Offshoring Issue Guide

EPI Issue Guide on Offshoring

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Updated May 2006

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An Introduction to offshoring
Key Figures
Resources

Frequently asked questions (FAQs) about offshoring

An introduction to offshoring

Recent reports of the widespread offshoring (substituting foreign for domestic labor) of white-collar jobs that were previously insulated from foreign competition have attracted much public attention. Although workers in manufacturing industries have long been exposed to foreign competition, trends such as falling communication costs, the rise of Internet commerce, and other technological advances have made a much wider spectrum of jobs vulnerable to relocation across national borders.

This issue guide aims to provide some insight into the economics of white-collar offshoring: its causes, consequences, impact on the U.S. economy, and implications for the future.

Policy implications of offshoring
Offshoring of white-collar work remains relatively modest when measured in aggregate employment flows. In some key industries, however, (software, for example) this employment impact is likely quite significant. Furthermore, the overall economic impact of offshoring is potentially enormous. Employer announcements of plans to move more white-collar jobs abroad can have an immediate effect on the on willingness of the current workforce to accept lower pay increases and to work harder. If a greater share of jobs in the United States becomes exposed to foreign competition, this could place steady downward pressure on wages of U.S. workers.

For years, policy makers and trade advocates recommended training and the acquisition of technical skills as the remedy for the depressing wage effects of trade on blue-collar workers' wages. This prescription was always insufficient, and the recent trend toward offshoring white-collar work just serves to emphasize this.

The challenge to policy makers in the United States is to make sure the potential benefits to be gained from trade in services are widely shared. Capital-owners and corporations seemed poised to reap large benefits from service trade; public policy needs to insure that U.S. workers are compensated for the extra risk they now bearing due to competition with workers all over the globe. This compensation should take the form of large social insurance programs (publicly guaranteed health and pension benefits) as well as more-directed programs like making sure that service-sector workers displaced by trade are eligible for trade-adjustment assistance (TAA).

Furthermore, the publicly owned firms that engage in offshoring ought to at least be transparent in their business dealings, offering layoff notices and providing clear accounting of the employment in their various units, both domestic and abroad.

Less controversially, there seems to be no reason why the U.S. tax code should privilege offshoring over domestic employment, and proposals to fix any such asymmetry should be welcomed. In addition, there should be a strong consensus to fix the official data on imports of services (which has been shown to be woefully inadequate). The Bureau of Economic Analysis should be provided the resources necessary to understand why its surveys are not picking up the extent of offshoring and to collect the data necessary to correct the problem.

Frequently Asked Questions about offshoring

For more information on offshoring, read this Issue Guide's Frequently Asked Questions section.

Key figures on offshoring

Figure 1: Employment rates of college graduates, 1979-2004

Figure 2: Real hourly wages of young college graduates ages 25-35, 1979-2004

Figure 3: Real software investment and employment in software industries

Figure 4: Wages by occupation, 2004

Figure 5: Trade balance in business, professional, and technical services as percent of U.S. gross domestic product

Other offshoring resources

Key EPI Publications:

Bivens, L. Josh. 2005. Truth and Consequences of Offshoring. Economic Policy Institute Briefing Paper. Washington, D.C.: EPI.

Offshoring resources on the Web:

http://www.brookings.edu/es/commentary/journals/tradeforum/agenda2005.htm
The Brookings Trade Forum in 2005 focused on the issue of offshoring and its impact on the American and Indian economies.

http://www.techsunite.org/
TechsUnite is an association devoted to connecting IT workers to data critical to their careers. TechsUnite is a project of the Communications Workers of America collaborating with a range of other partners, supporters, and stakeholders.

http://www.aflcio.org/aboutaflcio/ecouncil/ec03112004i.cfm
Statement by the AFL-CIO executive council regarding offshoring.

http://www.ieeeusa.org/forum/POSITIONS/offshoring.html
Statement by the Institute of Electrical and Electronics Engineers, the world's largest technical professional society.

http://www.itaa.org/itserv/docs/execsumm.pdf
Executive summary of a study commissioned by the Information Technology Association of America (ITAA) from the consulting firm Global Insight. The actual content of the study must be purchased. ITAA describes itself as the only trade association representing the broad spectrum of the world-leading U.S. IT industry.

General resources:

Amiti, Mary and Shang-Jin Wei. 2005. "Fear of service outsourcing: is it justified?"
Economic Policy., Vol. 20, No. 42, pp. 308-47.

Bardhan, Ashok and Cynthia Kroll. 2004. The New Wave of Outsourcing. Fisher Center for Real Estate & Urban Economics, Research Report. Berkeley, Calif: University of California, Berkeley.

Cohen, Stephen and J. Bradford DeLong. 2005. "Shaken and stirred." The Atlantic Monthly. Vol. 295, No. 1, pp. 112-17. January/February.

Cline, William. 1997. Trade and Income Distribution. Washington, D.C.: Institute for International Economics.

Gordon, Robert J. 2003. Exploding Productivity Growth: Context, Causes and Implications. Brookings Papers on Economic Activity. Vol. 2. Washington, D.C.: The Brookings Institution.

Hira, Ron. 2005. Outsourcing America: What's Behind Our National Crisis and How We Can Reclaim American Jobs. New York, N.Y.: AMACOM.

Kletzer, Lori and J. Bradford Jensen. 2005. "Tradable Services: Understanding the Scope and Impact of Services Offshoring." in Lael Brainard and Susan M. Collins, eds .. "Offshoring White-Collar Work — The Issues and the Implications," Washington, D.C.: Brookings Trade Forum 2005.

Krugman, Paul and Maurice Obtsfeld. 1991. International Economics: Theory and Policy. New York, N.Y.: HarperCollins.

Mann, Catherine. 2003. Globalization of IT Services and White-Collar Jobs: The Next Wave of Productivity Growth. Institute of International Economics, Policy Brief. Washington, D.C.: IIE.

McKinsey Global Institute. 2003, Perspectives: Offshoring: Is it a Win-Win Game? MGI Report. Washington, D.C.: MGI.

Oliner, Stephan and Daniel Sichel. 2002. Information technology and productivity: Where are we now and where are we going? Federal Reserve Bank of New York, Working Paper.

Wood, Adrian. 1995. How trade hurt unskilled workers. Journal of Economic Perspectives. Summer. Volume 9 (3).

Frequently asked questions (FAQs) about offshoring

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