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I've been reading a great deal about overseas outsourcing today - it seems that everyone and their cousin is interested in the idea that jobs might go overseas. The big trigger for this was probably Bush economist Gregory Mankiw's comments that outsourcing was good for everyone, in the long term [1]. I have a number of comments.

In the Financial Times today, one outsourcing company commented "the guys who have been in the business a long time will try to fight it out, but the options are really limited. We work 40 hours a week, in China they have no concept of week-ends." [2] This is one of the things that most labour organizations get, and most mainstream media misses - we still, at this time, have the option of making someone else work harder, in another country, and then claiming more 'productivity' because the group we measure isn't working as hard, but still seems, somehow, to produce. That's silly.

That said, however, there is another angle - if the people in place A are actually more efficient than the people in place B, then outsourcing makes a lot of sense. An excellent example is programmers in India. If the programmer knows the language and the format already, then he or she will naturally produce a product more efficiently than someone closer to home who has to learn the language and so forth. So then, the question becomes what to do with people whose skill sets aren't appropriate anymore? This is where big money comes in, and unfortunately governments are rarely willing to do what they ought. Over the long term, the market will remove unneeded skills naturally - younger people don't know how to use carbon paper, for example, because now we have copy machines and printers. But if someone who had done carbon paper all their life lost their job because nobody needed carbon paper people anymore, the question becomes 'should that person starve because their skills are not needed?' By and large society seems to have decided this is not the case, but has not actually gotten around, in most cases, to actually doing something about it (at least in the US, and many Western nations). Logically, the answer is social support, i.e. paying their rent and food costs, and retraining - getting them a useful skill. It would also make sense, but increase the costs yet again, to offer them a lifetime subsidy or tax credit, since they will never be as skilled in their new job as they could have been had they kept working at their old job.

Most likely, with a good social safety net and retraining options, outsourcing will not cause too much damage in the short term, and the long term outcomes will then be positive for everyone. But once again it comes down to safety nets - if everyone is afraid they're going to lose their job, it's one thing. If everyone is afraid they're going to lose their job, and then starve to death, it's something else again. Alan Murray, in the Wall Street Journal today, stated:

Sure, in the short term, 'higher productivity may mean fewer jobs. But in the medium and long term, it doesn't. My friend and fellow columnist E.J. Dionne of the Washington Post disputed this comment last week, saying that in the long run we are all dead. I don't know what E.J. has planned, but I hope to be around 20 years from now. If productivity growth continues at a healthy rate of 3% or more for those two decades, the U.S. economy will double in size, produce far higher living standards, and he in better shape to finance the costly retirement of the baby boomers. Any effort to stop outsourcing or block trade will slow productivicy growth and threaten that rosy future. [3]
Which is proof that many people just don't understand life at the margins. The fact of the matter is, without housing, food, and medical care, many of the people whose jobs are outsourced quite literally will never see any of the benefits which might accrue from their losses.

An additional danger comes with using protectionism in place of social safety nets. Discussions are currently underway in the U.S. to limit the outsourcing of government jobs to overseas employees. Assuming, for the moment, that the overseas employees are truly more efficient than their American counterparts (and since most of the work involves call centres and computer work, it is possible they are), then the 'best' response would be to allow the jobs to go abroad, and allow the social safety nets to catch those who lose their job because of it. However, another option is to simply make it illegal. According to Reuters, the Indian government has stated "an adverse environment is being created for (WTO) talks with moves to close down markets which were open and then talk of opening other markets. Accepting this would be difficult for the public as well as the government" [4]. Depending on the final reaction of the Indian government, not only might government agencies lose any productivity gains they might have realized by outsourcing the jobs, we might also realize losses due to retaliatory actions by foreign governments who feel (perhaps correctly, depending on how you choose to measure these things) that jobs are being taken away from their citizens. Thus we come full circle to the idea that arbitrary lines, as in measurements of productivity, described above, and as in free trade, here, can have unintended effects.

© Copyright 2004, David Barber.
If you have comments send them to david@davidbarber.org


[1] - "Bush Economist Performs Bellyflop Into Outsourcing".
Alan Murray, Wall Street Journal Europe, 17 February 2004.

[2] - "Hunt begins for millions of missing jobs as US recovers"
Dan Roberts, Financial Times, 17 February 2004.

[3] - "Bush Economist Performs Bellyflop Into Outsourcing".
Alan Murray, Wall Street Journal Europe, 17 February 2004.

[4] - "India says U.S. outsourcing curb risks WTO support"
Surojit Gupta, Reuters, 17 February 2004.

Related story: Economist, Feb 19 2004.