Why ‘Outsourcing’ May Lose Its Power as a Scare Word - New York Times
Why ‘Outsourcing’ May Lose Its Power as a Scare Word - New York Times
considered in its macroeconomic context, outsourcing just isn’t that big a deal right now. In the years since Mr. Mankiw’s encounter with the buzz machine, economists have been crunching data on short-term trends in outsourcing in the vast service sector, which accounts for about 80 percent of domestic jobs. While there are some exceptions, they generally find more reason for concern than alarm.
In December 2005, the McKinsey Global Institute predicted that 1.4 million jobs would be outsourced overseas from 2004 to 2008, or about 280,000 a year. That’s a drop in the bucket. In July, there were 135.35 million payroll jobs in the United States, according to the Bureau of Labor Statistics. Thanks to the forces of creative destruction, more jobs are created and lost in a few months than will be outsourced in a year. Diana Farrell, director of the McKinsey Global Institute, notes that in May 2005 alone, 4.7 million Americans started new jobs with new employers.
What’s more, the threat of outsourcing varies widely by industry. Lots of services require face-to-face interaction for people to do their jobs. That is particularly true for the biggest sectors, retail and health care. As a result, according to a McKinsey study, only 3 percent of retail jobs and 8 percent of health care jobs can possibly be outsourced. By contrast, McKinsey found that nearly half the jobs in packaged software and information technology services could be done offshore. But those sectors account for only about 2 percent of total employment. The upshot: “Only 11 percent of all U.S. services job could theoretically be performed offshore,” Ms. Farrell says.
Economists have also found that jobs or sectors susceptible to outsourcing aren’t disappearing. Quite the opposite. Last fall, J. Bradford Jensen, deputy director at the International Institute of Economics, based in Washington, and Lori G. Kletzer, professor of economics at the University of California, Santa Cruz, documented the degree to which various service sectors and jobs were “tradable,” ranging from computer and mathematical occupations (100 percent) to food preparation (4 percent).
There is evidence that within sectors, lower-paying jobs are being outsourced while the more skilled ones are being kept here. In a 2005 study, Catherine L. Mann, senior fellow at the Institute for International Economics, found that from 1999 to 2003, when outsourcing was picking up pace, the United States lost 125,000 programming jobs but added 425,000 jobs for higher-skilled software engineers and analysts.
Economists also point out that jobs and services that are tradable won’t necessarily move to lower-cost places. Ms. Farrell of McKinsey said that despite their huge populations, China and India lack enough university graduates with the specific skills and experience to meet the staffing needs of Fortune 500 companies.
In addition, labor costs are only one of many factors that companies consider. Executives have to worry about reliable power supplies and the proximity of vendors and customers. Here, again, the United States has significant advantages over countries like India and China. As a result, only a small portion of the jobs that could be outsourced will be outsourced; Ms. Farrell believes that by 2008, outsourcing will affect less than 2 percent of all service jobs.
considered in its macroeconomic context, outsourcing just isn’t that big a deal right now. In the years since Mr. Mankiw’s encounter with the buzz machine, economists have been crunching data on short-term trends in outsourcing in the vast service sector, which accounts for about 80 percent of domestic jobs. While there are some exceptions, they generally find more reason for concern than alarm.
In December 2005, the McKinsey Global Institute predicted that 1.4 million jobs would be outsourced overseas from 2004 to 2008, or about 280,000 a year. That’s a drop in the bucket. In July, there were 135.35 million payroll jobs in the United States, according to the Bureau of Labor Statistics. Thanks to the forces of creative destruction, more jobs are created and lost in a few months than will be outsourced in a year. Diana Farrell, director of the McKinsey Global Institute, notes that in May 2005 alone, 4.7 million Americans started new jobs with new employers.
What’s more, the threat of outsourcing varies widely by industry. Lots of services require face-to-face interaction for people to do their jobs. That is particularly true for the biggest sectors, retail and health care. As a result, according to a McKinsey study, only 3 percent of retail jobs and 8 percent of health care jobs can possibly be outsourced. By contrast, McKinsey found that nearly half the jobs in packaged software and information technology services could be done offshore. But those sectors account for only about 2 percent of total employment. The upshot: “Only 11 percent of all U.S. services job could theoretically be performed offshore,” Ms. Farrell says.
Economists have also found that jobs or sectors susceptible to outsourcing aren’t disappearing. Quite the opposite. Last fall, J. Bradford Jensen, deputy director at the International Institute of Economics, based in Washington, and Lori G. Kletzer, professor of economics at the University of California, Santa Cruz, documented the degree to which various service sectors and jobs were “tradable,” ranging from computer and mathematical occupations (100 percent) to food preparation (4 percent).
There is evidence that within sectors, lower-paying jobs are being outsourced while the more skilled ones are being kept here. In a 2005 study, Catherine L. Mann, senior fellow at the Institute for International Economics, found that from 1999 to 2003, when outsourcing was picking up pace, the United States lost 125,000 programming jobs but added 425,000 jobs for higher-skilled software engineers and analysts.
Economists also point out that jobs and services that are tradable won’t necessarily move to lower-cost places. Ms. Farrell of McKinsey said that despite their huge populations, China and India lack enough university graduates with the specific skills and experience to meet the staffing needs of Fortune 500 companies.
In addition, labor costs are only one of many factors that companies consider. Executives have to worry about reliable power supplies and the proximity of vendors and customers. Here, again, the United States has significant advantages over countries like India and China. As a result, only a small portion of the jobs that could be outsourced will be outsourced; Ms. Farrell believes that by 2008, outsourcing will affect less than 2 percent of all service jobs.
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