N. Gregory Mankiw, chairman of President Bush's Council of Economic Advisers and an economics professor at Harvard, proved his political tone-deafness in February when he observed that outsourcing by U.S. companies is "probably a plus for the economy in the long run." Mankiw hasn't said much on the subject since then, but a lively debate is raging in academic circles about the extent and importance of the trend.
The discussion excerpted here took place via teleconference on May 18 at the New York-based Academy of Management, a 68-year-old professional association of more than 14,000 members worldwide who study management and organizations.
Sara L. Rynes, chair, Department of Management & Organizations, Henry B. Tippie College
of Business, University of Iowa
Rosemary Batt, Alice H. Cook
Professor of Women and Work at the Industrial and Labor Relations School, Cornell University
Peter Cappelli, George W.
Taylor Professor of Management, Wharton School, the University
Richard A. D'Aveni, Professor
of Strategic Management, Amos Tuck Business School, Dartmouth College
Martin Kenney, professor,
Department of Human and
University of California at Davis
Thomas A. Kochan, George
Maverick Bunker Professor
of Management, co-director
of the Institute for Work and
Employment Research, MIT
Sloan School of Management
Raghuram Rajan, Economic
Counselor and Director
of Research, International
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.
D'Aveni: This process may be more difficult for service industries than for manufacturing, where an auto worker could be redeployed to make higher-end equipment. Tax accountants can't be retrained in three months or four months, as a factory worker can. They have to put in years of school and apprenticeship to develop the expertise needed for a higher-value-added position.
In addition, it is far from axiomatic that the United States will be able to create the number of high-value knowledge jobs that may be required, given the decreasing expenditures in this country for R&D at both the corporate level and national level, and given the lagging rate of patents inside the U.S. versus outside the U.S. . . .
Rosemary Batt: Things don't look very promising either at the low-wage end of the workforce. Although we've supposedly been creating this knowledge economy, about 40 percent of U.S. workers are in low-wage service and sales. Historically, the thinking has been that the way to get wages up was through enhanced productivity, which has been difficult to achieve in services. Now, lo and behold, we have new technologies . . . that would seem to offer the promise of increased productivity and good office jobs, as, for example, in call centers. The problem is these technology-enabled jobs can be eliminated at the drop of a hat. There are no leverage points to raise wages. The minute a unionization effort gets under way, management will close up shop and move.
Rynes: A piece of conventional wisdom for some time has been that the more skills and education one has, the more likely one will be to escape the negative effects of globalization. In view of the increased offshoring of technical and white-collar jobs, is this still the case? What career advice would you give to workers and to students?
Cappelli: The idea that a college degree protects you is very much a traditional notion in the U.S. economy and the U.S. workforce. It was true into the 1980s, but it's absolutely not true now. . . . Another traditional notion that has now gone by the wayside is that developed nations would lose low-skill jobs through globalization and would be left with high-skill jobs. That is not true, either, which makes it very difficult to give career advice to people, particularly if they're concerned about having a stable, secure job.
Thomas Kochan: I agree that some jobs requiring advanced education are at risk, but I think it would be a mistake to stray from the notion that we should encourage education. What we should be trying to foster is the right mix of strong technical skills and communication skills. We've created too many people who have kind of generic MBAs.
Rajan: If flexibility contributes to job security, I'm not sure that the MBA is the worst form of education. It does prepare you to change jobs, if necessary, and gives you general skills that may be useful if your career is not going anywhere.
Cappelli: Clearly, it makes sense for the economy as a whole to invest more in education. But for individual workers, more education doesn't necessarily provide protection, and it's not evident what type of education would do so. This is a difficult notion for some people to grasp. The idea that getting a computer-science degree might not necessarily provide much job protection seems to stand traditional notions and values on their head.
Rynes: Is there enough urgency about offshoring?
D'Aveni: There is plenty of urgency right now, but it's politically motivated and not attentive enough to the larger change destined to take place in the world economy. We are going to see the relative role and power of the United States diminish over the long term as a result of the rise of China and India, even if that development doesn't reduce our standard of living. . . .
Batt: The problems we have been addressing . . . are not unique to the United States or even to the developed world. India, the Philippines and South Africa . . . are concerned about preventing jobs from being outsourced down the line to lower bidders. The overarching international challenge is how to keep wages at the low end from falling in a perpetual race to the bottom.
Rynes: When Richard [D'Aveni] commented that the public discourse about offshoring has been too politically motivated and too narrowly focused, I thought I heard a collective "yes" from the panel. What is it going to take to get informed discussion out of Washington about the big issues that have been raised in the past 10 minutes, such as our role in globalization or our relationship to other countries?
Kochan: Ultimately, I think, the pressure is going to come from our kids. . . . I expect this group will be the vanguard for reform in this country, because they are well educated and are going to be frustrated by their inability to achieve their parents' standard of living and by the number of hours it takes to earn a decent living. Our job is to have the ideas ready, because they're going to demand change, and the ideas will not come from Washington or from the current labor force.