April 02, 2004

David Wessel on Outsourcing

The Wall Street Journal's David Wessel has a very nice article about outsourcing this morning:

WSJ.com - The Future of Jobs: New Ones Arise, Wage Gap Widens: ...two different kinds of jobs are likely to flourish amid outsourcing and computerization. One sort requires physical contact -- nursing-home aides, janitors, gardeners, dentists. Foreign-born workers may do them, but they'll have to move to the U.S. A 2000 survey found that the average starting salary of graduates of community-college dental-hygiene programs was $41,900. A hot program at many community colleges these days is massage therapy. Springfield Technical Community College in western Massachusetts gets nearly 50 applications each year for the 20 slots in its six-year-old program, nearly all of them from women. Graduates earn an associate's degree and haven't had any trouble finding work, says Bernadette Della Bitta Nicholson, who runs the program. About a third go to work for local spas, which give therapists half of the $80-an-hour charge for a massage. Another third find work at local health-care facilities and the remainder go into business for themselves.

The other sort of jobs destined to remain here are high-end jobs. Some require exchanging information in ways that e-mail and teleconferencing don't handle well. Think about teaching first grade or selling a mansion to a multimillionaire or conceiving new forms of software. Others demand such intimate knowledge of the U.S. that it's hard to see foreigners doing them from afar. Think about marketing to American teenagers or lobbying Congress.

Precisely identifying jobs that will replace those now disappearing is impossible. The Bureau of Labor Statistics, as good as anyone at this exercise, shows just how difficult it is. In 1988, the agency predicted that the number of gas-station attendants would rise from 308,000 to 331,000 in 2000. When 2000 arrived, there were only 140,000. "Most gas stations are now self-service only," BLS economists Andrew Alpert and Jill Auyer explained in a candid retrospective the agency published. The BLS didn't see that coming. In 1988, the BLS also projected travel agents would be among the 20 fastest-growing occupations, their ranks growing by 54% by 2000. Wrong again. The number of travel agents fell by 6.2%. Government prognosticators foresaw an increase in travel -- but not the explosion of online booking.

Of 20 occupations that the BLS predicted in 1988 would suffer the greatest losses between 1988 and 2000, half actually grew. The agency predicted that the number of assemblers in electrical and electronic factories would drop by 173,000, a 44% decrease. Twelve years later, there were 45,000 more, an 11% increase. Neither outsourcing nor robots made as much of a dent as the BLS expected.

In trying to discern persistent trends, Mr. Levy distinguishes between jobs that require workers to follow rules and those that require them to recognize patterns. The first -- whether in manufacturing or services -- are vulnerable to technology and outsourcing. The second are less vulnerable. Consider income-tax preparation. "The tax system is based on rules ... built into software like TaxCut and Turbo Tax," Mr. Levy and Harvard economist Richard Murnane write in "The Division of Labor," a forthcoming book. "While the preparation of complex tax returns requires expert human judgment, many other tax returns do not. ... So it is not surprising that the preparation of routine income tax returns is beginning to move offshore." Ernst & Young LLC is sending some simple tax-return processing work to India, and a handful of U.S. companies have sprung up to help smaller accounting firms do the same.

In contrast, other jobs rely on the human ability to recognize patterns -- the truck driver turning left across traffic, for instance, or the seasoned physician diagnosing an unusual disease. The doctor may rely on X-rays read by a radiologist in India or blood tests processed automatically, but diagnosing disease remains a complex human endeavor. Such jobs are proving much harder to computerize than high-tech prophets anticipated. They also are much harder to supervise from afar and thus more resistant to outsourcing abroad.

Community colleges, publicly funded two-year colleges, excel at sniffing out jobs for which local employers are hiring -- and then training for them. "Some of this stuff isn't very scientific. It's just paying attention," says Andrew Scibelli, president of Springfield Technical Community College. "When my former wife was having our child 15 years ago and had an ultrasound, I was talking to the sonographer and asked where she got her training. 'I didn't. I'm an X-ray tech. The doctors and the folks who make the equipment showed me how to do this,' she said." Mr. Scibelli went back to his office and asked his staff to look into a training program, talked to local employers, got the OK of the state bureaucracy and started a program. Today, the program, started in 1994, draws more than 100 applicants each semester but accepts only 10, most of whom take about three years to complete the prerequisites, the coursework required for certification and clinical rotations. Graduates start at between $20 and $28 an hour. These days community colleges are baffled by conflicting forecasts about the job outlook. "There is an incredible angst about the jobless recovery and yet there's no change in the forecast that 10 years out there will be this incredible skills shortage," says Albert Lorenzo, president of Macomb Community College outside Detroit. "All of us are trying to reconcile this."

One unpleasant possibility, acknowledged even by those firmly in the trade-is-good camp, is that jobs will proliferate at both ends of the barbell -- and fewer in the middle. The result would be an ever-wider gap between well-paying jobs and poorly paid jobs. That, too, has happened before, as recently as the 1980s when unionized skilled manufacturing jobs evaporated. The overall pace of wage increases in the U.S. generally tracks growth in productivity, the amount of goods and services produced for each hour of work. But in any economy, wages for workers in high demand rise and wages for others lag or even fall. For the past couple of decades, the forces of economic change have favored workers with education and skills. Though unemployment among college graduates has risen lately, the jobless rate among workers with a four-year college degree remains only 3%, well below 5.5% for high-school graduates and 8.5% for high-school dropouts...

Posted by DeLong at April 2, 2004 04:28 AM | TrackBack | | Other weblogs commenting on this post

The real key point in the analysis is the description of bar-bell type job distribution.
Economic forces are squeezing the middle class and policy is making the problem worse rather than trying to ease the squeeze on the middle class.

We are being turned into an "upstairs-downstairs"

Posted by: spencer on April 2, 2004 05:26 AM


For instance why does "conceiving new forms of software" need to be done here? Likewise with complex U.S. tax returns. There is no reason why someone in India couldn't become an expert in U.S. tax law. Even much high end medical diagnostics could as easily be done elsewhere.

A small point: I don't know what they pay first grade teachers in your state but its not one normally considered being "high end".

Frankly the only way I can see out of this is if the demand for normal middle class jobs grows fast enough that it more than overwhelms the rate that outsourcing is happening.

On the other hand if the huge competitive advantage than countries like India and China have continues than the technology that makes outsourcing possible will advance rapidly and the dark potential of truly massive outsourcing will be upon us.

The growing bottom line of the companies taking advantage of this outsourcing are not really tied to the welfare of the U.S. or her citizens. They are after all international and they can thrive anywhere.

Posted by: Boelf on April 2, 2004 07:08 AM


A good point, which it seems the "free trade is good" contingent is obligated to address: "is free trade good for the Gini Coefficient?"

Posted by: Michael Robinson on April 2, 2004 07:32 AM


In a blog from where I can't remember, a couple of Indian guys were predicting that the "West" (USA) would be outsourcing the wearhousing of us old crocks. The cost of "high touch" labor in the west will drive it. Might not happen, but could be if the young get tired of taking care of us and tired of the high cost. When I am sitting in a wheelchair or in a bed hooked up to lots of plumbing and not really caring where I am or what is going on - will I or my family care where I am?
Wish I could live long enough to see the end point of these oncoming changes.

Posted by: dilbert dogbert on April 2, 2004 07:38 AM


Also, the inequality effects arise on both ends of the trade. The benefits of outsourcing are highly concentrated in the upper deciles of the Chinese and Indian populations.

Posted by: Michael Robinson on April 2, 2004 07:52 AM


"outsourcing the wearhousing of us old crocks"

I've often wondered why more Americans don't retire to India. It's warm and your money supposedly goes further.

Posted by: digamma on April 2, 2004 09:23 AM


What about all the dollars that are going to offshore things here.

Think about it - the US has a huge investment deficit. That means that more money is flowing in to do work here, than is flowing out to do work there. If we were at a flat balance of trade and investment - that is getting rid of our trade and investment deficit, there would be fewer, not more, jobs being created.

Outsourcing is a political symptom of a different problem.

Posted by: Stirling Newberry on April 2, 2004 09:24 AM


"Outsourcing is a political symptom of a different problem."

Which is... ?

Posted by: djs on April 2, 2004 12:35 PM


Financial Times reported a comment by Japanese finance minister about the possibility of sending their old folks to Philippines. (I can not remeber the date, maybe 8-9 month ago) His argument is that joint family system in Japan is in decendency and given the lack of safety net for the retirees in Japan, the Philippinos can take care of these people as they have tonnes of nurses and health workers. This will be what we economist call a "win-win" outcome.

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