The politics and economics of outsourcing

Offshore outsourcing "is a difficult issue for economists", according to Harvard's Gregory Mankiw and Phillip Swagel from the American Enterprise Institute in a newly published AEI Working Paper. In 2004 both authors were working at the Council of Economic Advisers as, respectively, chairman and chief of staff, and the outsourcing debate was in full swing. The Politics and Economics of Offshore Outsourcing (PDF) reflects that backdrop:

During the presidential campaign of 2004, no economic issue generated more heat or shed less light than the debate over offshore outsourcing. ...While the job of the CEA is to focus on the economics of current policy debates, the environment in which that job is performed is highly political, especially in an election year. To some extent, therefore, this paper is a report from inside the eye of a storm. Our goal is both to describe the heat and then to shed some light.

The first part of the paper focuses on the politics, describing the outsourcing debate of 2004. ...The second part of this paper surveys the empirical literature on offshore outsourcing, with an emphasis on outsourcing of business services.

Despite data limitations, the authors offer some relatively upbeat conclusions:

There is a lot we still do not know about outsourcing, largely because the available data do not provide the information needed to fully understand the magnitude of outsourcing, the reasons behind it, and the effects it has on the economy. What is known, however, suggests several tentative conclusions:

• So far, the extent of outsourcing to date and in the foreseeable future is and will be modest relative to any meaningful labor market indicator.

• As technology develops and global economic integration deepens, more jobs and people will be affected by actual or potential offshore outsourcing. This could affect employment relationships and alter incentives for human capital accumulation. Further development of theoretical models will help foster better understanding of the associated welfare impacts.

• Outsourcing appears to be connected to increased U.S. employment and investment rather than to overall job loss. Some U.S. jobs are certainly lost to other countries. On the whole, however, firms involved with offshore outsourcing are not shifting net jobs overseas but instead are creating jobs both in the United States and in other countries.

Outsourcing will create winners and losers, and the pain of dislocation will be real for workers and their families. Taken together, however, these conclusions suggest that offshore outsourcing is likely to be beneficial for the United States as a whole. This presents a challenge of how to best assist people affected by offshore outsourcing without retreating from international engagement and thereby giving up the economic gains that trade in services makes possible. As is the case with more familiar forms of trade, in the long run, outsourcing is likely to be a good thing for the U.S. economy.

While their conclusions are in line with most of the empirical evidence so far, it seems a little complacent to assert that the extent of outsourcing will remain modest "in the foreseeable future". It is just too early to tell.

Comments

[Lord]

Yes, outsource high paying jobs and create more low paying ones in transportation and personal services and the world will be hunky dory. Is this supposed to be the level of intellectual reasoning today?

[angela]

I think like the right's ten times a year declaration of complete victory in Iraq, the pro globalization movements Pan glassian rhetoric cuts off the possibility of analysis and reform while setting the stage for disillusion.

In other words the "advocates" of both Iraq and globalization are doing more than the opponents to undermine these things.

[la]

There isn't any intelluctual reasoning today. We have been taken over by a cult, politically and academically.

[Offshore Web Design Company]

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