Samuelson: Debunking the Great Offshoring Myth

Remember the great "offshoring" debate? It was all the rage a few years ago. Modern communications allowed white-collar work to be zapped around the world. We faced a terrifying future of hordes of well-educated and poorly paid Indians and Chinese stealing the jobs of middle-class engineers, accountants and software programmers in the United States and other wealthy nations. Merciless multinational companies would find the cheapest labor and to heck with all the lives ruined in the process.

What happened? Well, not much.

Every so often, it's worth revisiting old controversies to see whether the reality matches the rhetoric. In a recent paper, Jacob Funk Kirkegaard of the Peterson Institute for International Economics did just that for offshoring (a.k.a., overseas "outsourcing"). He reviewed many studies. His conclusion: "The heated public and political debate ... has been vastly overblown."

For the United States, Kirkegaard examined a survey on "mass layoffs" from the Bureau of Labor Statistics to see how many stemmed from offshoring. The answer: 4 percent. That included both manufacturing and service jobs.

In 2004 and 2005, the BLS counted almost 1 million workers fired in layoffs of 50 or more. That isn't a huge number in a labor force of about 150 million. Moreover, most causes were domestic. The largest reason (accounting for about 25 percent) was "contract completion"—a public works job done, a movie finished. Other big categories included "downsizing" (16 percent) and the combination of bankruptcy and "financial difficulty" (10 percent). Only about 12 percent of layoffs stemmed from "movement of work"—a category that would include offshoring. But two thirds of those moves were domestic.

Kirkegaard located a similar survey for Europe. Although the cutoff for layoffs was higher (100 workers), the results were similar. About 5 percent of job losses resulted from offshoring. The other 95 percent involved bankruptcies, "downsizing," domestic outsourcing and firings after mergers.

Among wealthy nations, Japan was the only major example of a possibly larger effect. It may have lost factory jobs to China. From 2001 to 2006, Japanese manufacturing employment dropped by 1.3 million, to 11.5 million; meanwhile, jobs at Japanese manufacturing affiliates abroad rose by 900,000. But Kirkegaard thinks Japan's loss of manufacturing jobs could also have resulted from greater productivity—fewer people making more.

It's true that offshoring doesn't measure the full impact of globalization on U.S. labor markets. That effect would also include trade and investment by multinational firms. Still, with the unemployment rate at 4.5 percent, it's clear that globalization hasn't crippled the U.S. job machine.

One reason for modest offshoring is that it's not so easy to do. It involves more than just changing phone numbers and switching computer hookups. A survey by the consulting firm A.T. Kearney found the following problems: cross-border differences of culture and language (80 percent); lack of skills offshore (49 percent); customer complaints (49 percent).

As communications technology improves—and companies gain experience—offshoring may increase. Some economists still expect it to explode. Writing in The Washington Post, Alan S. Blinder of Princeton said "offshoring may be the biggest political issue in economics for a generation," threatening "tens of millions of American workers." Indeed, some studies examined by Kirkegaard estimated that roughly one fifth of all U.S. jobs could theoretically be moved abroad. But just because a job can theoretically be relocated doesn't mean that it will be.

Adjustments occur. Developing countries need skilled workers for their own economies, not just exports. India's entire information technology industry employs less than 1 percent of the nation's workforce, reports the International Labor Organization. As the global demand for services—engineering, programming—rises, so will the wages of foreign service workers (engineers, programmers, accountants). That will make offshoring less cost competitive. Finally, if countries run big trade surpluses from offshoring, their currencies should rise. That, too, would reduce their cost advantage (and explains why changing China's artificially undervalued exchange rate is important).

Losing a job is a wrenching experience for anyone, but the lesson here is that most job loss has local causes. The offshoring obsession reflects its novelty and the potential threat to white-collar jobs that seemed inherently safe from foreign competition. In our mind's eye, globalization is so powerful that it's sweeping everything before it. The reality is that, though globalization is increasingly important, it's still a weakling compared with the domestic economy. The antidote to job loss is job creation, and that depends decisively on national economic policies and conditions.

It's easy to blame all our economic anxieties and problems on globalization, because that makes foreigners and multinational companies responsible. Though satisfying, it will also be self-defeating if it diverts attention from fostering a healthy economy at home.