By Gerald A. Daquila, Ph.D. (Candidate)
The Chicago School of Professional Psychology
Offshoring or offshore outsourcing has entered the modern lexicon following globalization. It refers to jobs that are outsourced to countries outside the United States that are normally done within the border (Levine, 2012). Enabled by technological advances, these jobs not only include manufacturing, but also, service jobs such as stock market research for financial firms, legal online database services, call centers, payroll, and other back-office related tasks (Bardhan & Kroll, 2003).
There are no official estimates that exists, but BLS, the Bureau of Labor Statistics (BLS, 2004) regularly publishes out-of-country mass layoffs as a result of company closures. According to its 2004 estimates, there are approximately 29-30 million jobs, or 20% of total US employment that are vulnerable to such large-scale displacements (BLS, 2004). Forrester Research, as reported by PBS in November 2002, estimates that another 3.3 million jobs will be lost due to outsourcing by 2015 (PBS, n.d.; Aspray & Marklund, n.d.). Bardhan and Kroll (2003) write that the share of ‘imported’ manufacturing labor increased from 10.5% to 16.2% between 1987 and 1997, with data from high-technology manufacturing such as computers and related electronics rose from 26% to 38% (Bardhan & Kroll, 2003).
China, India, and the Southeast Asian countries are the favored destinations for these outsourced jobs. China has captured bulk of manufacturing jobs, propped by an artificially low currency, the Chinese Yuan vs. the US dollar (Aspray & Marklund, n.d.). India has become the software programming capital of the world; while the Philippines, on the other hand, has emerged as the front-runner for voice-based call-center jobs. The wide use of English language in India, the Philippines, Malaysia and South Africa has facilitated the creation of a global village where 24x7x365 service has become the norm (Bardhan & Kroll, 2003).
Amidst this exodus, US policymakers have begun to be alarmed and have started initiatives to stem the tide. There are currently more than 20 federal bills that have been introduced in Congress, none of which have yet passed (Aspray & Marklund, n.d.). Most, if not all, have protectionist underpinnings, which, as we shall see, may be moot in the face of an increasingly globalized world.
Researchers have identified the jobs that are most vulnerable to being outsourced. These are routinary jobs that can be performed remotely from customers. There are no extensive research of the total population that is potentially impacted, but in another analysis by BLS (2007), it estimated that approximately 30 million jobs are vulnerable, representing 20% of total US employment (Levine, 2012). There are several players or stakeholders that are either directly or indirectly affected by outsourcing (Aspray & Marklund, n.d.).
Workers. What began as a ‘blue collar’ phenomenon with manufacturing workers, later became a ‘white-collar’ trend following the exodus of computer programmers and call center jobs to low-wage countries. With the rapid pace of advancement in telecommunications technology (i.e., computers, bandwidth), once remote countries have become readily accessible. This modern-day ‘bridge’ connecting the first- and third-world countries have made doing backroom operations feasible and cost-effective.
Labor Unions. Unlike the more organized labor unions in Germany and France, the labor unions in America have seen their declining influence. Labor laws in these European countries, for example, have strict labor codes that structurally limit the export of jobs to low-wage countries. As well, there are not too many German- or French-speaking countries that could absorb these offshored jobs even if the labor conditions are conducive to offshoring (Aspray & Marklund, n.d.).
Business. Companies have resorted to outsourcing as a means to become cost-competitive in an ever increasing competitive market place. It’s the law of comparative advantage (Porter, 1998) that is at work on a global scale. Leaders of businesses have to make these hard choices not because they lack social conscience, but because of economic reasons and the shareholders’ demand to find the greatest value for every dollar invested in their business.
Science and Technology Students. According to Forbes, there will be 2.8 million jobs opening in science, technology, engineering and mathematics (STEM) by 2018 of which 800,000 of these would require a master’s degree (Lenzner, 2013). Yet, the American-born students that are entering in these critical disciplines are dwindling. The decline is partly due to a false belief that these types of jobs can easily be outsourced (Aspray & Marklund, n.d.). The truth, as we shall discuss, is nowhere close.
Many of the high-technology start-up businesses in the US were started by engineers and entrepreneurs who were of foreign origins (Aspray & Marklund, n.d.). Many of these immigrants came into the country as foreign students and founded some of the biggest technology companies that the world has now known—eBay, Google, Brightstar (Lenzner, 2013). According to Forbes, 25% of high-technology companies that were founded between 1995 and 2005 have at least one immigrant founder (Lenzner, 2013). This record goes back centuries with Proctor & Gamble (1837), Pfizer (1849) and U.S. Steel (1901) being started by their founders with foreign descents (Lenzner, 2013).
Legislators. Amidst the popular clamor to ‘protect’ local jobs, legislators have become the main players in adjudicating who wins or loses in this outsourcing game. Unlike in Germany or France where organized labor are more active, US legislators (both the executive and legislative branches) have stepped in to fill the policy void. However well-intentioned, these bills are often short-term, and ‘protectionist’ in orientation, and ignore the laws of global supply and demand (Aspray & Marklund, n.d.).
The 20 plus bills that are in various stages of policy debates, and therefore, have not been tested in courts can be summed as follows:
Tax Equalization. Because of the relatively high corporate tax in the US, multinational companies prefer to ‘park’ their profits in so-called ‘tax haven’ countries or territories where they are not taxed at all, or if they are, at a much lower rate than the US’s. Former presidential candidate, John Kerry for example, recently introduced a bill changing the timing at which profits could be taxed, i.e., at the year the profits are incurred vs. the time they are being repatriated (Aspray & Marklund, n.d.).
US Visa Policy. The issuance of H-1B and L-1 visas to foreign workers was intended to mitigate the skills gap that was at issue during the technology boom of the 1990s to early 2000s. Started in 1991, the USCIS or the US Immigration Service allocates 65,000 temporary worker visas annually, but this facility has been ‘abused’ by some BPO companies with Indian descent. Critics argue that these companies are using cheap Indian software programmers at US-labor rates, which is another form of ‘dumping’ (i.e., the selling of goods at below market value). To curb this practice, Sen. Christopher Dodd (D-CT) and Rep. Nancy Johnson (R-CT) have introduced bills to limit the issuance of these visas. The business community isn’t happy, arguing that there is a lack of young people who have science and engineering backgrounds to support their labor requirements (Aspray & Marklund, n.d.).
Retraining. A third approach that is gaining ground is retraining for displaced workers. Originally passed in 1962 as ‘Trade Adjustment Assistance Act’ (TAA), this law provides re-training assistance and extension of unemployment benefits to American workers who are displaced as a result of trade readjustments. It is currently being amended to include not just manufacturing workers, but also, software programming jobs and other service workers. None of these bills has passed into law (Aspray & Marklund, n.d.).
Move to Higher-Value R&D Jobs. Capitalizing on America’s inherent advantages on innovation and creativity, there is a growing realization among scholars and business leaders that the only way to protect local jobs is to migrate to higher-value added jobs such as research and development. Whereas the US may have been the leader in technological innovation in the last 50 years, its lead is fast eroding because of structural shifts: (1) US share of worldwide science and engineering graduates with masters and doctoral degrees is declining due to declining numbers of young Americans entering into these fields of discipline; (2) US share of patent applications is on the decline, whereas Asia’s is growing seven times faster; (3) thirty-year decline as percentage of GDP in support of basic research in engineering and physical sciences; (4) twenty-year decline in US share of worldwide high-tech exports (Aspray & Marklund, n.d.).
The extent of damage wrought by outsourcing to American jobs may have caught legislators and policymakers by surprise, and the impact of globalization on the local economy may have been underestimated. Given the delicate balance between keeping jobs, and remaining competitive as a nation, policymakers are at a crossroads. On the one hand, there is the very real temptation to give in to the populist demand to raising barriers, as suggested by majority of the bills that are currently in review. Not only are these short-term solutions to a long-term challenge, but, more critically, they fly in the face of market economic forces. The more proactive stance, on the other hand, which this author suggests, is to invest more in worker retraining for higher-value added jobs like what Sweden has done.
Sweden is a small country with a highly internationalized and globalized economy, a member of the European Union. Its success with globalization can be linked to its open, and liberal trade with the rest of the world, which started in late 19th century and continued into the late 1970s (Aspray & Marklund, n.d.). While there were early attempts in the 1970s at (a) protectionist policies to thwart international competition (e.g., steel, apparel and marine industries); and (b) artificially depreciating its currency to make Swedish products look ‘cheap’ overseas, the government quickly abandoned these protectionist policies in favor of open, market-based policies. There were massive labor displacements during the early stages of the economy’s transformation, but the Swedish government stayed firm.
Today, Swedish policy response to globalization is devoid of any protectionist rhetoric and job-protection arguments (Aspray & Marklund, n.d.). In addition, the Swedish government has increased its private-public partnership and increased its total investment in advanced R&D by focusing on its top three industries where it still commands relative comparable advantage, e.g., automotive, biotech, and security (Aspray & Marklund, n.d.).
Conclusion and Recommendations
America’s painful experience with outsourcing is not entirely new. As Sweden has demonstrated, the short-term pain of rebalancing displaced workers as low-skilled jobs are lost and higher skills are created, is inevitable. The immediate temptation is to introduce protectionist laws to stem the tide, but as Sweden has shown, these initiatives ignore market forces, and are therefore, bound to fail.
The US budget deficit has burgeoned beyond the current generation’s ability to pay, and continuing the route of protectionism will only add to that deficit (Anderson, 2011). As a policy adviser, I would recommend (1) higher investments in advanced R&D, (2) expand the temporary worker visa program to mitigate the lack of high-skilled workers, (3) amend the corporate tax law to make it competitive with those of tax havens so that profits that are made overseas can be repatriated and reinvested back into the local economy (4) expand job retraining programs to cover not only displaced manufacturing workers, but also, including those from service industries. These solutions might be too painful to swallow, but, as the experience by other countries who have had a head start show, there is really no other way but to let the market forces dictate who buys what and from whom.
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Bureau of Labor Statistics (2004, 2007). Retrieved on April 12, 2014 http://www.bls.gov/mls/home.htm
Lenzner, Robert (2013). 40% of the largest U.S. companies founded by immigrants or their Children. Retrieved from http://www.forbes.com/sites/robertlenzner/2013/04/25/40-largest-u-s-companies-founded-by-immigrants-or-their-children/
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