Moving some employment offshore helps U.S.;
trying to 'protect jobs' will make everyone worse off
Loss of jobs overseas opens debate on whether
it's a problem
by Robert Kennedy
February 1, 2004
The business press has hyped offshoringlocating service jobs in remote
placeswith headlines like "Is Your Job Next?" and "America's pain, India's
gain." This leads to unwarranted concern among workers and potentially
destructive calls for the government to "do something."
Like any development that improves productivity, offshoring causes disruption
in the short term but is hugely positive in the long term. There are five things
First, offshoring is a small phenomenon. Most estimates are that the movement
of service jobs overseas to date involves 300,000 and 500,000 positions, the
majority in India and the Philippines. This is only 0.3 percent of U.S.
employment. Going forward, the highest estimates are that about 200,000 jobs
annually may move offshore. This is only 8 percent of annual involuntary job
losses (around 2.5 million) and less than 6 percent of annual job creation
(around 3.5 million).
Second, this trend appears new and threatening because trade has historically
been concentrated in natural resources and manufacturing, which account for
about 15 percent of employment. More than four-fifths of workers face no
international competition. During the next decade, this percentage may fall a
few points, but the overwhelming majority of workers will be unaffected.
History is full of much larger shifts. Since 1850, the percentage of workers
in agriculture has fallen to less than 2 percent from 55 percent, while output
has increased more than 100-fold. Since 1955, employment in manufacturing has
fallen to 13 percent from 33 percent, while output has increased four-fold. The
economy thrived because of, not despite, these shifts.
Third, trade benefits everyone because it leads to specialization, increased
production and lower prices. Increasing productivity always involves dislocating
and reallocating workers, but the benefits vastly outweigh the costs to
A McKinsey Global Institute study recently revealed that for every $100 of
activities offshored to India, the total value creation was $146with India
capturing about $33 and the United States realizing $113. India gains from
service exports and increases its ability to purchase U.S. exports. The U.S.
economy benefits from lower prices, higher profits and new exports to India.
Firms that undertake offshoring are saving 40 to 70 percent on costs and can
offer their remaining workers greater job security and higher wages. This is a
Fourth, the 80 percent of U.S. workers who face no effective international
competition (for example, education, public safety, local travel and
hospitality, health care, law, construction) benefit when other firms increase
Consider hairdressers, who in the United States earn about 50 times more than
their counterparts in India. They don't work 50 times as hard, nor are they 50
times more productive. They have relatively high wages because the U.S. economy
is 50 times more productive than India's, and a portion of that wealth flows to
hairdressers. The relatively small number of service workers displaced by
offshoring will be absorbed into nontrade sectors and will ultimately benefit
from the wealth created by offshoring.
Finally, offshoring is inevitable. Advances in telecommunications, the
digitization of business processes, potential savings and the fact that millions
of skilled workers in poor countries are now eager to serve the U.S. market have
created an irresistible pressure for globalization.
Offshoring is just the latest example of the creative destruction that made
the United States the most economically successful nation in the history of the
world. The best policy is to embrace this development and smooth the adjustment
for dislocated workers. But turning away from globalization, slowing wealth
creation, and trying to "protect jobs" is destined to fail and will ultimately
make everyone worse off.
Robert Kennedy is associate director of the William Davidson Institute at the
University of Michigan Business School and a member of the school's Competitive
Strategy and International Business Group.
For more information, contact:
Phone: (734) 936-1015 or 647-1847
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