Outsourcing Debate - Part III

Despite the political debates over outsourcing that are emerging in this US presidential election year, the economic story is quite simple. In the final installment of a three-part series on outsourcing, economist David Dapice says that outsourcing allows hundreds of thousands of people in developing countries like Vietnam the chance to earn wages, pull themselves out of poverty, and - in turn - buy goods produced overseas. Moreover, in the absence of any definitive study, it could be that job loss is caused by technological upgrading - the traditional culprit - rather than outsourcing. Regardless of the causes of job loss, Dapice argues, the US government should implement new measures to help ease the pain of those who find themselves out of work. Medical insurance subsidies could lower labor costs and make US workers more attractive to companies, and wage insurance could help fill in the gaps between new and old jobs while workers seek new skills or better paying jobs. As the presidential election draws near, calling for protectionist barriers may be politically expedient, but Dapice cautions, to thrive economically over the long term the US must find new ways to handle the ups and downs of global integration. - YaleGlobal

Outsourcing Debate - Part III

The losers in globalization must be helped
David Dapice
Monday, March 1, 2004
Vietnamese workers earn a living by making Nike shoes: This is not the outsourcing that Americans are most concerned about.

HO CHI MINH CITY: Most economists believe that trade benefits the economy in the long run. An unemployed worker whose job has been outsourced to a foreign factory or back office in Asia might argue differently, however. In the long run, they might say, we are all dead. During this election year, political battles in Washington will rage and complicate the issue. But in economic terms, the story remains quite simple. In places like Vietnam, hundreds of thousands of workers get better jobs than they had, produce goods more cheaply, and are able to buy imported goods.

The race for the White House has sparked a debate in the US about the desirability of increased economic integration. In recent years, liberal economic policies have facilitated trade and also outsourcing, in which companies relocate certain operations to countries such as Vietnam where labor is cheaper. In the past, mostly blue collar factory jobs went abroad. Now, white collar workers, who previously benefited from cheaper goods, are bidding their jobs bon voyage. Regardless of the type of work affected, the US must find a way to help its citizens who work hard and play by the rules maintain a decent and reasonably secure life.

Most economic studies indicate that trade is only a secondary cause of job losses and gains, however. Even in the recent past, it has been technology that primarily destroys and creates jobs. While production of labor-intensive products such as shoes or garments does move out of the US due to cheap labor in places like Vietnam, these are seldom the quality jobs critics and workers are most concerned about.

One thing that needs to be sorted out is whether it is still true that technology accounts for most "lost" jobs. For example, call centers represent a major class of outsourced jobs. But counting each call center job in India as a "lost" US job might be quite wrong. Moreover, the alternative could be "voice mail hell," in which automated responses reduce human labor, though at a great increase in annoyance. If technology still accounts for most displaced workers, then the anger directed at trade and outsourcing is misplaced, and measures to restrict trade or outsourcing would raise costs without much helping those workers.

Regardless of why people are losing their jobs, public policy could do much more to help the losers. The US government currently gives tax breaks to investment through accelerated depreciation. This is, in effect, a subsidy to capital. If it instead gave medical insurance subsidies to those who lost jobs, this would make the cost of labor cheaper. It would make it possible for a new firm to set up in a depressed area and enjoy lower labor costs, offsetting training and setup costs.

Suggestions of this sort, including wage insurance, are better than the current trade adjustment assistance. This assistance is narrow - restricted to those displaced by trade - and extends unemployment compensation and provides training programs, though most of those have failed to be very effective. (Wage insurance would pay a worker some share of the difference between her old job and her current one, if the new job's wages were lower. It would be for a period of time and allow a more gradual search for better jobs or training.) By changing the relative prices of capital and labor, especially displaced labor, it should be possible to reduce the pain inflicted upon those that are displaced.

Another perspective on the jobs issue - one removed from the current election year - comes from the demographic facts that Alan Greenspan alluded to last week. In a few years, a lot of Americans will begin to retire. The growth rate of the US workforce will fall sharply. The elderly will need many labor-intensive services. In that time frame, there may well be a need for outsourcing lower productivity jobs that can be done remotely. It is hard to think of the gains from outsourcing when job growth is so slow. But if we need even more “high-touch” jobs and do not want to increase immigration, outsourcing call center or basic computer programming jobs will become an economic necessity.

Even this potential benefit does not wholly dispel the fear that smart people in poor countries will discourage US workers from upgrading their skills. What good is it to become a US computer whiz if someone in India will do the same work for $1500 a month?

A few points might be made here. First, a lot of the pain from recent IT job losses came from the popping of the Internet bubble, not from India. Outsourcing does have implications, but not for the entire computer industry. Secondly, there are limitations on the ability of companies to use remote labor for these high-end purposes, and it is uncertain how fast wage costs will increase in places like India. Finally, it is important to remember that if overall output increases, it should be possible for gains to offset losses. Since we are prone to worry about terrorism and development in poor countries, allowing outsourcing to proceed has benefits well beyond only narrow economic ones.

Most commentators urge workers to get skills. And President Bush's recent suggestion to better fund community colleges is a step, albeit an inadequate one, in that direction. However, few believe that the US education system provides an adequate basic knowledge set - at least if relatively low math and science scores in international tests are any indication. Endowing students with a fundamental skill and knowledge base - which means educational reform - is another necessity that will probably get little but lip service in the next few months.

The Economist made a point in a recent article on outsourcing and trade. The US economy, it noted, destroys and creates a huge number of jobs each month - their estimate was two million or more. If technology and globalization are creating even more economic change, it will necessarily create a response from those who are hurt by it, no matter how accustomed workers are to the fluctuations of the US job market.

If public policy does not find a way to reduce the pain of adjustment, the injured will attempt to slow down the perceived cause of their insecurity. A concentrated dollar's worth of injury might create more political pressure than several dollar's worth of gains that are widely spread among consumers.

While we have learned something from the Smoot-Hawley tariffs and trade collapse of the 1930's that caused a world depression, it is nearly certain that those who wish to see globalization raise living standards around the world need to pay more attention to those who are currently left behind. These injured groups include factory workers and white-collar professionals in the US, and also poor farmers and workers in many countries with far fewer resources to deal with change. Unless some of the rough edges are taken off globalization, the average gains will not persuade governments that the game is worth the candle. For those workers who do benefit, in Vietnam and elsewhere, the costs of backsliding would be very high.

See "Outsourcing Debate - Part II" , the second article in the three-part series.

David Dapice is Associate Professor of Economics at Tufts University and the economist of the Vietnam Program at Harvard University’s Kennedy School of Government.

© 2004 Yale Center for the Study of Globalization