McKinsey Global Institute
Exploding the Myths About Offshoring
April 2004 Martin N. Baily Diana Farrell
McKinsey Global Institute The McKinsey Global Institute (MGI) was established in 1990 as an independent economics think tank within McKinsey & Company to conduct original research on important global issues. Its primary purpose is to provide insights into the workings of the global economy and a factbase for decision-making for the benefit of business leaders and policymakers. MGI's staff members are drawn primarily from McKinsey's consultants. They serve 6- to 12-month assignments and then return to client work. MGI also commissions leading academics to participate in its research. The institute's director is Diana Farrell, a McKinsey partner.
Exploding the Myths About Offshoring
Total U.S. employment has fallen by over 2 million since 2000. While employment is rising again as the economy recovers, the pace of job growth has been agonizingly slow. Many people blame “offshoring,” or the nation's growing trade in services with emerging markets. Because of the digital revolution and the dramatic fall in international telecommunication costs, white-collar jobs that once were insulated from global competition can now be performed in low-wage nations like India for as little as one-tenth of the cost of U.S. labor. Employees with jobs as diverse as call-center agents, data processors, medical technicians, and software programmers are thought to be at risk. Even self-proclaimed free-trade advocates have wavered in their beliefs, and critics warn that as hiring favors the enormous supply of highly educated Indian and Chinese workers, millions of Americans will become jobless. In response to these concerns, Congress included in the fiscal 2004 omnibus spending bill a provision that prohibits federal agencies from outsourcing some kinds of work to private companies that use workers abroad. Over thirty states are considering similar restrictions; at least four have already passed them. Jobs and trade have become the hot-button issues of the 2004 presidential election race. However, the current debate is misplaced, because the problem is neither trade itself nor globalization more broadly, but the question of how the nation should allocate the benefits of global trade. The global labor market, like other international trade, benefits the nation as a whole by making the economic pie bigger and raising the standard of living. For some businesses, outsourcing jobs abroad will allow them to remain profitable, thereby preserving other U.S. jobs. Many companies use the savings from outsourcing to lower prices and offer consumers new and better types of services. By increasing productivity, offshoring enables companies to invest more in the next-generation technologies and business ideas that will create new jobs. With the most flexible and innovative economy in the world, the United States is uniquely positioned to benefit from the trend. After all, despite a large overall trade deficit, the United States has consistently run a surplus in its international trade in services. Many people believe that the money U.S. companies spend on services abroad is lost to the U.S. economy, but a 2003 study by the McKinsey Global Institute shows that offshoring creates wealth for the United States as well as for the country receiving the jobs.1 For every dollar of corporate spending that is 1. "Offshoring: Is it a win-win game?" The McKinsey Global Institute, August 2003.
outsourced to a low-wage nation, the spending economy captures more than three-quarters of the benefit and gains as much as $1.14 in return. Far from being a zero-sum game, offshoring is instead a story of mutual economic gain. Of course, what is good for the economy as a whole may not be good for particular individuals. Based on economic history, we can expect that some U.S. workers will indeed lose their jobs. But this painful reality does not weaken...
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