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
Detroit News
February 1, 2004

The business press has hyped offshoring–locating service jobs in remote places–with 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 to consider.

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 dislocated workers.

A McKinsey Global Institute study recently revealed that for every $100 of activities offshored to India, the total value creation was $146–with 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 win-win situation.

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 their productivity.

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:
Bernie DeGroat
Phone: (734) 936-1015 or 647-1847
Email: bernied@umich.edu

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