Offshore Outsourcing and It's Economic Impact on U.S.

Abstract
Economic changes that affect employment usually produce conflicting viewpoints and angry rhetoric. During an election year, the rhetoric is hugely amplified. So it 's not surprising that offshore outsourcing is caught in the perfect storm of rhetoric, politics and 24-hour news analysis.
This paper discusses different views on anti-outsourcing and pro-outsourcing. It also states economic data and survey results which leads us to an understanding that instead of having protectionist approach towards the U.S. jobs, we should have policies in place, which would help the U.S. workers to retrain themselves in new immerging technologies in short run. This will allow workers to get a high skilled, high paid job and allow corporations to compete in global market by benefiting from the lower cost of offshore outsourcing. Offshore outsourcing and it 's economic impact on U.S.
Economic changes that affect employment usually produce conflicting viewpoints and angry rhetoric. During an election year, the rhetoric is hugely amplified. So it 's not surprising that offshore outsourcing is caught in the perfect storm of rhetoric, politics and 24-hour news analysis.
Outsourcing is not a new concept. Before the concept of offshore outsourcing became front-page news, many large companies already had operations all over the globe. But in recent months, small and medium sized companies have started following the lead of their larger counterparts. A recent survey of CEOs from small and medium-sized businesses revealed that 27 percent intended to outsource certain functions overseas in the next three years.
U.S. software programmers ' career prospects, once dazzling, are now in doubt. In the past 3 years, offshore programming jobs have nearly tripled, from 27,000 to an estimated 80,000, according to Forrester Research Inc. And Gartner Inc. figures that by yearend, 1 of every 10 jobs in U.S. tech companies will move to emerging markets.
There are conflicting views as how this off shore outsourcing in IT and service industry will impact the U.S, workers and economy.

Views of Executive Council of AFL-CIO (American Federation of Labor and Congress of Industrial Organizations.)
Executive council of AFL-CIO is concerned that after two decades of devastation of the U.S. manufacturing sector and the permanent loss of millions of high-wage, good benefit, middle-class jobs, America is now threatened with a similar hollowing out of its service sector. Among the millions of service jobs threatened, now high paying, professional and technical career opportunities are also at serious risk due to the growing off-shoring trend.
The council emphasizes on recent studies and analyses that predict direct consequences, should current trends continue unabated. What these reports make clear is that any work that can be digitized and transmitted through cyber-space is a target for export:
• Forrester Research Inc. predicts that American employers will move about 3.3 million white-collar service jobs and $136 billion in wages overseas in the next 15 years, up from $4 billion in 2000.
• Gartner Inc., a high-tech forecasting firm, estimates that 10 percent of computer services and software jobs will be moved overseas by the end of this year.
• A survey by Deloitte Research found that the world 's 100 largest financial services firms expect to shift $356 billion worth of operations and about two million jobs to low-wage countries over the next five years. The study also revealed that one-third of all major financial institutions in the world are already utilizing offshore outsourcing, with 75 percent reporting that they would be doing so within the next 24 months.
• A recent study by INPUT Research, a market research firm in Reston, VA, projects that outsourcing of state and local government technology contracts will grow from $10 billion last year to $23 billion in 2008.
In executive council ' opinion, lost employment due to offshoring across many industries has already had a severe impact on the U.S. labor market, stalled economic recovery and left policymakers alarmed about long-term prospects for job restoration. Federal Reserve Bank publication, "Current Issues in Economics and Finances," determined that in the most recent downturn (beginning in March of 2001 and ending in November of 2001), 79 percent of the job losses were reported to be structural (permanent) and only 21 percent were cyclical (temporary). This compares to 49 percent and 51 percent, respectively, during the economic downturns of the mid-1970s and early 1980s.
While offshoring by companies wanting to exploit workers in other countries instead of hiring U.S. workers and graduates will be difficult to deter, the executive council suggests that U.S. must proactively develop a coherent and comprehensive employment policy:
• Tax policies: Federal tax policies that encourage shipping U.S. jobs overseas must be replaced by tax incentives focused on job creation here.
• Procurement: Federal, state and local contracts for services worth hundreds of billions of dollars should assure that American taxpayers are not subsidizing the flight of U.S. jobs.
• Research and Development: Government R&D funds should be denied to companies that transfer the technology, intellectual property and other by-products of this investment overseas. Tax dollars that pay for this research should be invested in strengthening the national economy and creating domestic employment.
• Trade Agreements—Trade agreements must be fundamentally reformed to include enforceable protections for the rights of all workers—whether in manufacturing, agriculture, or services—to form independent unions, bargain with their employers, and reject child labor, forced labor and discrimination. Trade agreements should also allow appropriate space for countries to implement legitimate tax and procurement policies that support job creation in domestically oriented production, and for countries to implement safeguards and other trade remedies in response to import surges and unfair trade practices in the services sector.
• Worker visa programs need major reform. Visa programs like H-1B and L-1 are in effect technology transfer pipelines that enable foreign professionals to gain knowledge and core competencies here and then take them, along with American jobs, when they return home.
• Security: Export control laws need to be assessed and, if necessary, revised to assure that they can prevent the transfer of highly sensitive technology and other resources that could be adapted for purposes contrary to U.S. security or economic interests.
• Trade Adjustment Assistance—Currently, displaced service-sector workers are not eligible for Trade Adjustment Assistance benefits, which only cover workers producing a tangible good. The TAA program needs to be expanded to include service-sector workers, while also improved and fully funded, so that all displaced workers, in manufacturing and services, can receive the income support and training they are entitled to.
The council urges the Congress, as well as state and local governments, to take immediate action on those policy initiatives to dissuade corporations from pursuing business strategies that will further weaken the already fragile U.S. economy. The report is concluded with a warning that inaction means that millions of other workers and their families will pay the ultimate economic price of losing their job, their dignity and their way of life.
Views of Daniel W. Drezner in his article "The Outsourcing Bogeyman"
Daniel W. Drezner in his article states that offshore outsourcing deserves attention. But if their exaggerated alarmism succeeds in provoking protectionist responses from lawmakers, it will do far more harm than good, to the U.S. economy and to American workers. Author thinks that the Americans should not be concerned about the economic effects of outsourcing. Most of the numbers thrown around are vague, over hyped estimates. What hard data exist suggest that gross job losses due to offshore outsourcing have been minimal when compared to the size of the entire U.S. economy.
The law of comparative advantage does not stop working just because 401(k) plans are involved. The creation of new jobs overseas will eventually lead to more jobs and higher incomes in the United States. Protectionism would not solve the U.S. economy 's employment problems, although it would succeed in providing massive subsidies to well-organized interest groups.
Author agrees that, at first, the numbers about the offshore outsourcing sound ominous. The McKinsey Global Institute estimates that the volume of offshore outsourcing will increase by 30 to 40 percent a year for the next five years. Forrester Research estimates that 3.3 million white-collar jobs will move overseas by 2015. According to projections, the hardest hit sectors will be financial services and information technology (IT). In one May 2003 survey of chief information officers, 68 percent of IT executives said that their offshore contracts would grow in the subsequent year.
At first glance, current macroeconomic indicators seem to support the suspicion that outsourcing is destroying jobs in the United States. But the author further insists that the outsourcing will help U.S. economy. Americans need to separate fact from fiction. The predictions of job losses in the millions are driving the current outsourcing hysteria. But it is crucial to note that these predictions are of gross, not net, losses. During the 1990s, offshore outsourcing was not uncommon. (American Express, for one, set up back-office operations in India more than a decade ago.) But no one much cared because the number of jobs leaving U.S. shores was far lower than the number of jobs created in the U.S. economy.
Author explains that most current predictions are not as ominous as they first sound once the numbers are unpacked. Most jobs will remain unaffected altogether: close to 90 percent of jobs in the United States require geographic proximity. Such jobs include everything from retail and restaurants to marketing and personal care, services that have to be produced and consumed locally, so outsourcing them overseas is not an option. There is also no evidence that jobs in the high-value-added sector are migrating overseas. One thing that has made offshore outsourcing possible is the standardization of such business tasks as data entry, accounting, and IT support. The parts of production that are more complex, interactive, or innovative, including, but not limited to, marketing, research, and development, are much more difficult to shift abroad. The author also refers to an International Data Corporation analysis on trends in IT services that concluded; "the activities that will migrate offshore are predominantly those that can be viewed as requiring low skill since process and repeatability are key underpinnings of the work. Innovation and deep business expertise will continue to be delivered predominantly onshore." Not coincidentally, these are also the tasks that generate high wages and large profits and drive the U.S. economy.
Emphasizing on the fact that offshore outsourcing is counterbalanced by job creation in the high-end service sector; the author gives example of Delta Airlines. Delta Airlines outsourced 1,000 call-center jobs to India in 2003, but the $25 million in savings allowed the firm to add 1,200 reservation and sales positions in the United States. An Institute for International Economics analysis of Bureau of Labor Statistics employment data revealed that the number of jobs in service sectors where outsourcing is likely actually increased, even though total employment decreased by 1.7 percent. According to the Bureau of Labor Statistics "Occupation Outlook Handbook," the number of IT-related jobs is expected to grow 43 percent by 2010. The case of IBM reinforces this lesson: although critics highlight the offshore outsourcing of 3,000 IT jobs, they fail to mention the company 's plans to add 4,500 positions to its U.S. payroll.
The author refers to the suggestions of Federal Reserve Bank of New York that the economy is undergoing a structural transformation. Jobs are disappearing from old sectors (such as manufacturing) and being created in new ones (such as mortgage brokering). In all such transformations, the creation of new jobs lags behind the destruction of old ones. In other words, the recent recession and current recovery are a more extreme version of the downturn and "jobless recovery" of the early 1990s -- which eventually produced the longest economic expansion of the post-World War II era. Once the structural adjustments of the current period are complete, job growth is expected to be robust.
McKinsey Global Institute has estimated that for every dollar spent on outsourcing to India, the United States reaps between $1.12 and $1.14 in benefits. Thanks to outsourcing, U.S. firms save money and become more profitable, benefiting shareholders and increasing returns on investment. Foreign facilities boost demand for U.S. products, such as computers and telecommunications equipment, necessary for their outsourced function. And U.S. labor can be reallocated to more competitive, better-paying jobs; for example, although 70,000 computer programmers lost their jobs between 1999 and 2003, more than 115,000 computer software engineers found higher-paying jobs during that same period. Outsourcing thus enhances the competitiveness of the U.S. service sector (which accounts for 30 percent of the total value of U.S. exports). Contrary to the belief that the United States is importing massive amounts of services from low-wage countries, in 2002 it ran a $64.8 billion surplus in services.

Views of Tim Kane, Brett D. Schaefer, and Alison Fraser.
Tim Kane, Tim Kane (Research Fellow in Macroeconomics in the Center for Data Analysis), Brett D. Schaefer (Jay Kingham Fellow in the Center for International Trade and Economics), and Alison Fraser (Director of the Thomas A. Roe Institute for Economic Policy Studies, at The Heritage Foundation.) have emphasized on few facts about outsourcing which helps to remove common myths about outsourcing. Following are the some facts that they have mentioned.
• The household employment survey of Americans indicates that there are 1.9 million more Americans employed since the recession ended in November 2001. There are 138.3 million workers in the U.S. economy today; more than ever before.
• According to Bureau of Labor Statistics the unemployment rate low in historical terms at 5.6 percent, but the workforce has been growing—there are now 2.03 million more people in the labor force than in late 2001. Without a higher rate of unemployment or a shrinking workforce, there is no evidence of growing discouragement.
• Outsourcing has little net impact, and represents less than 1 percent of gross job turnover. Over the past decade, America has lost an average of 7.71 million jobs every quarter (Labor Department, BED data series, 1992 to 2003). The most alarmist prediction of jobs lost to outsourcing, by Forrester Research, estimates that 3.3 million service jobs will be outsourced between 2000 and 2015—an average of 55,000 jobs outsourced per quarter, or only 0.71 percent of all jobs lost per quarter.
• A study conducted for the 2004 Index of Economic Freedom confirms a strong, positive relationship between economic freedom and per capita GDP. Countries that adopt policies antithetical to economic freedom, including trying to protect jobs of a few from outsourcing, tend to retard economic growth, which leads to fewer jobs.
• Outsourcing is a means of getting more final output with lower cost inputs, which leads to lower prices for all U.S. firms and families. Lower prices lead directly to higher standards of living and more jobs in a growing economy.
• Protectionism is isolationism and has a history of failure. Proposals to punish businesses that outsource jobs, institute tariffs, or change tax rules will carry unintended consequences if enacted. Such measures would injure U.S. firms that export goods and services and erode U.S. competitiveness, often in unexpected ways. Recent steel tariffs, for example, cost jobs in dozens of industries while raising prices for consumers.
In conclusion the authors mention that America 's workers deserve a more informative, less partisan debate on outsourcing. The negative impact of outsourcing on the economy and American employment has been greatly exaggerated, and the benefits of outsourcing almost entirely ignored.

Offshore outsourcing and U.S. economy.
Graham S. Toft, a senior fellow and director of the Center for Economic Competitiveness at Hudson Institute in Indianapolis, says three factors have led to the rise in off shoring: The educational systems of the less-developed world have improved dramatically over the past few decades; investment capital to both China and India is on the move in support of existing or new businesses; and corporations are facing pricing pressures due to an increasingly competitive global marketplace.
John Sullivan, professor of management at San Francisco State University, says this global shift could mean a radical change for HR. "To compete around the world, you have to get talent from around the world," Sullivan says. "To keep your company strong, you can 't protect your U.S. jobs."
Many anti-outsourcing organizations argue that offshore outsourcing is the major factor in recent economic downturn. In fact, however, outsourcing has not played a key role in the relatively delayed and moderate labor market response to two years of solid recovery in GDP (gross domestic product) growth (see Table. 1). A strong productivity trend at home has been much more influential. Nonetheless, despite the rhetoric, the pace of productivity growth is moderating and labor 's share of output is on the rise.

Year 2001 2002 2003
Total GDP 10100800 10480800 10987900
TABLE 1 : Total GDP ( in US$ mn ) Historical Values in Current prices (Source: Euromonitor Market Research Monitor )

The net flow of business services exported by the U.S. to foreign customers (in-sourcing) relative to those imported from foreign producers (outsourcing) is positive and reached a record $50 billion last year.
Above facts suggests that the offshore outsourcing in service and IT industry, does not have any negative impact on US economy. The United States today has more than 150 million employed workers. Technological change, economic recessions, shifts in consumer demand, and other changes make jobs turn over constantly, so that each month roughly two million people in the United States change them. Even the gloomiest predictions suggest that the number of jobs lost to off shoring will be far lower. It will also be small compared with the mass layoffs prompted by corporate mergers and restructuring when the economy grows. In 1999 alone, at the peak of the economic bubble, 1.15 million workers lost their jobs through mass layoffs as companies restructured operations. Job churn is part of life, even in a growing economy.

How the United States benefits
Outsourcing dramatically reduces labor costs, allowing companies to sell goods ranging from software to tax-preparation services at lower costs or higher profit margins. Greater profits theoretically allow companies to buy new equipment, build laboratories and conduct scientific experiments.
Savings from outsourcing allowed companies to create 90,000 new jobs in 2003, researchers said. The report predicts that in 2008, outsourcing will create 317,000 jobs (Konrad, 2004)
A 2003 study by the McKinsey Global Institute (MGI) showed that off shoring creates wealth for the United States as well as for India, the country receiving the jobs.1 For every dollar of corporate spending outsourced to India, the US 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, off shoring creates mutual economic benefit. See TABLE 2, which gives the estimates of India 's contribution to US Economy (Nasscom, 2003)
Ultimately, in a competitive economy such as that of the United States, consumers benefit as companies pass on savings in the form of lower prices. New research by Catherine Mann, of the Institute for International Economics, in Washington, DC, found that the global sourcing of components has reduced the cost of IT hardware by up to 30 percent since 1995. Diffused IT investment through US sectors due to demand elasticity greater than 1.0; accounted for more than ½ of accelerated productivity growth; adding as much as $230 billion to the US GDP in that period (1995-2000). Trade in services will have similar effects. A technician in India, for instance, can read a magnetic-resonance-imaging (MRI) scan for a fraction of what it would cost in the United States. Transferring that position to India might cause a US medical technician to be laid off, but lower prices for life-saving technologies mean that more sick people can receive them.

Projected Software and Services Exports to US in 2003-04 US$ 8.5 Billion
Savings to the US Economy by Offshoring to India US$ 10-11 Billion
Hi-Tech Imports from US to India US$ 3 Billion
Contribution by Indian IT professionals to US social Security US$ 0.5 Billion
Income Tax paid Indian IT professionals in US US$ 0.5 Billion
Spending by Indian IT professionals in US US$ 1.8 Billion
Total benefits to the US economy US$ 16.8
TABLE 2: India 's contribution to US Economy (Source: Nasscom, 2003)

Given our global economy, the globalization of the IT industry is inevitable. Most big IT companies do much of their business overseas and naturally want to have some of their employees in those markets. The offshore outsourcing will allow companies to compete in global market. With lower cost the services will be more affordable. This will be increasing the demand, which in turn will help companies to generate more revenue and increase the jobs. Conclusion
Outsourcing is not a new concept. The recent trend in off shore outsourcing the service and IT industries created a concern for many white-collar workers and many anti-outsourcing organizations.
The total offshore outsourcing in service and IT industry is less that one percent of total U.S. economy. The recent GDP growth and other economic indicators suggest that it does not have a negative impact on U.S. economy. As Gregory N. Mankiw, chairman of President Bush 's Council of Economic Advisers, have mentioned, "Free trade is good for America. The truth is when a good or service is produced at lower cost in another country; it makes sense to import it rather than to produce it domestically". Cost saving due to offshore outsourcing allows the corporations to invest the money into the new technology and job creation in upcoming technology.
Instead of having protectionist approach towards the U.S. jobs, we should have policies in place, which would help the U.S. workers to retrain themselves in new immerging technologies in short run. This will allow workers to get a high skilled, high paid job and allow corporations to compete in global market by benefiting from the lower cost of offshore outsourcing. Bibliography

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