A rash of media stories has heightened concern about foreign outsourcing of U. S. jobs. But analyses show that many of these reports may have exaggerated the extent and economic impact of jobs moving overseas.Contracting out ; Employment

Jane Sneddon Little

English

Research Papers in Economics

a
2 REGIONAL REVIEW Q2/Q3 2004
Observations
continued from previous page
were fairly evenly spread across all 
wage levels. But this time, the job 
downturn has fallen heavily on the 
highest wage industries. Ranking U.S. 
industries from highest to lowest pay, 
the top-paying 10 percent (such as 
telecom, software, ﬁnance, and certain 
segments of durables manufacturing) 
accounted for over a quarter of the 
total job losses. 
Thus, regions with heavy shares 
of high-wage technology industries, 
which beneﬁted greatly from the 
boom of the late 1990s, are now pay-
ing a heavy price. A full 16 percent of 
Massachusetts jobs are in the high-
paying industries that comprise the top 
10 percent of the nation’s employment. 
Because of this high concentration, 
and because job losses in one sector 
spill over into other sectors, the state 
lost nearly 6 percent of its employ-
ment—the largest statewide decline 
in the nation. Even worse, the San 
Francisco Bay Area, where 22 percent 
of jobs are in the top decile, has seen 
almost a 10 percent overall drop in 
employment. Still, despite the heavy 
toll, these job losses are no worse than 
would be expected given the nation-
wide weakness in top-paying indus-
tries. As these sectors improve, it’s 
likely that the local economies depen-
dent upon them will strengthen, too.
But not all hard-hit regions are 
like Massachusetts. Heavily industrial 
Michigan and Ohio have also been 
hurt by losses in traditional manufac-
turing sectors such as metals, plastics, 
machinery, and auto parts--industries 
in the 50th to 80th percentiles of 
wages. They have lost more than 3 
percent of their employment statewide, 
double the national average. The com-
bination of large overall employment 
losses and a lower concentration of 
the highest-wage industries has placed 
these states in perhaps a more difﬁcult 
position. Indeed, as the national jobs 
recovery continues to gather momen-
tum, states like these may ﬁnd it hard-
er to share in the nation’s growth. 
—Yolanda Kodrzycki and Nelson Gerew
<<
lmost daily, the press alerts us 
that yet another major U.S. com-
pany has laid off several thousand 
U.S. workers while moving back 
office  or  skilled  programming 
work, a call center, or even the 
whole corporate HR function to 
China, India, or other low-wage 
countries. Media analyses claim 
that anywhere from 250,000 to 
500,000  business  service  jobs 
moved abroad between 2001 and 
2003, at the same time that total 
U.S.  nonfarm  employment  re-
mains down almost 500,000 from 
its most recent peak. Indeed, al-
though  the  U.S.  economy  has 
finally begun creating jobs—2.1 
million in the past 12 months—this 
recovery has witnessed the weak-
est job growth of any upturn since 
World War II. Voters, policymak-
ers, and the media are all calling for 
measures to stem the job ﬂow. 
Outsourcing work to foreign 
countries, per se, is nothing new. 
We understand that this is part of
Professional jobs are 
starting to migrate 
overseas, as manufac-
turing jobs did before 
them. But this only 
accounts for a small 
portion of job losses in 
the recent recession.
perspective
Outsourcing jobs overseas:       A cause for concern?
By Jane Sneddon Little
Illustration by Dan PageQ2/Q3 2004  REGIONAL REVIEW  3 
Outsourcing jobs overseas:       A cause for concern?4 REGIONAL REVIEW Q2/Q3 2004 4 REGIONAL REVIEW Q2/Q3 2004
the economy’s evolution as employment shifts from agriculture 
to manufacturing to services and knowledge-based activities 
and as products mature through their life cycles. Historically, 
at each successive stage, U.S. workers have shifted to “better,” 
more productive, higher-wage jobs in burgeoning industries or 
the high-value-added parts of mature industries. 
What is raising new concerns is the shift to foreign outsourc-
ing in services, including the export of moderately high-skilled, 
white-collar jobs. As countries like China and India have accu-
mulated human capital, at least some of the jobs going overseas 
are the better jobs—the professional jobs in programming or 
software design, in accounting or microeconomics or radiology, 
in the “new” service industries where the United States was 
supposed to have a comparative advantage.
But a careful analysis shows that media reports may have 
exaggerated the economic impact of foreign outsourcing. Many 
conﬂated the gross number of jobs lost through outsourcing 
with the net number lost economy-wide, overlooking the jobs 
created here in the U.S. thanks to outsourcing abroad. In fact, 
outsourcing can probably only explain a small share of our slow 
“job-loss” recovery. To explain why job growth was so long 
delayed in the current upturn, we need to look much further.
Between 2001 and 2003, 143 million U.S. workers were sepa-
rated from their jobs—56 million due to involuntary layoffs and 
discharges, plus 87 million due to quits and other reasons. The 
separations were largely offset by 141 million hires, but given 
the recession and sluggish recovery, the outcome was a small 
negative—a net decline of 2 million jobs over the period.
How much of this job loss was due to foreign outsourcing 
of business and professional services—the kinds of job losses 
attracting the most attention? It’s difﬁcult to say precisely, but 
we do have some clues. One comes from the Bureau of Labor 
Statistics, which collects data on mass layoffs—those layoffs 
involving 50 or more workers within a ﬁve-week period and 
lasting more than 30 days. According to the BLS, import com-
petition and job relocation overseas explained just 2.4 percent 
of all mass layoffs in 2001 through 2003 (about the same share, 
incidentally, that these two factors accounted for in the boom 
years of 1998 and 1999). Some outsourcing-related layoffs, of 
course, may have been mistakenly attributed to other causes. 
But even tripling or quadrupling the 2.4 percent share still leaves 
domestic developments like business restructuring and slack 
demand explaining the bulk of recent mass layoffs. 
Now assume that job relocation and import competition ac-
counted for 2.4 percent of all 56 million layoffs made in 2001, 
2002, and 2003. This suggests that outsourcing led to about 
1.3 million layoffs over those three years, of which perhaps 
200,000 or so were in business and professional services. Add 
to this some outsourcing-related job loss that may have occurred 
through attrition, and it’s no wonder that everyone knows of 
someone whose job has gone to India or the Philippines. 
But, to put that 200,000 ﬁgure in perspective, the business 
and professional services industry experienced 8.5 million lay-
offs during the last downturn. Foreign outsourcing only ex-
plained a small share of them. And while hiring rates fell more 
in business and professional services than in the average U.S. 
industry, they also fell more quickly than average in wholesale 
and retail trade, transportation, entertainment and recreation, 
and accommodations and food services—all industries not well 
suited to foreign outsourcing. Once again, it appears that do-
mestic forces, not outsourcing, are largely to blame.
Furthermore, it’s easy to forget that outsourcing has led to 
U.S. hiring as well. Foreign call centers rely on U.S. software, 
U.S. communications equipment, and U.S. air conditioners, 
while their newly afﬂuent young workers buy U.S. jeans and 
source: Bureau of Labor Statistics
Job growth in the long run
INDEX: JAN 1948 = 100
Non-farm payroll employment
Civilian population over age 16
’48 ’58 ’68 ’78 ’88 ’98 ’04
50
100
150
200
250
300
note: Shaded areas represent recessions as dated by the National Bureau of Economic Research.
Despite growing exposure to trade, U.S. jobs have always
grown faster than the population.
source: Bureau of Labor Statistics
Home-grown job loss
Domestic, not international, economic changes are behind most
layoffs. Only 2.4 percent of extended mass layoffs during 2001
to 2003 were due to overseas relocation or import competition.
Overseas
relocation
1.0%
Import
competition
1.4%
Financial
difficulty
7.3%
Bankruptcy
5.7%
Slack
work
14%
Domestic
relocation
1.1%
Internal
reorganization
9.3% Contract
completion
8.7%
Seasonal
33.6%
Other
18%Q2/Q3 2004 REGIONAL REVIEW 5 
The China question 
In the debate about outsourcing work to foreign countries, 
China has emerged as a particular concern. The specter of 
almost 750 million Chinese workers, eagerly competing for a 
wide spectrum of U.S. jobs, weighs heavily on the minds of 
politicians, media analysts, and the American workforce. The 
fact that China has around a $137 billion annual trade surplus 
with the U.S. and accounts, by itself, for one-quarter of our huge 
trade deﬁcit just adds to growing concerns about U.S. workers’ 
ability to compete with China’s increasingly skilled but low-cost 
labor force. China caused a further stir recently when it (brieﬂy) 
became the top destination for foreign direct investment ﬂows 
in 2002, displacing the United States from its traditional ﬁrst-
place position. 
But let’s keep China in perspective. For one thing, China’s 
large share of our trade deﬁcit is not really that unusual. 
Western Europe commands a 20 percent share today. And in 
the mid 1980s, Asia’s Newly Industrialized Countries (the NICs) 
accounted for about the same share that China does now, while 
Japan’s share was almost 40 percent. But as China’s share has 
grown over time, Japan and the NIC’s shares have shrunk—in 
part because Asian ﬁrms have also been outsourcing to China. 
Chinese workers now assemble components imported from the 
rest of Asia and export these goods to the United States—goods 
that Japan and the NICs once exported directly.
What’s more, China’s huge labor cost advantage probably 
won’t last. In the mid 1980s, Japanese manufacturing wages 
and beneﬁts were about half of their U.S. equivalent, but lower 
labor productivity meant that its unit labor costs (which take 
into account both compensation and productivity differences) 
were about 70 percent of U.S. levels. Korean compensation mea-
sured 10 percent of U.S. manufacturing compensation, while its 
unit labor costs were only 40 percent of the U.S. level. Fifteen 
years later, in 2000, Japan’s unit labor costs had risen to match 
those in the United States, and Korea’s unit labor costs had 
closed to within 80 percent of the U.S. base. China’s unit labor 
costs may be low today, but it is a good bet that they will not 
stay that way. 
Just as economic development in the U.S. and Japan helped 
to raise global living standards, so too should China’s emer-
gence as a developed economy be widely beneﬁcial to the U.S. 
economy. Many individuals will inevitably face painful adjust-
ments as some jobs and industries continue to move offshore. 
But the resulting increase in U.S. real incomes should allow the 
many who beneﬁt to help those who are harmed. Such mea-
sures might include broadening the scope of trade adjustment 
assistance, increasing the portability of pension and health 
beneﬁts, and encouraging ﬁrms to invest in human as well as 
physical capital. 
By contrast, the large gap between Chinese and U.S. stu-
dents’ skills in math and science probably should raise concerns 
about this country’s ability to maintain its technological lead in 
future years. But we cannot blame China for that. 
Chinese ﬁrms now export 
electronic components 
and back-ofﬁce services 
that we once produced
at home. What does this 
mean for the U.S.?
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s6 REGIONAL REVIEW Q2/Q3 2004 6 REGIONAL REVIEW Q2/Q3 2004
U.S. DVDs. And foreign computer and business service 
ﬁrms are now “insourcing” to the United States; for in-
stance, buying or establishing a U.S. afﬁliate so that they can 
better manage their interactions with U.S. customers. 
Foreign outsourcing has also helped U.S. ﬁrms to lower 
their computer hardware, software, and other input costs 
by obtaining these items offshore. These cost reductions 
have given the U.S. economy an indirect boost by allowing 
ﬁrms to attract business they otherwise would not have 
had and therefore to employ people they otherwise could 
not have employed. Analysts do not know how many out-
sourcing-related hires have offset the 1 million outsourc-
ing-related layoffs over this period. But it is clearly wrong 
to compare the estimated 1 million gross layoffs caused by 
outsourcing with the net loss of 2 million jobs between 
late 2000 and late 2003. That would be like comparing 
an apple with half an orange. 
In truth, it should be no surprise that the economic im-
pact of these recent job shifts has been pretty modest to 
date. For one thing, imports of “other private services,” 
which include the business and professional services of 
most interest in the current debate, amounted to only 0.7 
percent of GDP in 2003, while U.S. imports of “other pri-
vate services” from all of developing Asia (not just China) 
amounted to less than 0.1 percent. That’s far too small to 
have a signiﬁcant impact on U.S. output or job growth. 
Second, while the U.S. is running a huge trade deﬁcit 
overall, the nation continues to export more services than 
we import. Indeed, our trade surplus in “other private ser-
vices” is growing not just overall but vis-à-vis developing 
Asia as well. Clearly, U.S. workers remain highly competi-
tive in high-value-added services—even in Asia. 
Most important, these job ﬂows must be viewed in the 
context of the truly extraordinary dynamism of the U.S. 
economy—an economy in which almost 1 million people 
leave an old job and almost 1 million people start a new 
one every week. From time to time, over periods of a year 
or two, job separations may slightly exceed hires, and em-
ployment falls. But over the long haul since World War 
II, hires have exceeded separations and employment has 
grown decade after decade, despite our increased expo-
sure to international trade. This relationship held during 
the period of U.S. business expansion in Europe in the 
late 1960s and 1970s, when the Europeans were sure that 
Americans would wind up owning all of Europe. The re-
lationship also held in the 1980s, when the land under the 
Emperor’s palace in Tokyo was worth as much as the state 
of California and Americans thought the Japanese might 
buy up much of the U.S. And it held in the NAFTA years, 
despite that giant sucking sound. None of these episodes 
had any perceptible lasting impact on long-term U.S. job 
growth. The same will surely be true of the developing 
world’s emergence as an economic power. S
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Perspective: outsourcing jobs overseas: a cause for concern?

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Perspective: outsourcing jobs overseas: a cause for concern?

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