of 1.5 million layoffs reported in the 2003 MLS, 13,000 (0.9 percent) were reportedly due to overseas relocation. The data also show that most of these layoffs were in the manufacturing sector.

And this is from p. 15:

U.S. government data provide some insight into the trends in offshoring of services by the private sector, but they do not provide a complete picture of the business transactions that the term offshoring can encompass. In particular, they do not identify U.S. imports of services previously produced by U.S. employees. Similarly, federal procurement data on purchases of IT and other services provide some insights, but it can be difficult to determine where such work is performed. The available data indicate that the trend in offshoring show little change over the past 5 years. (emphasis added)

This is consistent with my own back-of-the envelope-calculations from earlier this year.

Now, what's interesting is the responses to this report. This is a snippet from the press release by two Seattle-based labor unions, SPEEA-IFPTE and WashTech:

"This study is a good first step," said Charles Bofferding, executive director of SPEEA. "It recognizes that outsourcing is growing and a troubling trend for our workers and our country."

"The GAO has clearly stated in this report that outsourcing of U.S. jobs abroad can not be ignored, and the government needs to act in order to address the issue in terms of data collection and policy solutions," said Marcus Courtney, WashTech president.

Released in Washington, D.C., the study was made at the request of Washington state Reps. Adam Smith (D-9th District) and Jay Inslee (D-1st District). The congressmen were prompted to make the request by the Society of Professional Engineering Employees in Aerospace (SPEEA), IFPTE Local 2001 and the Washington Alliance of Technical Workers (WashTech), CWA Local 37083. (emphasis added)

Now let's go to what Representative Adam Smith has to say about the report in his press release:

The extent of outsourcing is probably less than they [the GAO] had expected going into the study. Also, at least by using the metrics available, they were unable to separate out the impact of outsourcing on the economy versus other “meta� factors such as the burst of the technology bubble and the hangover from the pre-Y2K tech buildup.

Services are still a relatively small part of the US imports.

“This study shows us that we have the opportunity to address the growing trend of offshore outsourcing with positive and aggressive solutions,� said Smith. “We should increase investment in research and development, improve math and science education in K-12, enhance training and professional development for workers, open markets for American goods and renew the government’s focus on promoting innovation. By doing so, we can make sure that our economy remains the most vibrant and competitive one in the world.�

Smith continued, “We are at a relatively early state in the offshore outsourcing trend. We must get the facts straight and have a serious and educated policy dialogue on outsourcing. It’s my hope that this study will help “kick off� that process and move the discussion in a positive way that is focused on real issues and solutions. I am committed to continuing my work on identifying real solutions to this potentially growing problem for the American people.� (emphasis added)

A tip of the cap from everyone here at danieldrezner.com to U.S. Representative Adam Smith. Beyond the unbelievably cool-sounding name, Smith has acted like a responsible grown-up on the offshore outsourcing issue. His one op-ed on the subject didn't demagogue the issue, and offered an eminently sensible, constructive request -- expanding coverage of Trade Adjustment Assistance to include service sector workers. No hysterical claims that offshoring was destoying the American economy, or even his district. Just a sensible policy proposal and an appropriate request for more information. Also, in contrast to the aforementioned unions, it appeared he's actually read the GAO report.

A politician who seems reasonably well-informed and resists scapegoating a non-issue. Damn, that's refreshing.

Oh, and for those who just can't get enough of offshore outsourcing, the United Nations Conference on Trade and Development (UNCTAD) has just released its 2004 World Investment Report. If you download Chapter IV, there's a nice overview of the offshoring phenomenon.

UPDATE: Brier Dudley and Marilyn Geewax have dueling stories at the Seattle Times and Seattle Post-Intelligencer respectively. One data point that captures attention is the fact that "the number of business, technical and professional services, flowing into the United States, however is rising, from $21.2 billion in 1997 to $37.5 billion in 2002," as reported by Geewax (this is CNN's lead as well).

That's an increase of 76.9%, which sounds really bad. But it's only half of the picture. What about exports of business, technical and professional services?

Those precise figures weren't in the GAO report, so I e-mailed their staff to see if they knew -- and they promptly replied. As it turns out, during the same period, exports of these services rose from $44 billion in 1997 to $64.5 billion in 2002 (This is from the Bureau of Economic Analysis's Survey of Current Business, October 2003, p.65, Table E).

So in other words, between 1997 and 2002, when offshore outsourcing is supposedly taking off, the balance of trade in the services likely to be offshored went from a $22.8 billion surplus to a.... $27.0 billion surplus.

My heart be still.

FINAL UPDATE: In fairness, see this erudite comment below by an IT consultant. I certainly won't deny that offshoring can have a hard affect on indivudual workers -- I just don't think it warrants the hysteria that, say, this comment epitomizes.

One of the more common critical responses to defenses of offshore outsourcing is the claim that defenders of the practice are being deluded by a set of archaic economic ideas that only work in the ivory towers -- they need to get out in the real world, man.

Beyond ignoring the intrinsic value of economic theory as a device for understanding the world, what's amusing about this line of argumentation is that protectionists throw it out the window the moment someone comres up with an economic theory that seems to support their argument. Which is fine -- except that, far more often than not, the models they embrace rest on assumptions that are often harder to satisfy in the real world than the standard neoclassical trade models.

For exhibit A on all this, consider Paul Samuelson's recent contribution to the outsourcing debate. In The American Prospect, Eamonn Fingleton has a rhetorical field day proclaiming that Samuelson's bombshell has eviscerated the orthodoxy of free trade. One excerpt:

For James Fallows, a liberal-leaning critic of Washington's blink-first style in trade diplomacy, Samuelson's analysis is a call to policy-makers to break free from utopian theories and, instead, take a hard look at the real world.

"The great problem in Western discussion of trade theory has been its simpleminded Panglossianism," he says. "The main thing that has supported globalism, apart from the self-interest of many powerful participants, has been the idea that economic theory was 100 percent on the side of Dr. Pangloss. To have the most esteemed of all modern economists say that things are not this simple is a very important step."

There's just one problem with all of this -- Samuelson's paper has nothing to do with offshore outsourcing as it's commonly understood.

Arvind Panagariya -- Professor of Economics at Columbia -- provides a concise explanation for where Samuelson gets confused on offshore outsourcing (thanks to Asif Dowla for the link). Here's a long excerpt to explain what Samuelson was arguing:

Samuelson employs the standard Ricardian model, which assumes two countries (called America and China), two goods (called 1 and 2) and one factor of production (called labor). Because the endowment of labor is taken as fixed in the Ricardian model, any change in the total national income are reflected fully in the change in the real wage. If the real wage rises, real incomes of all individuals and therefore the nation rise. Alternatively stated, the wage also represents the per-capita income in the model....

Samuelson conducts three experiments in this model:

(1) He starts at autarky and then allows the countries to trade. Both America and China unambiguously benefit from this opening to trade. America has a comparative advantage in good 1 and specializes completely in that good and China in good 2. Nothing controversial arises here.

2) Starting at this free-trade equilibrium, Samuelson next introduces a productivity increase in China in the good it exports, good 2. With more of good 2 produced, its relative price falls. America can now buy good 2 more cheaply from China, which benefits America. Nothing controversial arises here either, at least from the American viewpoint.

(3) Starting once again at the free-trade equilibrium, Samuelson finally introduces a productivity improvement in China in the good it imports and America exports, good 1. If this productivity improvement is just right to equalize the cost ratios between America and China that gave rise to trade in the first place, all trade is wiped out and America is robbed off all benefits of trade it previously enjoyed....

Samuelson’s analytic result... that technical progress in China can wipe out all potential gains for America is not in dispute at all—as I describe below, it has been known to trade economists at least since 1950s when the late Harry Johnson who taught International Trade at the University of Chicago first demonstrated it. What is in dispute is whether it represents outsourcing.

Thus consider the example given by Samuelson in the last first of the two paragraphs quoted above (which is incidentally fully in conformity with the definition of offshore outsourcing provided at the beginning of this note): “High I.Q. secondary school graduates in South Dakota, who had been receiving from my New York Bank wages one-and-a-half times the U.S. minimum wage for handling phone calls about my credit card, have been laid off since 1990; a Bombay outsourcing unit has come to handle my inquiries. (Emphasis added)” In the analytic model, the good experiencing productivity change in China is the one exported by the United States to China (i.e., good 1). But did any high I.Q. secondary school graduates from South Dakota (or elsewhere in America for that matter) handle the phone calls for the customers in China? Not really. The calls were made by the Americans and answered by the Americans—no international trade in them took place. Virtually all activities associated with outsourcing—call center services, x-rays transmitted electronically to be read abroad, transcribing services, accounting services and virtually all back office services—have this property of having been non-traded before the Internet, phone and fax turned them into traded services. Therefore, the equilibrium at which Samuelson considers the productivity change is simply the wrong one to represent outsourcing.

The Ford Foundation has sponsored a study by the Washington Alliance of Technology Workers (WashTech), a local of the Communications Workers of America (an AFL-CIO affiliate union), in conjunction with the Center for Urban Economic Development at the University of Illinois, Chicago, on IT employment since 2001.

Their press release paints a grim picture:

The report found that high-tech workers have seen a doubling of unemployment rates in the past three years. The University of Illinois at Chicago conducted the research for the Washington Alliance of Technology Workers, a local of the Communications Workers of America.

The report goes on to analyze job growth and unemployment in six key regional high-tech labor markets. For example, San Jose continued to lose more than 14,000 IT jobs after November 2001, and its neighbor to the north, San Francisco, lost 9,300. The unemployment rate faced by San Jose area technology employees still remains high, going from 1% in 1997 to more than 6% by 2002, and in San Francisco from 1.3% in 1997 to more than 8.8% in 2002, the last year for which data are available.

The other labor markets studied are Boston, Chicago, Dallas, Seattle and Washington, DC. Nearly every labor market mirrored the Silicon Valley's experience, with Washington, DC the only location to show positive job growth in the past year.

The report cited offshore outsourcing as contributing to the lack of strong job creation in this sector. (emphasis added)

Here's a link to the actual report, and here is the AP wire report by Allison Linn.

The sum total of the discussion about offshore outsourcing comes on p. 5 of the report:

While there is a lack of current and reliable information on the extent of job losses due to offshore outsourcing, there is little doubt that it has contributed to soaring unemployment rates in the industry. For instance, UIC-CUED analysis of the Current Population Survey
reveals that national unemployment rates for computer programmers was 6.7% in 2003, two years after the end of the recession, compared to 2.5% in 2001. Incidentally, computer programming is also one of the top occupations sent offshore.

That's it -- lots of data about the unemployment picture, one paragraph on the causal connection between offshore outsourcing and that employment picture.

Certainly, their analysis could be correct -- but I have my doubts. One of them is that it's not clear whether their data are accurate -- a point made in Ed Frauenheim's analysis of the report at CNET.com:

In recent weeks, conflicting information has emerged about the job scene for tech professionals....

A survey by a staffing firm found gradually increasing confidence among IT workers in the job market. But a recent study by the Information Technology Association of America trade group found just a "slight" recovery for the IT job market in 2004.

That report concluded that the number of U.S. IT workers rose 2 percent, to 10.5 million, in the first quarter of this year, but demand for IT workers is dropping.

ITAA's report included workers in the internal IT departments of many types of corporations, while the new study for WashTech is limited to companies in the technology industry, such as Internet service providers and software publishers. (emphasis added)

Why is that last paragraph so important? Because if you look at Frauenheim's story about the ITAA report, you find the following sentence: "ITAA said nearly 89 percent of new jobs came from non-IT companies, despite popular fears over mass job loss to outsourcing and globalization." If one really believes that offshore outsourcing is responsible for massive job losses in the IT sector, that last figure is a puzzling one -- because the line that management consultants continually push is that offshore outsourcing is great for firms that don't specialize in IT services and want to subcontract those operations to the lowest-cost provider out there.

If the UIC/CUED study omitted the strongest source of job creation, that's somewhat problematic.

Even the AP report contains the following:

Sung Won Sohn, chief economist at Wells Fargo Bank, said he has seen some evidence that the high-tech job market began improving in the months after this study was completed. Still, he said, those in the software industry have fared better than those in the computer hardware industry.

Overall, Sohn thinks the high-tech industry will rebound, although the new jobs created might require different skills. That still leaves high-tech workers in better shape than other industries, he said.

"I view the setbacks in tech as temporary," he said, "whereas if you're talking about old-style manufacturing, those jobs are gone forever."

Before angry IT workers start posting comments, let's make it clear that I'm not claiming that it's a rosy jobs situation for IT workers. But some of the unemployment numbers sound a bit overstated. And what this report does not say -- indeed, the quoted paragraph acknowledges that that the authors can't say -- is the extent to which offshore outsourcing is responsible. There's no attempt to parse out the relative explanatory power of each possible cause (dot-com bubble, Y2K overhiring, productivity gains combined with slack demand, offshore outsourcing, etc.)

UPDATE: Some of the press reportage of this study has been very good on pointing out the flaws in the report. Barbara Rose's story in the Chicago Tribune has the following:

The American Electronics Association, which represents high-tech employers, agreed with the report's data but said the industry's outlook is brighter than the study suggests.

The group argued it is misleading to measure losses starting in 2001, when employment was near a historic peak.

"There was so much venture capital being thrown at the tech industry, it was a spike, a bubble, an abnormality," said Matthew Kazmierczak, the association's research director.

He said employment has been growing since January in categories included in the study.

Economist Bill Testa, director of regional programs at the Federal Reserve Bank of Chicago, said he was not surprised the Chicago region lost 16,400 jobs, including 10,200 after the official end of the recession.

"We really did take it hard in that area," he said. "We were late getting going with a lot of new companies being created near the end of the boom, and we went down hard."

The study defines IT employment narrowly, focusing on software firms, Internet service providers, data processing and computer systems design companies. It excludes high-tech manufacturing and the large numbers of IT jobs at financial-services firms and other companies.

The study identifies 47,000 information technology jobs in greater Chicago. By contrast, a University of Minnesota study identifies 347,000 IT workers in the Chicago area.

"It all depends on the methodology," said Paul O'Connor, executive director of World Business Chicago. "There's still been demand for skilled IT people."

This is from Diane Lewis' Boston Globe story:

Staffing agencies and recruiters in the Boston area said demand is up for individuals with project management experience or unique IT skills but not necessarily for those with basic skills. They said the demand appears to be in the financial services sector.

"A lot of what we are seeing is some demand for software engineers in the financial services area and stronger demand for the infrastructure people," said Aaron Green, president of the Professional Staffing Group, an employee staffing agency in Boston. "We have not seen a lot of demand for software outside of financial services."

Steve Lohr breathlessly reports in the New York Times that Nobel prize winner and undisputed godfather of modern economic theory Paul Samuelson is coming out with an article in the Journal of Economic Perspectives on outsourcing that contradicts the mainstream economic take:

At 89, Paul A. Samuelson, the Nobel Prize-winning economist and professor emeritus at the Massachusetts Institute of Technology, still seems to have plenty of intellectual edge and the ability to antagonize and amuse.

His dissent from the mainstream economic consensus about outsourcing and globalization will appear later this month in a distinguished journal, cloaked in clever phrases and theoretical equations, but clearly aimed at the orthodoxy within his profession: Alan Greenspan, chairman of the Federal Reserve; N. Gregory Mankiw, chairman of the White House Council of Economic Advisers; and Jagdish N. Bhagwati, a leading international economist and professor at Columbia University.

These heavyweights, among others, are perpetrators of what Mr. Samuelson terms "the popular polemical untruth."

Popular among economists, that is. That untruth, Mr. Samuelson asserts in an article for the Journal of Economic Perspectives, is the assumption that the laws of economics dictate that the American economy will benefit in the long run from all forms of international trade, including the outsourcing abroad of call-center and software programming jobs.

Sure, Mr. Samuelson writes, the mainstream economists acknowledge that some people will gain and others will suffer in the short term, but they quickly add that "the gains of the American winners are big enough to more than compensate for the losers."

That assumption, so widely shared by economists, is "only an innuendo," Mr. Samuelson writes. "For it is dead wrong about necessary surplus of winnings over losings."

Sounds like a radical break -- oh wait, let's get into the details:

Mr. Samuelson, who calls himself a "centrist Democrat," said his analysis did not come with a recipe of policy steps, and he emphasized that it was not meant as a justification for protectionist measures....

According to Mr. Samuelson, a low-wage nation that is rapidly improving its technology, like India or China, has the potential to change the terms of trade with America in fields like call-center services or computer programming in ways that reduce per-capita income in the United States. "The new labor-market-clearing real wage has been lowered by this version of dynamic fair free trade," Mr. Samuelson writes....

For his part, Mr. Bhagwati does not dispute the model that Mr. Samuelson presents in his article. "Paul is a great economist and a terrific theorist," he said. "And in markets like information technology services, where America has a big advantage, it is true that if skills build up abroad, that narrows our competitive advantage and our exports will be hit."

But Mr. Bhagwati, the author of "In Defense of Globalization" (Oxford University Press, 2004), says he doubts whether the Samuelson model applies broadly to the economy. "Paul and I disagree only on the realistic aspects of this," he said.

The magnified concern, Mr. Bhagwati said, is that China will take away most of American manufacturing and India will take away the high-technology services business. Looking at the small number of jobs actually sent abroad, and based on his own knowledge of developing nations, he concludes that outsourcing worries are greatly exaggerated....

The Samuelson model, Mr. Bhagwati said, yields net economic losses only when foreign nations are closing the innovation gap with the United States.

"But we can change the terms of trade by moving up the technology ladder," he said. "The U.S. is a reasonably flexible, dynamic, innovative society. That's why I'm optimistic."

The policy implications, he added, include increased investment in science, research and education. And Mr. Samuelson and Mr. Bhagwati agree that the way to buffer the adjustment for the workers who lose in the global competition is with wage insurance programs.

"You need more temporary protection for the losers," Mr. Samuelson said. "My belief is that every good cause is worth some inefficiency."

Before I throw my two cents in, let me just add the following caveats:

1) I haven't seen Samuelson's essay (anyone who's got a copy of it, e-mail it to my brand-new gmail address listed on the right);

2) I'm not an economist;

3) Paul Samuelson is way, way, way, way, way, way, way smarter than I am.

That said, this dispute boils down to a few empirical questions:

1) Just how many well-educated workers are there in China and India?

2) Will U.S. firms have an incentive to offshore sophisticated value-added work in areas where the United States currently has a comparative advantage?

3) Will the United States continue to be a locus for value-added innovations?

4) To what extent are wages and employment in the affected industries declining because of outsourcing as compared to technological innovation standardizing and commodifying what used to be highly complex (and highly paid) tasks?

In the past, my answers to these questions have been a) not as many as you think; b) no, c) yes, and d) not a lot. [On (d), see Tyler Cowen's and Arnold Kling]. Which is why I side with Bhagwati on the outsourcing question.

Furthermore, Samuelson appears to partially fall into the Douglas Irwin trap of firing a warning shot on outsourcing but providing little in the way of a solution that departs from those who believe outsourcing is not a problem. Indeed, Samuelson explicitly rejects the solution most favored by those who oppose outsourcing -- higher trade barriers.

So, in the end, I'm not convinced that Samuelson's dissent changes the substantive issues of debate. But as a political scientist, it is impossible to deny the extent to which Samuelson's article will alter the rhetorical balance of power in this policy debate. Samuelson will succeed in reigniting debate on this topic, as well as provide aid and comfort to those who wish oppose the practice of offshore outsourcing.

So let the debate be joined.

UPDATE: Arnold Kling links to a draft version of the response paper by Jagdish Bhagwati, Arvind Panagariya, and T.N. Srinivasan alluded to in Lohr's Times story. Kling's summary:

The authors point out that some of the concern is not about trade per se but about the accumulation of capital and know-how in China and India. They suggest that this could harm the U.S. if it reduces trade by eliminating the division of labor. That is, suppose that the U.S. stays stagnant, but China and India learn how to do everything that we know how to do. Then they will no longer export cheap goods to us, and we will lose. This, they claim, is what Samuelson's theoretical paper describes. If so, then it does not really describe outsourcing.

LAST UPDATE: Douglas Irwin – who’s read the paper – is underwhelmed. This is from an e-mail he sent to me:

[Samuelson’s paper] doesn't have much to do with outsourcing. If a foreign country experiences technological progress in a home country's export industry, it can deteriorate the terms of trade of the home country and make it worse off (not vis a vis autarky, but its previous trade situation). We've know this since the U of C's great Harry Johnson pointed it out in the 1950s…. Pretty thin stuff.

VERY LAST UPDATE: One of the commenters linked to Joe Stiglitz's outsourcing essay in the Singapore Straits-Times from May of this year. That essay contains the following:

Many of globalisation's advocates continue to claim that the number of jobs outsourced is relatively small. There is controversy, of course, about the eventual size, with some claiming that as many as one job in two might eventually be outsourced, others contending that the potential is much more limited.

Sounds dispassionate, except for one thing -- I have not seen any estimate even remotely suggesting that "one job in two might eventually be outsourced." That's way higher than any of the upper bound numbers I've seen (the highest I've seen is 30%).

Readers are invited to post a link to any study that suggests otherwise.

Yesterday, Virginia Postrel posted and linked to several stories about a Public Policy Institute of California study on the effect of offshore outsourcing on the Californian economy. Postrel wrote, "The study found that outsourcing actually increases employment in California. Now the Assembly is sitting on the study."

The Assembly may have sat on the study, but it now appears to be available to the public. I clicked over to the PPIC web site and found the report by Jon Haveman and Howard Shatz, which is dated today. Some of their analysis sounds awfully familiar. The good parts (from p. 22-24):

[T]here is evidence that some California jobs eliminated by offshoring are similar to those likely to be created in the state by offshoring. Offshoring can allow the economy to reallocate labor and capital from one set of tasks to another set of higher-level tasks, and California has a strong supply of highly skilled workers who can take on these higher-level tasks. A second mitigating factor for the U.S. economy, and especially for California, is that there is growing world demand for the U.S. provision of services that are similar to those being sent offshore. This is a source of job creation for workers dislocated because of offshoring. California is a significant producer and exporter of these services, and this fact should ease the transition for affected workers in the state.

These two points suggest that jobs are being created in industries and occupations that are relatively similar to those being eliminated. For example, computer programming is one occupation that is projected to be negatively affected by offshoring, and evidence suggests that this is in fact the case. Between 1999 and 2002, 71,000 computer programmer jobs were eliminated, 23,000 of which were in California. Note, however, that offshoring is only responsible for a small fraction of these lost jobs; the technology bust explains most of them.

At the same time that opportunities for computer programmers were declining, more than 115,000 software engineering jobs were created, a disproportionately large share of which – 24,000 – were in California. The transition between these occupation categories – programmers and software engineers – may be unsettling but also may be easier than the transition between many other jobs, and the software engineering jobs pay over $10,000 more per year on average. It is certainly true that not all the workers who held computer programmer jobs became software engineers, and tracing how any such transition might have taken place is difficult. However, the decline of programmers and the rise of software engineers illustrates the fact that as old opportunities disappear – through economic cycles, technological change, and offshoring – the U.S. economy has the capacity to create better opportunities, and in this case, the skill sets required are similar.

As a result, the economy’s adjustment to this new phenomenon need not be as difficult as it was to the shift from manufacturing to service sectors in the 1980s and 1990s. Many of the workers displaced by offshoring have significant skills, and this bodes well for their future employment prospects. This observation is consistent with the evidence suggesting that workers with more skills have less difficult transitions to new jobs; the transitions are faster and involve less wage erosion. This is not to minimize the effect on workers who lose their jobs, especially less-skilled workers, but merely to put it in perspective....

An additional item is worthy of note. It is likely that “outstating� – outsourcing to another state – is a much more important phenomenon than is offshoring for California. The recent mass layoffs report of the Bureau of Labor Statistics noted that of the job relocations where the destination was known, more than 68 percent took place within the United States, rather than overseas. California companies have actively engaged in outstating back-office processes for years. These are the very same processes that are the most vulnerable to offshoring. It is possible that many jobs being moved offshore by California companies would have left the state anyway. Newspaper accounts in places such as Phoenix express the fear that back-office jobs that have only recently arrived from California are headed abroad.

I look forward to the California state legislature's efforts to impose a tariff on services from Arizona.

Here's the report's conclusion regarding the bills designed to block the offshore outsourcing of government contracts (from p. 31):

In the end, the policy of restricting government contractors to vendors employing only domestic labor falls short of the optimal choice in several respects. First, on a per worker basis, it is likely to be more expensive than other options. Second, it is likely to assist a very small subset of workers displaced by offshoring. Third, policies banning offshoring are most likely to assist relatively skilled workers with high earnings capacity. In this time of tight budgets, more cost-effective means of assistance are available and should be investigated.

Red Herring has more on the California situation. Daniel Weintraub concludes in the Sacramento Bee:

The bottom line, though the researchers don't put it this bluntly, is that politicians, either from ignorance or malevolence, are trying to scare Californians into believing that offshoring is bad for the economy, and bad for them. The reality is that the opposite is true, and that the proposals seeking to freeze the economy in place will do far more harm than good.

Indeed.

[Sure, that's California. The rest of the country is losing jobs, right?--ed. Not according to this Business Week story from earlier this month]:

Foreign investment for setting up U.S. subsidiaries and plants doubled, to $82 billion, between 2002 and 2003, according to the Commerce Dept. That means 400,000 new jobs, most of them tech-related, figures the Organization for International Investment, a trade association based in Washington, D.C. Over the same period, outsourcing has taken away about 300,000 U.S. jobs, according to tech consultancy Forrester Research. So, on a net basis, foreign outfits have actually added some 100,000 U.S. jobs.

There's plenty of incentive to keep the trend going. For starters, foreign companies often find that having a U.S. base can be a big help when selling to the lucrative U.S. market. That's one reason Fremont (Calif.)-based Infosys Consulting, a subsidiary of Indian outsourcer Infosys, plans to hire about 500 consultants -- most of them Americans -- over the next two years, says Basab Pradham, senior vice-president and head of worldwide sales....

As U.S. companies begin to outsource such mission-critical functions as human resources and finance, they still want to be able to coordinate and oversee such work more closely. "What we're beginning to witness is a change in the [offshoring] business model," says Wipro's [corporate vice-president of human resources Pratik] Kumar. "A lot of outsourcing companies used to be completely offshore. But as they've begun to handle more complex work, they find that they need to have more local expertise deployed."

UPDATE: Ashish Hanwadikar has more links on this.

Lou Dobbs has just published a book, Exporting America : Why Corporate Greed Is Shipping American Jobs Overseas. To promote it, Dobbs gave a long interview to Bill Moyers on the latter's PBS program.

The interview provides a field day of contradictions and economic illiteracy, but the one thing that came through loud and clear is that Lou Dobbs is not the best writer in the world. Moyers quotes the opening passage from Exporting America:

The power of big business over our national life has never been greater. Never have there been fewer business leaders willing to commit to the national interest over the selfish interest for the good of the company over that of the company's they head. (emphasis added)

I'm pretty sure I know what Dobbs meant by that second sentence -- but I can't swear complete certainty.

UPDATE: Thanks to alert reader gw, who actually went into the bookstore and discovered that the underlined sentence is written as: "Never have there been fewer business leaders willing to commit to the national interest over the selfish interest for the good of the country over that of the companies they head."

Slightly more intelligible, but I think the Pulitzer committee will be underwhelmed.

Hi everyone. I'm looking forward to trading ideas this week while Dan takes a well-deserved break. We must all respect a man who, however unwisely, has put his blog where his mouth is and outsourced it. One or two readers have complained that we're not actually located in Bangalore, something we'll try and rectify in the future. If we had done this next week, I could have blogged while on vacation in Asia, which with time difference would have allowed the blog to run 24/7, demonstrating how outsourcing can release the full potential of American capitalism (to say nothing of web-based opinion journalism). And don't worry too much about our willingness to blog for no wages--so is Drezner.

If you've read our bios, there will be no prizes for guessing who the straight man is this week. So, rather than asking Reihan, "Who's on first?", let me jump in with a news item...

One of Bill Clinton's political gifts was to take at a divisive issue and frame it in a way that sidestepped traditional political faultlines. Quick example: his call for making abortion "safe, legal, and rare." That phrase epitomizes the vast American middle on the issue. One could argue that this is the core of "Third Way" politics in general -- Tony Blair's "tough on crime -- and tough on the causes of crime" would be another example.

Which brings me to Hillary Clinton and outsourcing. The good Senator from New York has managed to play both sides of the fence on this issue, blasting Treasury Secretary John Snow for suggesting that outsourcing helps the economy -- while simultaneously welcoming one of India's biggest outsourcing firms to Buffalo, NY. How to explain this? Some have accused her of lacking a firm grasp on policy issues -- but it could be that Hillary is stumbling around, trying to find a Third Way on the issue.

Which brings me to her Wall Street Journal op-ed of a few days ago. No stumbling here -- she comes up with a superior political response to offshore outsourcing -- that it's not as cost-effective as firms believe it to be:

New Jobs for New York, a nonprofit corporation focused on economic development, commissioned a study by Howard Rubin to explore the real facts on outsourcing. He found that next year, nine out of the 10 largest firms in New York are predicted to perform IT or business process work offshore. The primary reason given by 90% of these firms is "cost savings." So he analyzed these savings by category.

It turns out that the savings from outsourcing were not as large as many employers believe. While they cited average savings of 44% per outsourced job, Prof. Rubin demonstrates that the actual figure approximates 20%. Lower wages are only one part of the offshore equation. When you tabulate all the costs, our nation is more competitive than employers think.

You're probably asking, "How can we compete against countries where a computer programmer's wages are $10,000 per year while the equivalent U.S. wage is $100,000?" The explanation is that additional costs must be added to the offshore wages themselves to get the complete picture on costs. Companies have to spend money for planning, offshore transition, vendor selection, technology, communications, offshore management, travel and security. Many employers do not take every one of these costs into consideration. Add up all the costs and suddenly a call-center worker with a raw wage of $5 an hour offshore has a true cost of $17. And that's why we have the potential to be competitive.

The article then goes on to propose many of the things John Cassidy said wouldn't be discussed by politicians in his New Yorker essay. The political brilliance of this argument is that it allows the junior Senator from New York to blast the trend of offshore outsourcing without having to agitate for inane policy solutions like protectionism. Her argument is that if firms only realized the true costs, they wouldn't outsource to Bangalore, but to Buffalo instead.

Now, I'm pretty sympathetic to Clinton's argument -- it's a definite improvement over the position taken by the senior Senator from New York. It also buttresses a point I made in "The Outsourcing Bogeyman":

It is also worth remembering that many predictions [about the explosion of outsourcing] come from management consultants who are eager to push the latest business fad. Many of these consulting firms are themselves reaping commissions from outsourcing contracts. Much of the perceived boom in outsourcing stems from companies' eagerness to latch onto the latest management trends; like Dell and Lehman, many will partially reverse course once the hidden costs of offshore outsourcing become apparent.

My one caveat: eager to learn more, I checked out the New Jobs for New York web site to find the Howard Rubin study. I found this press release and this summary of the Rubin report (co-authored with Patricia Jaramillo). What I did not find was any hard numbers to back up Rubin's findings. It's not that they don't necessarily exist -- I just couldn't find any copy of the full report, and the summaries provided no data on this point.

Lest I be accused of not doing enough shoe-leather reporting, I, like, actually picked up the phone and called New Jobs for New York. The executive director was very friendly, and suggested I contact Rubin directly. I've left a message with him.

Should I see hard numbers, the readers of danieldrezner.com will be the first to know.

In the meantime, consider this a case study of how Hillary is learning from Bill.

UPDATE: Rubin might have his own consulting prejudices -- according to Forbes, he's a VP for Meta Group.

I got a lot of e-mail requests to discuss John Cassidy's New Yorker story from last week on offshore outsourcing. I resisted them because Cassidy's essay was not on the New Yorker website, so it seemed like it would have been weird. But the e-mails kept coming. So here goes:

What's weird about the piece is that it reads like Cassidy wrote it back in April and then put it in a desk until The New Yorker had some pages to fill. For example, the estimate Cassidy cites from Forrester Research on the number of jobs that will be outsourced was revised upwards in May -- which would bolster Cassidy's point -- but the older figure is used.

This paragraph is emblematic of the problems with the story:

While outsourcing isn't the only reason that business are so reluctant to hire American workers -- rising productivity and a lack of faith in the recovery are others -- it is certainly playing some role, a fact that corporate executives are much more willing to admit than economists are. Moreover, economists tend to overstate the theoretical case for outsourcing, arguing that trade liberalization is always and everywhere beneficial, which simply isn't true.

OK, let's skip over the fact that 70% of those corporate execs have said they have no immediate or future plans to outsource. What's important is that Cassidy's small caveat about productivity gains allows him to commit a major fudge, blaming outsourcing for the larger, lackluster employment picture. This simultaneously ignores the importance of productivity and conveniently ignores the fact that the employment data doesn't back Cassidy up.

Don't take my word for it, though -- Charles L. Schultze has more on this in a Brookings Institution policy brief. Schultze makes important caveats about the official data, but nevertheless concludes:

If the disappointing employment growth of the past several years came about because America's production needs were being met to an increasing degree by production from foreign rather than American workers, as Americans increased the share of consumer and capital goods they bought from abroad, or as domestic firms expanded the share of their operations located abroad, this should show up as a rise in the inflation-adjusted value of imports relative to GDP. During the 1990s the import share rose steadily, but apart from some short-term fluctuations the share leveled off thereafter. It is difficult from this data to see how changes in the combination of import substitution and offshoring could have played a major role in explaining America's job performance in recent years.

The estimates on imports of goods come from relatively comprehensive U.S. customs data. Conceivably, the surveys of business firms used by the Department of Commerce to collect data on service imports may be missing some of the increase attributable to offshoring.... But the absolute size of any such errors in the import data cannot realistically be anywhere near large enough to alter the earlier conclusion that the speedup in productivity growth was by far the dominant factor behind the disappointing job growth. (emphasis added)

Both Schultze and Cassidy state that outsourcing and productivity gains can cause the gross destruction of jobs. However, Cassidy wants the reader to believe that outsourcing is the real villain -- Schultze shows that it isn't.

Cassidy closes with the following paragraph:

If the United States is to meet the challenge posed by a truly global economy, it will have to insure that its scientists are the most creative, its business leaders the most innovative, and its workers the most highly skilled -- not easy when other nations are seeking the same goals. A truly enlightened trade policy would involve increasing federal support for science at all levels of the education system; creating financial incentives for firms to pursue technological innovation; building up pre-school and mentoring initiatives to reduce dropout rates; expanding scholarships and visas to attract able foreign students and entrepreneurs to these shores; and encouraging the development of the arts. In short, insuring our prosperity involves investing in our human, social, and cultural capital. But don't expect to see that slogan on a campaign bumper sticker anytime soon.

Brad DeLong has his own problems with this closing. For me -- beyond the dubious linkage between arts funding and outsourcing -- what's missing from the Cassidy piece is a recognition of American strengths in innovation for the future. Hell, even the Progressive Policy Institute -- in a policy brief on offshoring by Richard Atkinson that reads like Cassidy's wish list no less -- recognizes this fact:

The next wave [of innovations] is not just about technology. It is also about innovative new business models, which the United States is particularly well positioned to develop because of its unique combination of information technology (IT) talent, entrepreneurial energy, and flexible capital markets. India boasts high-level computer programmers, but innovative companies that combine IT with creative business models, such as Yahoo!, Amazon.com, Akami, and Google, were all developed in the United States.

When the Progressive Policy Institute agrees with the former head of the McKinsey Global Institute, it does suggest that this is kind of important.

Also on this point, Tammy Joyner has a long Atlanta Journal-Constitution story on the hidden costs that can come from offshoring -- in large part due to the infrastructure deficiencies that Cassidy elides in his essay.

Two other offshoring stories worth checking out:

1) Bruce Bartlett has a policy brief on insourcing vs. outsourcing.

2) William Bulkeley has a Wall Street Journal story on how IBM is adopting new policies to reduce layoffs due to offshore outsourcing. Key line: "IBM is increasing employment for the first time in three years. Earlier this year it said it expected to boost world-wide employment by 15,000 to 330,000 in 2004, including a net U.S. employment boost of up to 2,000, despite offshoring."

I've taken Josh Marshall to task for essentially outsourcing the thought behind his lone outsourcing post to the Kerry campaign.

However, it now turns out that there was an error in the underlying story -- a speech that U.S. Chamber of Commerce President and CEO Thomas Donohue gave to the Commonwealth Club about offshore outsourcing. Here's how the Associated Press initially reported the story:

Donohue acknowledged the pain for people who have lost jobs to offshoring - an estimated 250,000 a year, according to government estimates. But pockets of unemployment shouldn't lead to "anecdotal politics and policies," he said, and people affected by offshoring should "stop whining."

"One job sent overseas, if it happens to be my job, is one too many," Donohue said. "But the benefits of offshoring jobs outweighs the cost."

The Associated Press now admits it was in error:

In a story June 30 about a speech by U.S. Chamber of Commerce President Tom Donohue to the Commonwealth Club of California, The Associated Press erroneously reported that Donohue said people affected by offshoring should "stop whining."

According to a transcript of the speech provided by the chamber, Donohue said of offshoring, "Let's not whine."

Let me stress here that this is entirely the fault of the Associated Press; neither the Kerry campaign nor Marshall can or should be blamed for relying on the AP wire.

However, I do wonder if those in the blogopsphere who linked to this story will post the correction -- because it drastically alters the perception of what Donohue said. [Why?--ed. Because the new formulation sounds far less haughty. Iinstead of Donohue addressing others, the pronoun used is first person plural, implying that he is not placing blame.]

I'd like to congratulate Joshua Micah Marshall for improving his productivity by recycling a John Kerry press release in his snarky post on offshore outsourcing. Sure, some bloggers might have dug a bit deeper to get more information -- like the fact that John Kerry's policy proposals on outsourcing would have zero effect on the job losses Marshall broods about. And sure, by completely outsourcing his research to Kerry's campaign, Marshall may have missed just a few of the nuances involved in the debate on offshore outsourcing -- but Marshall did post first on this. Congratulations, Josh!!

[Hey, didn't you just do this as well?--ed. Yeah, but I said it was a press release when I did it.]

More seriously, in the wake of mediocre job numbers for June, Paul Blustein has a Washington Post story that's worth checking out on the topic. The lead paragraphs look scary:

A report by an influential consulting firm is exhorting U.S. companies to speed up "offshoring" operations to China and India, including high-powered functions such as research and development.

In blunt terms, the report by the Boston Consulting Group warns American firms that they risk extinction if they hesitate in shifting facilities to countries with low costs. That is partly because the potential savings are so vast, but the report also cites a view among U.S. executives that the quality of American workers is deteriorating.

However, the story goes on to quote some interesting research findings:

Matthew J. Slaughter, a professor at the Tuck School of Business at Dartmouth, pointed to research he published in March using Commerce Department data to show how offshoring can have a positive impact on U.S. job growth, as part of the "churn" in employment that constantly eliminates jobs but also adds them.

Although U.S. multinationals expanded their overseas payrolls by 2.8 million from 1991 to 2001, in moves that often involved factory closures and layoffs in the United States, they expanded their U.S. employment levels by nearly 5.5 million, according to Slaughter's study. That is partly because as such firms expand the scale of their operations abroad, they need more personnel at home to handle functions such as marketing, logistics, finance and product design. For similar reasons, McKinsey & Co., one of Boston Consulting's main rivals, has estimated that for every $1 invested abroad by U.S. companies, the U.S. economy gains $1.14, which can be plowed into job-creating enterprises.

Click here for a case study that buttresses Slaughter's aggregate data. And here's the relevant table:

If I wasn't busy trying to get tenure and all that, I'd be sorely tempted to write a quickie paperback with that title. Never mind Dobbs' tendentious reporting about outsourcing -- now he's got bigger ethical quandries.

Back in March, James Glassman pointed out in Tech Central Station that Dobbs was praising companies like Boeing and Washington Mutual as worthy stocks in his eponymous investment letter -- even though he was bashing these very same companies for offshore outsourcing on his CNN show, Lou Dobbs Tonight.

Last week, Zachary Roth at CJR's Campaign Desk followed up on this tendency of Dobbs to say one thing to his viewers and another thing to readers of his investment letter:

Unlike most investment advisors, Dobbs goes beyond talking up the earning potential of these companies. He typically goes out of his way to praise them as good corporate citizens. The newsletter keeps a running tally of the companies profiled, under the heading, "The following companies have been featured in the Lou Dobbs Money Letter as those 'doing good business with good people.'" The appeal is alluring: You're not just buying a smart investment choice, you're buying a piece of good citizenship.

Dobbs devoted a column in the March issue to touting the prospects of the Minnesota-based Toro Company, which makes outdoor landscaping-maintenance equipment. He told subscribers that Toro was a "long-term wealth-builder," and praised Toro's "formal code of ethics, something I think is sorely needed at more of America's companies," and its "...exemplary corporate governance structure, which aligns the interests of shareholders, employees, and customers." He concluded his interview with Toro CEO Kendrick Melrose by frankly telling him, "I like the way you treat your shareholders, employees, and customers."

One wonders whether Dobbs' admiration extends to Toro's 2002 decision to move 15% of its workforce -- about 800 jobs -- to Juarez, Mexico. Indeed, CEO Kendrick Melrose might be interested to know that Toro appears on Dobbs' own list of companies that are "exporting America."

And Toro is not alone. Of the 14 companies Dobbs has highlighted for investors since starting his newsletter last year, eight appear on his CNN website as companies that outsource jobs (emphasis added).

Read both Glassman and Roth. We here at danieldrezner.com are appalled -- there are actually people out there who would pay $398 a year for Lou Dobbs' investment advice?! To be fair, however, Glassman does point out in another column that on his TV show, Dobbs is the perfect anti-predictor when it comes to investment decisions.

Amazingly, Dobbs is proving to be somewhat two-faced in his response to the Campaign Desk post. In a follow-up post, Roth writes, "When we contacted him, Dobbs was unrepentant, saying that he didn't see a problem with using one hand to reprimand companies for outsourcing, while using the other to promote the same firms." However, when the Wall Street Journal came a callin', Dobbs changed his tune:

In an interview, Mr. Dobbs said he would change his newsletter in response to critics' concerns. In the future, Mr. Dobbs said, every examination of a company and every interview in the newsletter will include mention of that business's offshoring record. "It makes absolute sense," Mr. Dobbs said. "If this is a concern -- and it certainly is a concern of people -- I will respect that. It's something I will begin implementing in the newsletter."

Lou, Lou, Lou -- it's never the original scandal that brings you down -- it's the cover-up to the scandal.

I'll give Roth the final word of this post:

It's nice that Dobbs will now inform the thousands of subscribers to his newsletter about the offshoring records of his featured companies. It would be even nicer if he informed the much larger number of people who watch his anti-outsourcing crusade on CNN that he promotes some of the companies on his "exporting America" list.

With the BLS report, I suspect I'll have little need to post on offshore outsourcing for some time -- no doubt inspiring a sense of relief among regular readers.

However, before I get off my outsourcing high horse, it's worth noting that the phenomenon is not limited to the for-profit sector -- now the Catholic Church is getting in on the act. Saritha Rai has the details in the New York Times:

With Roman Catholic clergy in short supply in the United States, Indian priests are picking up some of their work, saying Mass for special intentions, in a sacred if unusual version of outsourcing.

American, as well as Canadian and European churches, are sending Mass intentions, or requests for services like those to remember deceased relatives and thanksgiving prayers, to clergy in India....

In Kerala, a state on the southwestern coast with one of the largest concentrations of Christians in India, churches often receive intentions from overseas. The Masses are conducted in Malayalam, the native language. The intention - often a prayer for the repose of the soul of a deceased relative, or for a sick family member, thanksgiving for a favor received, or a prayer offering for a newborn - is announced at Mass.

The requests are mostly routed to Kerala's churches through the Vatican, the bishops or through religious bodies. Rarely, prayer requests come directly to individual priests.

While most requests are made via mail or personally through traveling clergymen, a significant number arrive via e-mail, a sign that technology is expediting this practice.

In Kerala's churches, memorial and thanksgiving prayers conducted for local residents are said for a donation of 40 rupees (90 cents), whereas a prayer request from the United States typically comes with $5, the Indian priests say.

Bishop Sebastian Adayanthrath, the auxiliary bishop of the Ernakulam-Angamaly diocese in Cochin, a port town in Kerala, said his diocese received an average of 350 Mass intentions a month from overseas. Most were passed to needy priests.

In Kerala, where priests earn $45 a month, the money is a welcome supplement, Bishop Adayanthrath said.

Thanks to alert danieldrezner.com reader R.S. for the link.

CNN's Chris Isidore provides the most in-depth coverage of the BLS report showing that offshore outsourcing is responsible for a piddling number of lost jobs. Among other things, he has the only story I've seen that actually quotes anyone from the BLS.

Isidore's story provides a lovely contrast with to how fellow CNN employee Lou Dobbs ran with the same information on his show. Let's compare and contrast!

Isidore first:

Only a small portion of jobs lost in the first quarter were due to outsourcing of work overseas, according to a government report Thursday that's already being questioned by critics of the Bush administration.

The Bureau of Labor Statistics (BLS), in its first look at layoffs due to the relocation of work, identified only 4,633 jobs that were lost due to relocation of work overseas during the first quarter.

The jobs lost to overseas relocations were outweighed by 9,985 jobs lost due to relocation of work within the United States.

And both types of relocations made up just a tiny fraction of the mass layoffs that accounted for the loss of 239,361 jobs in the quarter.

The number of jobs lost to overseas relocations equals 2.5 percent of overall layoffs in the quarter, excluding seasonal job losses, while the domestic job relocations accounted for another 5.4 percent....

Josh Livens, an Economic Policy Institute economist, and critic of the Bush administration and corporate outsourcing of work overseas, said he is pleased the BLS has started collecting this survey data. But he's concerned it will be misused to minimize the impact of overseas outsourcing.

"It's interesting for a number of reasons, but it doesn't shed a lot of light on what's happening in the broader job creation and destruction picture," he said.

Read the whole thing -- Isidore does a good job of explaining the caveats to the BLS numbers, as well as giving critics an opportunity to make their points.

Here's how Dobbs treated the same information:

The government for the first time is beginning to track the number of American jobs lost to cheap foreign labor markets. A Department of Labor report released today finding that more than 4,600 American jobs were exported to those cheap foreign labor markets in the first three months of the year.

That report, however, is certainly incomplete. It does not, for example, count every job lost to a foreign worker. Companies that laid off fewer than 50 employees are not even included, and companies that employ fewer than 50 people in total are not included as well in this first government effort.

But it is certainly at least a long-awaited, much-needed beginning.

The government study also confirmed what we've been reporting here for more than a year, that the manufacturing sector has been devastated by the export of American jobs to cheap overseas labor markets. While corporate America increases its reliance on cheap foreign labor, a new report finds that outsourcing simply doesn't pay.

Lisa Sylvester reports from Washington.

LISA SYLVESTER, CNN CORRESPONDENT (voice-over): The survey by the Bureau of Labor Statistics found off-shoring is still in its early stages with less than 3 percent of all job loss due to overseas outsourcing. But the trend is expected to grow.

A survey by "CFO" magazine asked corporate managers who have already sent work overseas whether they will increase off-shoring in the next two years. Sixty-four percent said yes. And white-collar jobs are increasingly in jeopardy.

To be fair, Dobbs and Sylvester did not out-and-out lie in their version of events. They just left out two one minor details: 1) The BLS survey suggests that the percentage of jobs lost due to offshoring was less than 2.5% of the total (sorry, my screw-up -- Sylvester did mention this -- Dobbs didn't); and 2) That cited CFO survey showed that 70% of respondents had no present or future plans to engage in any offshore outsourcing.

We here at danieldrezner.com salute Lou Dobbs for his unique ability to slant data that flatly contradicts his hypothesis -- as well as CNN's other reportage. Way to go Lou!!

For other treatments of this story, check out Paul Blustein in the Washington Post, as well as the New York Times and Financial Times. The Washington Post also has a nice round-up of other press treatments.

One of the problems with the outsourcing debate is that the estimates about job losses due to offshoring are mostly coming from management consultants, who appear to be basing those numbers on some really shoddy guesstimates. Official data collection from the Bureau of Labor Statistics didn't sem to directly address this phenomenon. My back-of-the-envelope calculations from the BLS Mass Layoff data suggested that the number of people laid off due to offshoring was around and about 3% of total layoffs.

Starting this calendar year, however, the BLS decided to ask employers whether offshore outsourcing -- or onshore subcontracting that led to offshore outsourcing -- was the reason for the mass layoff.

Data for the first quarter are now available for extended mass layoffs -- and it turns out that my 3% estimate was incorrect. This is from the Bureau of Labor Statistics press release:

Of the 239,361 private sector nonfarm workers who were separated from their jobs for at least 31 days in the first quarter of 2004, the separations of 4,633 workers were associated with the movement of work outside of the country, according to preliminary data. Domestic relocation of work--both within the company and to other companies--affected 9,985 workers....

In establishments that had layoffs related to the movement of work, the average size of a layoff was 135 workers. This compares with an average of 199 for all establishments that had extended mass layoffs in the first quarter of 2004....

Sixty-eight percent of the layoff events involving the movement of work and 65 percent of the laid-off workers were from manufacturing industries during the first quarter of 2004.

So, to conclude -- the percentage of jobs lost due to mass layoffs -- in turn due to offshore outsourcing -- as a percentage of total jobs lost through mass layoffs was not 3% -- it was a whopping 1.9%. If you drop out seasonal employment, the figure rises to 2.5%. So my back of the envelope calculations from a few months ago are an exaggeration. My apologies.

The caveats -- this data does not cover two other kinds of job loss via outsourcing -- 1) Those let go due to ousourcing when fewer than 50 people were let go; and 2) Those jobs created de novo overeas that may have been created in the U.S. instead were it not for the outsourcing phenomenom.

At the same time, this data also does not cover two kids of job gains via outsourcing -- 1) Those jobs created via insourcing, when a foreign firm hires U.S. workers; and 2) Those jobs created via the budgetary savings reaped from outsourcing.

The bottom line -- offshore outsourcing is responsible for a piddling number of lost jobs.

I'll be commenting on these figures this evening for Nightly Business Report on PBS. Check your local listings!!

UPDATE: Here's how Reuters plays the story:

The bulk of outsourced jobs never leave U.S. shores, the government said on Thursday in a new report suggesting concerns over American workers losing jobs to cheaper foreign labor may be exaggerated.

Nine percent of non-seasonal U.S. layoffs in the first quarter were due to outsourcing, but less than a third of the work was sent overseas, the U.S. Labor Department said in releasing new figures on mass layoffs and outsourcing.

"In more than seven out of 10 cases, the work activities were reassigned to places elsewhere in the U.S.," the Bureau of Labor Statistics said in its report on mass layoffs for the January-to-March period.

Only trouble is, the headline says "OUTSOURCING CAUSES 9% OF U.S. LAYOFFS" -- which is true but includes onshore as well as offshore outsourcing.

A while back, I blogged here and here about how American consumer behavior seems generally unaffected by the spectre of outsourcing -- i.e., Americans make choices based more on price than origin of production.

To be fair, some people do not think this way -- click here for a few examples courtesy of Newsweek. Beyond anecdotal evidence, however, what do Americans now think about outsourcing? And do these feelings affect their behavior?

Two recent polls -- one by the Employment Law Alliance ("the world’s largest independent network of labor and employment attorneys") and one by Ipsos (for the Associated Press) suggest some commonalities and cleavages on the issue.

On the one hand, the polls largely confirm that most Americans are mercantilists at heart. The Ipsos poll shows that 69% of Americans believe that outsourcing hurts the country -- and only 17% think it helps the economy. 58% of respondents in the ELA poll believe that companies outsourcing work that could be done by Americans to offshore contractors should be penalized by the US government.

At the same time, the ELA poll shows that 46% of Americans believe that offshoring has been exaggerated by the media. Still, it would be hard not to conclude that most Americans think offshore outsourcing is a bad thing.

So how does this affect actual consumer behavior? Here the answer changes. On the one hand, the Ipsos poll shows that when asked to choose between a product made in the USA and a similar one made elsewhere, 93% of Americans say that they'd buy the American product. However, if the foreign good is cheaper, that percentage falls to 54%. Furthermore, a slight plurality (38% to 35%) do not check product labels so as to "buy American."

The AP story by Will Lester goes on to suggest a generational divide in the economic reaction -- with younger folks more sanguine:

"That's not a big deal to me, where it was made," said Serena Evans, a machine operator from Hurt, Va. "I look for the cheapest product, because I barely have the money to buy it."

Evans, 24, was typical of her age group.

Nearly two-thirds, 63 percent, of those younger than 30 said they seldom if ever check to see where a product is made -- more than three times the number who do. A majority of young adults said they would buy a lower-priced product from another country over a more expensive U.S. one.

Americans 60 and older were almost twice as likely to say they usually or always check labels to see where a product is made. And by more than 2-to-1, they said they would buy an American product even if it cost more than foreign goods.

As the story concludes, "Fresh concerns about U.S. jobs being shipped overseas are not being turned into renewed public sentiment to buy American."

So, to sum up -- Americans do not like offshore outsourcing as a phenomenon -- but over time, and increasing number of them are happy to reap the benefits of it as consumers.

This is really the biggest intellectual divide on the outsourcing issue -- whether one thinks the most important effect of offshoring is on employment or on consumption. Most Americans say the former but do not act on it. The data I've seen suggest that outsourcing's effect on employment is negligible -- and the effect on consumption is a positive one.

It seems that California is not the only state that is coming to grips with the costs that come from outlawing offshore outsourcing.

The AP's Allen Breed reports that in the wake of efforts to block the offshore outsourcing of government contracts, some state legislatures don't like the pricey hangover:

Governors and legislators in two-thirds of the states have ordered or proposed antioutsourcing actions.

But many of those efforts at "economic patriotism" have run headlong into another time-honored American tradition: taxpayers' demands that the government give them the most bang for their buck....

When Kansas officials learned that food stamp questions were being answered by workers in India under a contract with an Arizona company, state senators added language to the budget requiring the work be done in the United States.

But the language was deleted when negotiators learned it would boost the state's costs by $640,000, about 38 percent.

The Boston Globe's Diane E. Lewis reports on the effect that offshore outsourcing is having on IT salaries:

Technology specialists with hot skills continue to command top salaries and bonuses despite the outsourcing of some information technology jobs to India, Russia, Ireland, and other countries, according to a report released today.

Offshore outsourcing has had little impact on the salaries of those with critical skill sets such as senior network architects or senior database management staff, said the report by the META Group, based in Stamford, Conn. Based on a compensation survey of 650 large and midsized firms with at least $200 million in annual revenue, the report includes salary data for 180 information technology positions in 14 industries.

The technology research firm found that technology workers with general skills are more likely to experience stagnant wages than those whose expertise is in demand. The survey also found that 19 percent of the companies polled outsource IT work to foreign countries. Of those, the majority send jobs to India.

Opponents of outsourcing jobs offshore have maintained the practice causes layoffs and depresses salaries in the United States, forcing many full-time IT professionals to seek work in other professions or turn to temporary contract work.

The IEEE-USA, which represents electrical engineers, electronics engineers, and computer specialists, declined to comment on the META Group findings yesterday. The industry group has spoken out against the outsourcing of IT jobs. A spokesman said the organization needed time to study the report.

Maria Schafer, the report's author and a senior program director at META Group, said salaries for IT specialists are starting to return to their 2000 levels.

Read the whole article -- and you can download the executive summary of the META group report by clicking here (registration required).

Given that 2000 was the peak of dot.com hysteria, the salary rebound is pretty impressive.

UPDATE: This elaboration on salary structure comes from page 11 of the executive summary:

1) companies paying staff this much more than others in the organization are very eager to retain these individuals; 2) there is a continuing and strong market for experienced individuals with critical skills; and 3) the job market is picking up. The rate of increase in salaries has slowed, but IT staffs have held onto salary levels because their role is necessary to the organization. There are many more available workers — due to the net effects of continuing vendor-side layoffs in the high-tech sector, fewer opportunities for consulting, and the overall sluggishness in companies of all sizes — yet the issue of quality in the available labor pool is compounded by a continuing lack of some skills (mainly in the highly specialized areas that represent emerging technology needs, such as wireless, security, and data management).

As for the magnitude of offshoring (from page 16):

Of the 20% of organizations that are currently engaged in sourcing (or siting) labor offshore, the percentages vary substantially for how much companies are deploying labor this way. Forty percent of this number have only 5% or less of their total workforce deployed offshore.

Practicing what I preach, instead of posting my latest mini-essay on offshore outsourcing here at danieldrezner.com, I've outsourced it to... GlennReynolds.com. Regular readers will recognize some of the material, but there's a lot of new stuff as well!

Go check it out.

Not often, but every once in a while, opponents of outsourcing manage to implement policy designed to thwart the subcontracting of tasks overseas. We here at danieldrezner.com feel that they should be congratulated for these efforts, as well as the transparently obvious economic benefits that such policy measures bring to our great country.

So let's hear it for the state of California's anti-outsourcing procurement rules, which are having quite an effect on the state's efforts to rebuild the Bay Bridge. Jean-Paul Renaud of the Los Angeles Times reports:

When officials six years ago unveiled their plans to rebuild portions of the earthquake-damaged San Francisco-Oakland Bay Bridge, they said the span would rival even the famed Golden Gate Bridge.

They envisioned a sleek, modern design that would have at its center a 525-foot suspension tower rising from San Francisco Bay, providing a distinctive addition to the area's skyline.

But this gem is proving to be costly. The elaborate design, praised at its inception, now is being blamed for ballooning costs and seve