The Hindu Business Line : Is outsourcing the cause of job loss in the US?

The fear that outsourcing to India will eat into wages and result in huge lay-offs in the US is unwarranted. Stopping outsourcing is not the solution for job losses in the US.

WITH its abundant supply of labour and low operational overheads, India is a prime outsourcing destination for countries such as the United States. As more tasks are assigned to Indian professionals there is widespread fear that such excessive outsourcing will drive down wages and result in massive job losses in the US. But this is far from reality.

As a United Nations Conference on Trade and Development report `Shift Towards Service' shows, the predicted 3.4 million service jobs to be outsourced from the US till 2015 seems insignificant compared with the average turnover of four million jobs every month.

According to an independent agency ITAA (Information Technology Association of America) and Global Insight 2004, only 2.8 per cent of all IT software and service jobs in the US were lost to outsourcing between 2000 and 2003. The UNCTAD report predicts that call centre activity will grow from 3 per cent in 2001 to 5 per cent in 2005. Further the number of IT-related jobs in the US is expected to grow by 43 per cent by 2010.

A few international experiences are also available in this context. Following the opening of China's economy to foreign investment in the 1970s, Hong Kong entrepreneurs shifted their manufacturing activities to the mainland.

China's abundance of low-skilled workers made it the right choice for low-tech jobs, while skilled jobs remained in Hong Kong. Subsequently, the demand for skilled workers in Hong Kong increased sharply, and the rate of skill upgrading was greater in those industries that outsourced to China.An estimated 45 to 60 per cent shift in the demand for skilled workers was attributed to outsourcing.

Studies show that outsourcing is not the cause for wage declines and job losses. Paul Krugman and Robert Lawrence, on the contrary, found that trade with poor countries in fact improved wages. Another study by Robert Feenstra and Gordon Hanson examined the impact of outsourcing on foreign suppliers of labour intensive components to US manufacturing firms. They concluded that outsourcing raised the real wages of US workers. To capital-rich and labour-intensive countries outsourcing has proved to be a most economically efficient option, allowing those rich in capital to export capital-intensive products and countries abundant in human resource to export labour-intensive products.

The fear that outsourcing will eat into wages and result in huge lay-offs stems from the assumption that lower prices will mean lesser wages. But whether or not outsourcing will adversely impact the labour market depends on the prices of goods and the real wages of those who produce them.

According to a study by Jagdish Bhagwati titled `Defence of globalisation', during the 1980s when the real wages of US workers remained stagnant, prices of labour intensive goods actually rose in relation to prices in the global market. But in the 1970s prices of goods fell while real wages rose. Hence, cost of products cannot always be linked to wages.

On the other hand, they are determined by a host of factors such as production, consumption, and capital investment, productivity growth and so on. More investment would naturally lead to more production and if production is higher then consumption would result in lower prices.Factors that affect outsourcing are technical changes and huge capital investment in the US.

More investment in the US creates an extra incentive to manufacture capital-intensive products. At the same time, technical progress also induces traditional industries to shift to capital-intensive products, outsourcing back-end services from developing countries to save on operation costs. The reason for decline in wage and job loss is sluggishness in the US economy characterised by rising inflation, slow growth and a high unemployment rate. The first quarter GDP grew at less than 3.7 per cent with the unemployment rate being 5.1 per cent; industrial production was only around 2.7 per cent in May. Consumer price rose up to 3.1 per cent in the first quarter of this fiscal compared to 1.7 per cent a year ago.

To some extent, the loose monetary policy is responsible. Monetary expansion increased liquidity in the market. Low interest rates and availability of loans spark huge investment. This resulted in poor savings, which, in turn, increased the gap between savings and investments. These factors contributed to a huge current account deficit in the US at 6.1 per cent of GDP and $709.7 billion in May. Current account deficit implies that the magnitude of import is higher than that of export, which leaves a country lacking in export competence. This results in an economic slow down or a decline in wages and some job loss.

Therefore, the US' concern over the negative impact of outsourcing on the labour market is unwarranted. In the past, when developing countries such as India sought to protect their domestic industry, developed countries argued that trade sans barriers would benefit the world economy.

Now that the tables have been turned, and India is becoming a more efficient supplier of goods and services, developed countries sing a different tune. But stopping outsourcing is not the solution for job losses in the US. A more appropriate one would be for the US to formulate constructive policies that stimulate domestic demand, reduce current account deficit and realign the dollar with other currencies.

(The author is a Faculty in International Business Area at the Institute of Management Nirma University of Science and Technology, Ahmedabad.)

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