September 29, 2004
Where Did All the Jobs Go? Nowhere
For about a year now, Americans have become fixated on the idea that the Internet had enabled firms to easily subcontract business services - including call centers and software development - overseas. I've read countless newspaper articles with anecdotes about American computer programmers who trained their Indian replacements and were then let go. The phenomenon landed simultaneously on the covers of Time, The Economist and BusinessWeek.
Politicians have been equally interested. On this page in January, Senator Charles Schumer, Democrat of New York, suggested that outsourcing rendered the law of comparative advantage null and void. When I.B.M. announced plans that month to fire up to 5,000 American workers and "offshore" their jobs to low-wage countries, politicians and pundits fell all over each other to denounce the company. When N. Gregory Mankiw, the chairman of the president's Council of Economic Advisers, said that outsourcing was simply another form of trade, Republicans and Democrats alike blasted him for his naïveté.
Not surprisingly, all this coverage had an effect on public opinion. This month a poll by Zogby International for the Foreign Policy Association found that 71 percent of Americans believed outsourcing was hurting the economy. It also found that 62 percent of American workers believed the federal government should penalize companies that send work offshore.
Now, however, we can add some actual figures to the overheated debate. The Government Accountability Office has issued its first review of the data, and one undeniable conclusion to be drawn from it is that outsourcing is not quite the job-destroying tsunami it's been made out to be. Of the 1.5 million jobs lost last year in "mass layoffs'' - that is, when 50 or more workers are let go at once - less than 1 percent were attributed to overseas relocation; that was a decline from the previous year. In 2002, only about 4 percent of the money directly invested by American companies overseas went to the developing countries that are most likely to account for outsourced jobs - and most of that money was concentrated in manufacturing.
The data did show that from 1997 to 2002, annual imports of business, technical and professional services increased by $16.3 billion. However, during that same half-decade, exports of those services increased by $20.5 billion a year. In 2002 alone, the United States ran a $27 billion trade surplus in business services, the sector in which jobs are most likely to be outsourced. The G.A.O. correctly stressed that it is impossible to compute exactly how many jobs are lost because of outsourcing, but unless its figures are off by several orders of magnitude, there's no crisis here.
Many companies moving jobs overseas have also received a bum rap. Lost in all the clamor about I.B.M.'s outsourcing plan was the company's simultaneous announcement that it would add 5,000 American jobs to its payroll. For the second quarter of this year, the company reported a 17 percent increase in earnings, allowing it to trim its outsourcing plan by a third and raise its overall hiring plans by 20 percent. The conclusion is obvious: I.B.M.'s outsourcing of some jobs helped it reduce costs, increase earnings and hire more American-based workers.
None of this is to dismiss the pain endured by those who lose their jobs to lower-paid workers abroad. But the magnitude of these job losses must be placed in the proper perspective. Technological innovation is responsible for a far greater number of lost jobs than outsourcing. The Bureau of Labor Statistics estimated that in the first quarter of this year 4,633 workers were laid off because of offshoring. In the same period Kodak, for example, announced layoffs of 15,000 workers because the growth of digital photography reduced demand for film. Few Americans suggest technological innovation be stifled for the sake of preserving old jobs. Yet during election years, restrictions on outsourcing are considered fair game.
This is not to say there aren't steps we can take to help those who lose their jobs. For example, Trade Adjustment Assistance, a federal program to compensate and retrain workers displaced by import competition, at present covers only those in manufacturing. It should be expanded to include service employees.
The American economy has some formidable challenges in the coming decades - rising health care costs, a ballooning federal budget deficit, failing schools and the need for greater investment in new technology and innovation. The voters should concentrate on the candidates' plans to overcome those obstacles, not on needless hoopla over outsourcing.
Daniel W. Drezner is an assistant professor of political science at the University of Chicago.