The following fact sheet about the impact of outsourcing on the U.S. economy was prepared by Resident Scholar Marvin H. Kosters for circulation at the March 10, 2004, AEI trade event Three Cheers for Globalization.

Offshore outsourcing: what is the impact on the U.S. labor market?

• Neither outsourcing nor offshore outsourcing is a new phenomenon. In contemporary usage, however, the phrase suggests skilled or semi-skilled work shifted abroad by making use of electronic communications.
• No one knows how many jobs may be affected. The most widely publicized estimate is that as many as 3.3 million jobs over fifteen years may be vulnerable to outsourcing abroad.
  For individuals or groups of workers affected, the need to find new work often entails a difficult adjustment.
• For the economy as a whole such an adjustment process implies that, on average, about 220 thousand workers per year (or 18 thousand per month) would need to find new jobs in a work force with more than 138 million currently employed.
• If 3.3 million U.S. jobs are lost to outsourcing overseas, 18 thousand or so U.S. workers per month would need to find a new job in a labor market where--in the context of normal job change in the economy--job gains of 2.5 to 3 million new jobs per month are typical. These numbers of workers getting new employment each month are usually accompanied by a slightly smaller number of job losses, resulting in normal net job gains of about 150 thousand per month.
• The possible effects of offshore outsourcing are not expected to produce extraordinary strains in the U.S. labor market because of federal and state programs created to provide income support, facilitate adjustment, and finance skill training.

Weak job growth: what does the data show?

• Some commentators have expressed concerns that outsourcing may have contributed to the weak growth of jobs in the labor market during the recovery from the recession. February employment data, for example, showed job gains that continued to be disappointingly small.
• According to the household survey data (a measure that includes farm workers, jobs in new firms, and the self-employed, and that avoids double counting of jobs), total employment is only about half a million workers higher than it was at its peak before the recession in the first quarter of 2001. According to the industry survey, however, the number of workers on payrolls in the non-farm component of the economy is still about 2 million workers below its level in the first quarter of 2001.

Offshore outsourcing: how are jobs in the U.S. affected?

• Total domestic employment in the U.S. economy is not determined by developments in a single component of the global labor market such as offshore outsourcing of electronic communications jobs.
• The total number of U.S. jobs is determined by the combination of (1) total demand for goods and services produced in the U.S. and (2) the supply of labor (taking into account factors such as retirement, new entry into the work force, population growth, immigration, labor force participation, and hours of work).
• Other factors relevant for employment growth include technical and managerial factors that result in productivity growth, and institutional factors such as retirement incentives and flexibility for wage and employment adjustments.

Offshore outsourcing and wage inequality: what are the prospects?

• Offshore outsourcing in the 1970s and 1980s was generally viewed mainly as procurement abroad of manufactured products or components. Such imported goods were generally viewed as produced by relatively low-skilled workers, workers with high school level training or less, who were employed as production workers in manufacturing.
• Starting in the late 1970s, in the U.S., the wages of workers with college level training began to increase relative to workers with only high school level training, with the result that wages in the U.S showed increasing inequality. Research indicated that advancing technology was the major factor behind increasing inequality, but labor market pressures from the effects of trade on skill demands were also working in the same direction.
• In contemporary usage, offshore outsourcing is a term used to describe business practices that lead to employment abroad of skilled and semi-skilled workers. The kinds of skills entailed range from clerical to technical and professional work, especially software development and related work, and sometimes English speaking skills are needed. Drawing on the skills of workers abroad in this way is made feasible by modern computer and communications technology.
• To the extent that contemporary offshore outsourcing entails drawing more heavily on the services of workers abroad with relatively higher skills than in recent decades, the resulting pressures in the U.S labor market would tend to foster less wage inequality.
• Wage premiums for workers in the U.S. with college level training and skill training beyond the high school level are still quite high: going to college or getting technical training will continue to have a high payoff for U.S. workers for the foreseeable future.

The following scholars are available to comment on offshore outsourcing:

Claude E. Barfield
AEI Resident Scholar, Cordinator of Trade Policy Studies
Tel: 202.862.5879 (asst.202.862.5853:)
E-mail: cbarfield@aei.org
Online Bio: http://www.aei.org/barfield

James K. Glassman
AEI Resident Fellow
Tel: 202.862.7198 (asst.:202.862.5933)
E-mail: jglassman@aei.org
Online Bio: http://www.aei.org/glassman

Kevin A. Hassett
AEI Resident Scholar, Director of Economic Policy Studies
Tel: 202.862.7157 (asst.:202.862.4873)
E-mail: khassett@aei.org
Online Bio: http://www.aei.org/hassett