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SECOND OPINION  by Cliff Slater

June 21, 2004

Outsourcing not the evil it's made out to be

Having just spent a frustrating hour talking from Hawaii to a Hewlett-Packard techie somewhere in Uttar Pradesh, my thoughts have turned to outsourcing. [1]

First, let us dispose of some outsourcing myths. According to the U.S. Dept. of Labor, domestic employment is at an all time high and climbing [2] while the unemployment rate is moderate [3] and declining. [4]

While the outsourcing of computer programmers is making a lot of noise lately, the latest U.S. Department of Labor estimates are for a 50 percent growth in domestic employment for programmers over the next ten years — after outsourcing. [5] And programmers have seen a 17 percent increase in compensation over the last ten years even after allowing for inflation. [6] And these increases in jobs and wages are despite the build up for Y2K and its aftermath, the dotcom bust, and 9/11.

For the most part, the work going overseas is what falls under the category of “grunt work.” That is the work requiring the lesser skilled, the lesser educated, and those less able to communicate appropriately. As I understand it, only certain kinds of less complicated programming tasks are going to India and elsewhere.

There is a tendency to discuss only raw labor costs. However these are not the only factors in outsourcing. Delays from placing an order to receiving the product can be very costly in everything from software to fine jewelry. Communication costs can be costly; if you have ever outsourced some of your gardening to someone who speaks English as a second language you will have undoubtedly experienced having prized plants or trees removed mistakenly. In short, cheap labor, in gardening or manufacturing, can turn out to be very expensive, and puts a limit on what can be efficiently outsourced overseas.

We must beware of the doom and gloomers who talk about us becoming a jobless society. They are the same ones who were forecasting a paperless society. Instead, office paper usage has doubled in the last 20 years.

We are experiencing what economist Joseph Schumpeter called “creative destruction.” [7] We created printing jobs 500 years ago and, in the process, put scriveners out of business. These jobs evolved over centuries into compositors, and later linotype operators. Then came the computer age and within 20 years these jobs had also disappeared. Today we use fewer but more high tech jobs in the printing trades.

The money saved from these changes and others in the “creative destruction” process have fueled the growth of jobs in industries that did not exist 20 years ago such as the Internet, the high tech health field and cellphones.

The prestigious Institute for International Economics shows that the “churn” in the job market — the rate of jobs lost and gained — is a staggering 7.5 percent every quarter. [8] Certain jobs are being eliminated since we now have more efficient ways to do the jobs such as gas station attendants, bank tellers, farmers, cinema projectionists, dishwashers and switchboard operators. They are not going overseas; they are being replaced by automation. The new jobs being gained are, for example, in the health field, fitness centers, software, and web workers.

And do not forget “insourcing.” Over six million Americans are now employed by foreign companies here in the U.S. and it is increasing. [9] For example, 4,400 Americans are now producing the new Mercedes M-Class in Vance, Alabama, Nissan is planning for over 5,000 American employees at its new $1.4 billion plant in Canton, Mississippi, and Taiwan’s Quanta Computer is adding 500 jobs in Nashville. [10]

And most Americans are unaware that, as examples, Gerber’s babyfoods is a Swiss Company, Certainteed Windows is French and Tempur-Pedic Mattress is Swedish. They all now manufacture in the U.S. and are currently expanding their presence. [11]

The important thing is that we must stand back a little from the anecdotal fear mongering about job losses and look at the full range of employment effects over time. We are in a global economy now and virtually everyone is better off for it.

Cliff Slater is a regular columnist whose footnoted columns are at: www.lava.net/cslater