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December 13, 2004

Business Week's View of White-Collar Outsourcing

But it's not a challenge to, it's a confirmation of conventional Stolper-Samuelson trade theory: the magnitude of the global gains from expanded trade opportunities is roughly proportional to the individual losses by those who find themselves ground by the millstones of the global economy:

Shaking Up Trade Theory: "I'm worried that rising anxiety among higher-skilled workers will erode support for continued globalization in the U.S.," says Dartmouth University economics professor Matthew J. Slaughter. How large might the white-collar offshoring trend become? The more jobs that go, the greater the impact on U.S. wages. Consultant Forrester Research Inc. (FORR ) in Cambridge, Mass., was among the first to spot the white-collar job shifts and has done the most detailed projections so far. It sees the pace of U.S. job flows abroad averaging 300,000 a year through 2015. This is probably conservative since Forrester has also found that the number of U.S. companies among the 1,000 largest that engage in some level of white-collar offshoring will rise sharply -- from 37% today to 54% by 2008. Already, some 14 million white-collar jobs involve work that can be shipped electronically and thus in theory could be moved offshore, according to a study by economists Ashok D. Bardhan and Cynthia A. Kroll at the University of California at Berkeley's Haas School of Business.

The hit to wages could be powerful if that happens. Forrester analyst John C. McCarthy identified 242 service jobs as likely to be affected among the 500-plus major occupations tracked by the Bureau of Labor Statistics (BLS). He ranked each by the share of jobs employers are likely to shift abroad by 2015. His conclusion: The cumulative job outflow will total 3.4 million over that period. That comes to 6% of the 57 million people who work in these 242 occupations today.

If that's in the ballpark, U.S. white-collar wages would get whacked, says Harvard University labor economist Lawrence F. Katz. Every 1% drop in employment due to imports or factories gone abroad shaves 0.5% off pay for remaining workers, he found in a study with Harvard colleagues Richard B. Freeman and George J. Borjas. So if job losses rise to 6% of the white-collar total, these workers' pay could be depressed by 2% to 3% through 2015, figures Katz. While a few percentage points over a decade or so may not sound dire, it's roughly as much as blue-collar workers lost to globalization in recent decades. "White-collar workers have a right to be scared," says Katz.

Another way economists gauge the potential wage impact is to look at examples of how people fare when they lose a job and extrapolate for those who might get displaced by offshoring. Turns out that just 30% of laid-off workers earn the same or more after three years, according to a study of 22 years of BLS data by economics professor Lori G. Kletzer of the University of California at Santa Cruz. Only 68% even hold a job at that point, while the rest are unemployed, retired, or perhaps at home with children. On average, those reemployed earn 10% less than before, Kletzer found. "Clearly, offshoring will be bad for U.S. wages, given what the job displacement numbers tell us," says Princeton University economics professor Henry S. Farber, who has written extensively about displaced workers.

But even if the incomes of more U.S. workers fall, won't the rest of American consumers benefit from the lower-priced goods and services globalization brings? Not necessarily, some economists now believe. Most studies of trade's impact on pay, including Katz's, assume that factory-job losses simply shift the demand for labor from one kind of worker to another higher up the value chain. So higher-educated workers gained much of what the less-schooled lost.

But if white-collar offshoring swells enough, the resulting job losses could undercut a large swath of U.S. consumers. In part, this is a question of scale. There's little doubt that globalization is likely to continue to cut into the country's 14.5 million factory hands. Add in 57 million white-collar workers suddenly facing global competition, too, and more than half the U.S. workforce of 130 million could feel the impact. Then, economists conclude, the benefits of globalization would flow mostly to companies and shareholders who profit from the cheaper labor, with little pass-through to workers and consumers. "If a majority of Americans have lower wages from outsourcing, then capital would be the prime beneficiary, even if U.S. GDP goes up," says Harvard's Freeman....

And the bulk of this last paragraph is simply wrong. Pass-through to consumers is very large. Workers making tradeables (and their households) lose; workers making non-tradeables (and their households) gain; shareholders gain.

Posted by DeLong at December 13, 2004 03:09 PM

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