The Outsourcing Threat Is: a) Big b) Small c) Both

A full transcript of this discussion is available at the Academy of Management's Web site, www.aomonline.org.

Sara Rynes, moderator: It seems you can hardly pick up a newspaper or magazine these days without reading about the outsourcing or exporting of work from the United States to other countries. Have the political and media reactions to these phenomena exaggerated their significance to the U.S. economy and workforce?

Raghuram Rajan: Outsourcing of jobs abroad represents only about four-tenths of a percent of U.S. gross domestic product, so it's hardly the size of the phenomenon that accounts for the uproar. More important, I think, is concern about how big this trend could become and the fact that it's affecting a segment of the workforce that hitherto was never subject to this kind of competition, namely service workers.

Martin Kenney: I agree that the number of U.S. jobs offshored to developing nations is quite small. After all, there are about 130 million people employed in the United States, while the number of software jobs and business-process jobs that have gone to India amounts to perhaps 650,000 or 700,000. In terms of growth, though, there is reason to believe we are at the lower elbow of the S-curve, by which I mean that this trend could accelerate quite rapidly.

Richard D'Aveni: [W]hat I'm amazed to discover is that a significant portion of jobs in several major industries is at risk right now. I've looked at the accounting industry, at business-process outsourcing, at information technology, at strategy consulting, and at four aspects of financial services -- namely, asset management, investment banking, commercial banking and retail banking. And when one analyzes what can be outsourced abroad and what cannot be, it turns out that a very significant number of jobs can be and that the threat to the people in those industries is quite real. My sense is that people's intuitive fear of this largely accounts for the uproar about offshoring. People watched the first wave of offshoring take place in manufacturing, and the economy survived by migrating to services. But now a major part of the service economy may undergo the same disruption, and people don't have another sector to which they can run.

Rynes: When will we have a better handle on how much is being outsourced abroad and how quickly it is changing?

Kenney: The Brookings Institution has scheduled a meeting in June that will bring together all of the government statistical organizations and various scholars to ponder how to get better measures.

Peter Cappelli: As things stand today, it's very hard to collect these data, because there is no record of outsourcing per se in company financials, let alone how much of it is going offshore.

Rynes: It would seem, then, that we do not know as much about the current situation as we would like to know. At the same time, certain features of the world economy, as it becomes increasingly globalized, are fairly clear. We do know that the world's developed countries constitute just a small fraction of the world's workforce and that the means of exporting jobs to the less developed world is far greater than it was just a decade ago.

D'Aveni: I think the excess labor supply abroad is going to have [a] substantial impact on our wages in service industries, just as it has had on manufacturing wages over the past 20 years. In fact, let me offer an illustration to suggest that the problem could very well turn out to be worse. This year, some 25,000 U.S. tax returns for 2003 were prepared in India; next year, the contracts have already been signed to prepare about 300,000 tax returns [there].

Now, if you're a tax accountant, and you have to compete with the wages of folks in India doing the same work, it's a substantial problem. It is also likely to have a considerable ripple effect. Right now it is not primarily the Big Four accounting firms that are starting to outsource to India but rather the mid-size accounting firms, which do it to compensate for their lack of economies of scale. Before long, this will put price pressure on the tax-preparation operations of the big accounting firms, which will respond by also outsourcing abroad. . . .

More broadly, I can see the offshoring phenomenon putting a lot of pressure on our educational system to develop better knowledge workers able to remain competitive with India and the rest of the world. A major question for us as a nation will be whether we will find extra resources for education in the face of increasing outlays for pensions and health care for aging baby boomers, interest on the national debt, or the demands of the war against terrorism. I believe we're going to have a problem maintaining our lead as the best knowledge workers in the world.

Rajan: A lot of the discussion about work going abroad and going off forever has a little bit of the "lump of labor fallacy," which economists always complain about. The fallacy is that there is only a fixed amount of work in the world and once it goes, no more work is to be had. Of course, it doesn't happen that way. If jobs can get done more easily abroad, the likelihood is that there will be more higher-value-added work here. Now, it is not an automatic process; it has to be nurtured, and clearly, education is part of this process. But, if we do nurture it, high-value-added work will emerge to replace the low-value-added jobs that have gone abroad.

Nobody laments the high-risk steel jobs and [other] high-risk jobs that have gone outside. Why would we lament the loss of boring accounting jobs, if something better comes to take its place? I'm an optimist, because we see from the history of trade that something better has always taken the place of lost jobs.