After decades, you’d think we’d know if outsourcing was The End of Middle Class America.
An FKD Feature exclusive

Outsourcing was, at one point, a much-needed solution to a millennial problem. It later became a millennial problem.

The millennium bug

In the 1960s and ‘70s, computer programmers coded years in two digits – 64 for 1964, for example. This meant that, come January 1, 2000, some programs wouldn’t be able to distinguish between the year 2000 and the year 1900; for others, 00 signified no date at all.

Because programs for utilities services, planes, supply chains, healthcare systems, banking and even the petroleum industry relied on correct dates, millions of people worried that January 1 signaled doom. A 1999 New York Times article called Y2K – year 2000 – “an expensive, potentially deadly global challenge,” citing polls claiming 10 percent of citizens expected to withdraw “most or all of their money from banks,” and 17 percent “expected to buy either a generator or a wood stove.” TIME ran a cover story on “The End of the World?”

Of course, nothing happened. On January 1, everything ran as usual, and everyone wondered why the freak out.

It’s unclear whether Y2K would have been a problem at all – even if companies and governments hadn’t spent hundreds of billions to fix their code. But one thing we know: the Y2K crisis fueled a massive trend of outsourcing IT and other industries to India.

Anupam Chander explains in The Electronic Silk Road, “With their lower labor cost base, Indian software companies recognized an opportunity to attract new clients, especially from the United States.” Indian outsourcing firms, most notably their leading software company, Infosys, booked billions of dollars from American businesses desperate to update their systems without breaking the bank.

Faster, cheaper and better

What was once a quick-fix became an irresistible movement. As the economists Devashish Mitra and Priya Ranjan summed in a 2007 paper, “temporary shocks like the Y2K problem can have permanent effects, i.e., they can permanently raise the extent of offshoring in an industry.” “At Internet speed,” Chander writes, Indian outsourcing firms became billion-dollar, multinational companies.

In 2004, when the outsourcing debate exploded during the election, Infosys CEO Nankin Nilekani told the Economist, “Almost everything that is done can be done by us faster, cheaper and better.” Nilekani also convinced New York Times columnist Thomas Friedman that electronic communications were simply leveling the playing field for international workers. “My God, he’s telling me the world is flat!” wrote Friedman.

Is the playing field still level, though, if foreign workers can and will do the same work as millennial Americans for a fraction of the price? This is one facet of the argument against outsourcing.

The millennial impact

But, as two 2013 articles point out in the Atlantic and the Economist, this premise is no longer true: many foreign workers won’t do the same work for a fraction of the price. As India’s economy begins to catch up, outsourcing no longer carries the financial benefits it once did. Cheap labor isn’t cheap anymore.

Furthermore, most American jobs that can be outsourced have already been. So outsourcing has, in the Economist’s words, reached a saturation point. As Deloitte Consulting predicted back in 2005, outsourcing has begun to lose its “holy grail” status for American corporations. In fact, businesses like Walmart, Boeing, Ford and Dell have brought thousands of jobs back to the United States.

Still, one article recently called offshore outsourcing “a greater threat than terrorism” to our economy. President Trump has said that, “We’re living through the greatest jobs theft in the history of the world.”

Are foreign workers actually taking millennial American jobs?

If you’re well-educated and/or have specialized skills, probably not. That’s because companies typically keep high-level knowledge work at home and then outsource “back-office” work. Most of these millennials don’t consider Chinese manufacturing threatening. Likewise, India’s back-office outsourcing firms don’t threaten this group, who want to be lawyers, doctors, engineers, academics, architects, entrepreneurs and managers.

In other words, the millennial elite is immune to outsourcing because they don’t want or need those jobs.

In fact, offshoring could even benefit them because it creates new jobs back home in fields like marketing, design, finance and engineering. For instance, between 1999 and 2003, 125,000 programming jobs were lost to offshoring – but then 425,000 American jobs were added for higher-skilled software engineers and analysts. One paper explains, “What is seen are jobs seemingly moving offshore. But what is far more difficult to see is all the jobs that are saved or created by outsourcing.”

One conceivable setback for elite, entry-level millennials is if potential starting positions have been offshored. This could make it hard for them to get a foothold in their desired occupation, let alone move up the ladder. But there’s a mounting difference between entry-level and low-level jobs; today, starting in the call center will nearly never land you CEO. Companies know they’ll eventually need to replace upper management, so they funnel high-potential millennials into leadership training programs with entry-level job titles.

"Knowledge work positions requiring minimal education or skills, on the other hand, may be more vulnerable."

If you’re a service worker whose job requires a body in America, you’re also safe from outsourcing. We’ll always need retail salespeople (the most common occupation in the United States), cashiers, food prepares and servers, nurses, housekeepers, flight attendants, hair dressers, construction workers and police officers. Knowledge work positions requiring minimal education or skills, on the other hand, may be more vulnerable. This group includes secretaries, telemarketers, bookkeepers, data entry and auditing clerks, and customer service representatives.

Here’s why: A Harvard economics paper explains that between 1970 and 1998, when computerization reduced labor demand for low-skilled workers, “computers substituted for jobs that could be accomplished by following explicit rules, but were complements to jobs requiring problem-solving and complex communications.” Read: Computers took jobs from low-skilled workers but supplemented jobs of high-skilled workers.

The same thing happens with outsourcing, probably to a lesser degree. Job gains from outsourcing aren’t evenly distributed. Instead, “high-skilled foreign workers are complements with U.S. workers, while low-skilled foreign workers are substitutes for them.”

But this may overstate the case against offshoring, because many low-skilled occupations have already been automated or will be soon. In other words, with offshoring losing its corporate appeal and automation rapidly advancing, outsourcing is the least of middle-class millennial problems. We should be careful not to scapegoat it.

The takeaway

The Congressional Resource Service reported estimations that the United States loses about 300,000 jobs a year to offshore outsourcing – a big-sounding number that’s actually just 0.2 percent of our workforce and doesn’t include the number of jobs we stand to gain. They concede that “the short- and long-run labor market implications of offshore outsourcing remain unclear.” After decades, you’d think we’d know if outsourcing was The End of Middle Class America.

Economist Gregory Mankiw is more blunt. He writes, “the empirical evidence suggests that the hysteria over offshore outsourcing is far out of proportion to its actual impact.”

Hopefully, like Y2K, this hype will someday end uneventfully.

 

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Posted 02.15.2017 - 03:02 pm EDT