I continue to be amazed at how quickly the buzz of offshoring is spreading. Most people I know are either just beginning to experiment with it, or are in the process of considering whether to experiment with it. The hotness of the topic is undeniable. CNet reproduces a good article from the McKinsey Quarterly:

Widely cited figures predict that by 2015, roughly 3.3 million U.S. business-processing jobs will have moved abroad. As of July 2003, around 400,000 jobs already had.

Other research suggests that the number of U.S. service jobs lost to ‘offshoring’ will accelerate at a rate of 30 percent to 40 percent annually during the next five years. Vast wage differentials are prompting companies to move their labor-intensive service jobs to countries with low labor costs: For instance, software developers, who cost $60 an hour in the United States–the country that does the most offshoring of jobs–cost only $6 an hour in India, the biggest market for offshore services.

The one-two punch dynamic of offshoring can’t be underestimated. Just as we’re recovering from the tech recession and people are starting to hire again, we get this! It seems like tech professionals will never enjoy the write-your-own-ticket status they had just a few painful years ago.

But focusing the offshoring debate on job losses misses the most important point: Offshoring creates value for the U.S. economy by creating value for U.S. companies and freeing U.S. resources for activities with more value added. It creates value in four ways:

Wow, it’s as if the article said that on cue. It goes on to describe positive economic dynamics of cost savings, new revenue, repatriated earnings, and redeployed labor.

It is intuitive to free-market folk that Everything Will Work Out Better if we let labor move to where it is most efficient. We should expect displaced American workers mostly to find new jobs, and American companies to operate more efficiently and to generate more wealth to be spread around to their increasingly democratized investors. I think only fairly hard-core leftists and hard-core protectionist paleoconservatives disagree. The center-left, the center, and almost all of the right are on board here.

The full article explains:

In this way, offshoring, far from being bad for the United States, creates net value for the economy. It directly recaptures 67 cents of every dollar of spending that goes abroad and indirectly might capture an additional 45 to 47 cents–producing a net gain of 12 cents to 14 cents for every dollar of costs moved offshore.

That means offshoring makes us richer, which is good, all things being equal. Naturally, it wouldn’t make me feel a whole lot better if my job got moved offshore and I had a hard time finding a good replacement, which historically has happened to 31% of those displaced:

The total possible wealth creation does not, of course, ease the plight of people who lose their jobs or find lower-wage ones. The statistics showing that 69 percent of those who lost jobs in the nonmanufacturing sector were reemployed also show that 31 percent were not fully reemployed. And while, on average, those who found new jobs secured similar wages (96.2 percent of their previous wage), 55 percent took lower-paid jobs. As many as 25 percent took pay cuts of 30 percent or more.

These issues must be addressed. Training programs and generous severance packages, perhaps accompanied by innovative insurance programs, are among the measures that could mitigate the effects of the transition without great cost to the economy. And while many people will undoubtedly suffer short-term disruption, it should be set against the consequences of resisting change: If U.S. companies can’t move work abroad, they will become less competitive–weakening the economy and endangering more jobs–and miss the chance to raise their productivity by focusing on the creation of jobs with higher value added.

And there you have it. It’s painful, it’s scary, and it comes at the worst possible time, but the piper will collect his bill. Labor practices that are inefficient on a global scale will not last forever. Electrons in high-energy orbitals simply do not stay there forever. We can be nimble and move jobs around now, or we can let our tech industry become decadent and slide slowly into global irrelevance.

Maybe I’ll start a small consulting firm specializing in architecting and managing mid-size projects for which the bulk of the development labor is offshored. See?

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• Posted by Tim on Monday, October 27, 2003 at 8:24:53 am PST
• Category: Miscellany
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