FOREWORD................................................................................................................................ iii

ACRONYMS................................................................................................................................. ix

EXECUTIVE SUMMARY........................................................................................................... xi

CHAPTER 1: INTRODUCTION................................................................................................. 1

Origins of the Academy Study..................................................................................................... 1

Objectives of the Academy Off-Shoring Study............................................................................. 2

Study Methodology..................................................................................................................... 3

Issue 1: How Should Off-Shoring Be Defined?....................................................................... 3

Issue 2: What Do Currently Available Data Indicate about the Extent

of U.S. Off-Shoring?....................................................................................................... 4

Issue 3: What Additional Data are Needed to Provide a More Complete

Assessment of the Economic and Employment Effects from Off-Shoring?......................... 4

Issue 4: What Factors Account for Current U.S. Off-Shoring?............................................... 5

Issue 5: What are the Major Impacts of Off-Shoring on U.S. Workers and the

Economy, and the Implications for the Educational System?.............................................. 5

Road Map to the First Report...................................................................................................... 5

CHAPTER 2: OVERVIEW AND CONCEPTUAL FRAMEWORK......................................... 7

Major Elements of Off-Shoring.................................................................................................... 8

Outsourcing versus Off-Shoring............................................................................................. 8

Key Off-Shoring Components............................................................................................... 9

Potential Economic Effects from Off-Shoring.............................................................................. 10

Employment Effects............................................................................................................. 11

Other Potential Economic Effects......................................................................................... 13

Two Separate Dimensions of Off-Shoring.................................................................................. 14

The International Trade Perspective..................................................................................... 14

U.S Trade Changes and Off-Shoring............................................................................. 16

Trade Benefits and Costs and Off-Shoring Implications.................................................. 19

The Domestic Labor-Market Perspective............................................................................ 19

Annual U.S. Job Losses and Off-Shoring....................................................................... 20

Assessing the Significance of Direct Short-Term Off-Shoring Job Losses........................ 26

Distinguishing Characteristics of Current Off-Shoring Effects....................................................... 27

Conclusions............................................................................................................................... 29

CHAPTER 3: ALTERNATIVE DEFINITIONS OF OFF-SHORING..................................... 35

Multiple Off-Shoring Terminology.............................................................................................. 35

Outsourcing, Off-Shore Outsourcing, and Off-Shoring......................................................... 35

International Sourcing.......................................................................................................... 36

Global Resourcing............................................................................................................... 37

The Panel’s Choice of Terms............................................................................................... 38

Alternative Off-Shoring Definitions............................................................................................. 38

Import Substitution Definitions................................................................................................... 38

Definition Limited to U.S. Imports........................................................................................ 38

Definition Limited to Intermediate U.S. Imports.................................................................... 39

Relocation Definitions................................................................................................................ 39

Single-Event Limitations....................................................................................................... 40

Definition Limited to a Single Relocation Event Combined with the

Movement of Portions of a Firm’s Production Chain...................................................... 41

Definition Limited to a Single Relocation Event and U.S. Imports.......................................... 41

The Panel’s Definition of Off-Shoring......................................................................................... 42

CHAPTER 4: Measuring the Impacts of Services Off-Shoring—Estimates,

Methodologies, and Data Implications................................................................................. 49

Introduction............................................................................................................................... 49

Estimates of the Impact of Off-Shoring on Jobs.......................................................................... 50

Estimates of Occupations and the Number of Jobs Potentially at Risk of

Being Off-Shored.......................................................................................................... 51

Forecasts of Number of Jobs Likely to be Off-Shored......................................................... 55

Estimates of Number of Jobs Off-Shored to Date................................................................ 57

Methodologies.......................................................................................................................... 60

Theoretical Models.............................................................................................................. 60

Overviews........................................................................................................................... 61

Case Studies....................................................................................................................... 65

Direct Measurement............................................................................................................ 67

Department of Commerce’s Bureau of Economic Analysis............................................. 67

Department of Labor’s Bureau of Labor Statistics.......................................................... 69

Web and Media Search....................................................................................................... 71

Private Research Surveys and Estimates............................................................................... 71

Model Estimation and Inferences......................................................................................... 72

Technical Analyses........................................................................................................ 72

Econometric Analyses................................................................................................... 73

Microdata and Longitudinal Analysis.................................................................................... 76

Implications of Methodologies for Data Needs..................................................................... 77

CHAPTER 5: PROPOSED ADDITIONAL RESEARCH........................................................ 79

Need for Additional Research.................................................................................................... 79

Industry Study Objectives.......................................................................................................... 81

Industry Study Selection Criteria................................................................................................ 82

Critical Issues Concerning Off-Shoring Effects........................................................................... 83

Off-Shoring Adjustment Problems....................................................................................... 83

In-Shoring Effects................................................................................................................ 84

Role of Temporary Workers and Foreign Students............................................................... 84

Demographic Trends and Worker Quality Issues.................................................................. 85

Off-Shoring Implications for Education and Training............................................................. 86

TABLES AND FIGURES

Figure 2-1: Growth in Volume of World Merchandise Trade and Gross Domestic Product ............. 15

Figure 2-2: Imports of Goods and Services as Percentage of Gross Domestic Product .................... 15

Figure 2-3: Exports and Imports of Goods and Services ................................................................. 17

Figure 2-4: Private-Sector Gross Job Gains and Gross Job Losses, Total Private ........................... 21

Figure 2-5: Private-Sector Gross Job Gains and Gross Job Losses, Goods—Producing.................. 22

Figure 2-6: Private-Sector Gross Job Gains and Gross Job Losses, Service—Providing.................. 22

Figure 2-7: Private-Sector Gross Job Gains and Gross Job Losses, Information.............................. 23

Figure 2-8: Job Gains and Job Losses, Total Private Sector............................................................ 24

Figure 2-9: Job Gains and Job Losses, Goods-Producing Sector .................................................... 25

Figure 2-10: Job Gains and Job Losses, Service-Providing Sector .................................................. 25

Table 2-1: Trade in Private Services by Type, 1992-2003.............................................................. 31

Figure 3-1: Off-Shoring, Outsourcing, and In-Sourcing—An Illustrative Matrix ............................... 37

Table 3-1: Alternative Definitions of Off-Shoring ............................................................................ 45

Table 4-1: Estimates of Occupations Potentially at Risk of Being Off-Shored................................... 52

Table 4-2: Forecasts of Jobs Affected by Off-Shoring..................................................................... 56

Table 4-3: Estimates of Actual Jobs Affected by Off-Shoring ......................................................... 58

Table 4-4: Summary of Methodologies Discussed in Appendix ....................................................... 62

APPENDICES

APPENDIX A: Panel and Staff Listing............................................................................................ 89

APPENDIX B: Individuals Interviewed of Consulted...................................................................... 93

APPENDIX C: Selected Bibliography.......................................................................................... 101

APPENDIX D: Overview of Existing Data to Estimate Off-Shoring............................................... 123

EXECUTIVE SUMMARY

The shifting of business operations to off-shore locations and its impact on America’s workforce and economy are central to national debates about the benefits and costs of economic growth and trade expansion. However, there is little consensus on the magnitude and significance of off-shoring activity and its impact on U.S. employment, workers’ earnings, and the economy in general. In part, this reflects the lack of a commonly accepted definition for the current off-shoring phenomenon, the different aspects of off-shoring activities that have been reviewed, and the use of data of varying quality from various sources. But, the inherent complexity of these activities also adds to disparate views about the extent and effects of off-shoring. While concerns about off-shoring and its economic impacts are not new, current heightened interest focuses on the services sector and white collar, high tech jobs, rather than on manufacturing activities and blue collar jobs. The Bureau of Labor Statistics (BLS), the Bureau of Economic Analysis (BEA), and others have attempted to expand the range and improve the quality of available data. These efforts, while useful, do not point directly to what needs to be measured. Recent studies by the Government Accountability Office (GAO), and others reinforce a growing consensus about the need for better data.

STUDY OBJECTIVES

Public Law 108-447 authorized a grant to the National Academy of Public Administration (the Academy) to conduct a comprehensive study of off-shoring activities and their major economic effects, particularly any associated job shifts. Recognizing the disparity of views, Congress indicated that “information and opinion should be collected from stakeholders in business, education, and government, as well as professional associations and employee organizations.” To direct the project and oversee the research, the Academy established an expert Panel of Academy Fellows and specialists, knowledgeable about international trade statistics and statistical systems. The Panel agreed that a comprehensive off-shoring study should answer the following questions:

1. How should off-shoring be defined?

2. What do currently available data indicate about the extent of U.S. off-shoring?

3. What additional data are needed to provide a more complete assessment of U.S. off-shoring?

4. What factors account for current U.S. off-shoring?

5. What are the major effects of off-shoring on U.S. workers and the economy and implications for the educational system?

Without a clear definition of and consistent terminology describing off-shoring, it is impossible to answer effectively these questions. Consequently, this first Panel report recommends a broad definition of off-shoring and a consolidation of the multiple, confusing terminologies used to describe the phenomena into three basic terms: “outsourcing,” “off-shoring,” and “off-shore outsourcing.”[1] This report also reviews recent off-shoring studies to determine whether these studies provided a consistent set of estimates about the extent and significance of U.S. off-shoring and its economic impacts. Substantial differences among these studies suggest instead the need for additional research using appropriate, reliable methodologies to determine the extent and impacts of U.S. off-shoring and the adequacy of current data to develop such estimates.

OFF-SHORING COMPLEXITY CREATES UNIQUE MEASUREMENT

AND ESTIMATION CHALLENGES

The complexity inherent in off-shoring arises from several sources: the wide gamut of reasons for making off-shoring decisions, the range of economic effects derived from off-shoring, and the need to consider both international trade and domestic labor-market dimensions in assessing the extent and effects of off-shoring.

Reasons for Off-Shoring

While anticipated cost savings is the most frequently cited reason for off-shoring particular activities or parts of a production process, previous studies identify a number of other reasons, as shown in the chart from a Ventoro survey of over 5,000 North American and European executives.[2] Many of these off-shoring reasons are the same for firms choosing to outsource an activity or part of their production process to an independent domestic supplier. However, access to new markets and skill sets that may be in short supply domestically are unique to off-shoring. Previous studies have also found that the reasons for off-shoring can change over time as firms gain more experience with off-shoring activities. Moreover, several studies note that the risks involved in off-shoring have produced failures and caused companies to reverse their off-shoring decisions.[3]

Why Move Off-Shore?

Range of Economic Effects

Off-shoring decisions can generate a wide range of economic effects, reflecting the gamut of reasons for off-shoring activities. While shifts in employment and other job changes are a critical concern, other economic effects include greater operational efficiency, improved product or service quality, expanded growth opportunities, increased income, reduction (or avoidance) of regulatory and other market barriers, price changes for the off-shored goods and services, and wage impacts for affected workers. Many of these economic effects occur both domestically and overseas. The emergence of economic effects depends upon the activity being off-shored, reasons for that decision, and relative success or failure of the relocated activity. All economic effects, including any employment effects and job shifts, derive from the relocation of a current activity or a part of an ongoing process. Since off-shoring decisions affect location of business activities, these changes are potentially measurable. However, because the economic effects of off-shoring—including any net employment shifts—derive from business location changes, their relationship to these location changes needs to be assessed.

Net Employment Effects

Net employment effects from off-shoring depend on not only the number of jobs shifted, but also changes in the mix of jobs, skill requirements, and total compensation paid to domestic workers relative to payments to foreign contractors or affiliated companies. Off-shoring employment impacts can vary over time and include both direct and indirect effects. As Chapter 2 explains, indirect employment effects can increase or decrease the net employment changes derived from off-shoring. For example, efficiency or quality improvements should increase demand for products or services that depend upon the off-shored activity, offsetting some of the net employment shifts from off-shoring. On the other hand, expansion of off-shored activity could reduce future demand for U.S. exports and increase the net employment shifts from off-shoring. Two points are clear about these indirect employment effects: they are important and therefore cannot be ignored and their estimation is not straightforward. Econometric models are commonly used to estimate these employment effects.

International Trade and Domestic Labor-Market Dimensions

Accurately assessing the impacts of off-shoring is complicated because it involves international trade and domestic labor-market dimensions. Both trade and domestic labor-market data are needed to help measure the extent of off-shoring and estimate its effects. Relocation of an outsourced activity overseas should increase imports of that activity. It is unclear whether current import data are sufficiently detailed to accurately measure the shifting of specific business activities off-shore and, equally important, whether the effects of off-shoring can be distinguished from other changes affecting trade flows. From a labor-market perspective, off-shoring is one of several structural reasons for the substantial number of jobs created and destroyed quarterly in the U.S. economy. Assessing the employment effects of off-shoring should be done relative to these other structural sources of job shifts.

CONSISTENT TERMINOLOGY AND A SINGLE DEFINITION FOR

OFF-SHORING WOULD REDUCE CONFUSION

The Academy Panel’s review of previous off-shoring studies revealed that different terminologies are used to describe similar economic phenomena. One reason for the differences in the estimates of the extent and effects of off-shoring among current studies was the different definitions of off-shoring used. The Panel found the multiplicity of terms currently used to describe various aspects of off-shoring activity unnecessarily complex. The Panel suggests that three key terms be used: “outsourcing,” “off-shoring,” and “off-shore outsourcing.” The Panel recommends they be defined as follows:

Outsourcing—firms contracting out service and manufacturing activities to unaffiliated firms located either domestically or in foreign countries

Off-shoring—U.S. firms shifting service and manufacturing activities abroad to unaffiliated firms or their own affiliates

Off-shore outsourcing—a subset of both outsourcing and off-shoring in that it refers only to those service and manufacturing activities of U.S. companies performed in unaffiliated firms located abroad

Because off-shoring is not unique to the United States, “in-shoring” is commonly used to reflect the foreign counterpart of U.S. off-shoring. Thus, “in-shoring” should be defined as “foreign firms shifting service and manufacturing activities to the United States to either unaffiliated firms or their own affiliates.”

The Panel’s recommended definition for off-shoring is much broader than many others that restrict off-shoring to certain activities or to activities shifting to certain locations, as described in Chapter 3. This broad definition avoids creating artificial distinctions for similar economic transactions with the same economic effects—such as including only multinational corporation (MNC) activities within the off-shoring definition. It also avoids the pitfalls of narrow definitions that change over time and thus create ambiguity over which transactions are “off-shoring.” For example, the economies of low-wage countries can grow over time, or affiliated firms can be sold off over time. The Panel, however, believes the definition of off-shoring should be consistent through time to avoid such ambiguities.

CURRENT ESTIMATES OF OFF-SHORING VARY

The literature review presented in Chapter 4 had several objectives:

determine whether the studies reviewed provide a consistent set of estimates about the extent of U.S. off-shoring and its various economic effects, including any net employment shifts

identify how currently available data affect estimates of the extent of off-shoring and its economic effects

examine the methodologies and data used to develop estimates and the ability to overcome particular data limitations

Major studies that have estimated the employment effects of off-shoring develop three different types of employment estimates: some focus on jobs potentially vulnerable to off-shoring, others present projections of future employment effects, and a third group estimate actual job shifts that have occurred. In addition to the significant variation in definitions already discussed, these studies have substantial differences in terms of data used, periods covered, analytic methodologies employed, and estimates of employment and other effects from off-shoring. Given these differences, the range of estimates contained in these previous studies is understandable.

Several analysts compare their estimates of the numbers of jobs impacted by off-shoring to total annual job losses in the United States. Data from BLS’ Business Employment Dynamics (BED) data series indicate that quarterly gross job losses and gains since 2002 have averaged between 7 and 8 million, with the gains exceeding the losses since the second quarter of 2003. Compared to these aggregate gross U.S. job flows, job-loss estimates from previous off-shoring studies, ranging between less than 15,000 to 192,000 annually (see Table 4-3 in Chapter 4), appear modest. However, this aggregate comparison does not account for potentially significant distributional issues for particular occupations or areas affected, nor does it consider the severity of the adjustment costs imposed on workers displaced by off-shoring.

NEED FOR ADDITIONAL RESEARCH

Unfortunately, these previous studies did not indicate any convergence in the range of off-shoring estimates, a consensus on the specific, additional data needed, or the preferred methodology to use in assessing the scale, scope, and impacts of off-shoring. Most studies used a different definition of off-shoring, usually narrower than that recommended by the Panel. Use of narrower definitions could understate the extent of off-shoring activity relative to the Panel’s definition.

Only a few studies attempted to estimate any off-shoring effects beyond direct employment impacts.[4] Those studies found that indirect effects substantially reduced the estimated employment shifts from off-shoring.

A number of studies identify limitations in currently available government data that impede a full assessment of off-shoring, but none have attempted to link industry and trade data available from BEA with the employment and wage data available from BLS. While such data linkage will undoubtedly be difficult, any assessment of the adequacy of current government data is incomplete if it does not fully consider and use all available data.

Another reason for substantial differences among the current off-shoring studies is that several relied on proprietary data and methodologies that were not wholly transparent. The inability to replicate many of these analyses and evaluate their findings adds to the need for further research.

The review of previous off-shoring studies also points to a need to look at distributional consequences. While the aggregate number of direct job shifts from off-shoring may appear small relative to the total number of job losses and gains occurring in the U.S. economy, these aggregate comparisons may mask important effects if they are concentrated in certain industries, occupations, or areas. If the off-shoring activity affects only a limited number of functions that are further concentrated in specific geographical areas or particular occupations or professions, the derived employment effects can be significant for those impacted areas. A disaggregated analysis of key sectors is needed to determine whether such distributional consequences are present and their significance. Chapter 5 describes the additional research needed for a more complete assessment of off-shoring activities and the adequacy of current data to estimate its extent and economic effects.

Implications for Other Key Issues

To assess the impact of off-shoring on U.S. workers, the economy, and the education and training system, this assessment will need to examine a number of key issues:

Adjustment problems for workers displaced by off-shoring activities and impacted communities. It can be difficult and costly for workers and communities to adjust to job shifts caused by off-shoring. For workers, these problems include their reemployment experience, wage and benefit differences between old and new jobs, any training and relocation costs, and other income changes affecting their long-term financial prospects. For communities, the adjustment problems include changes in economic activity, property values, tax revenues, and demands for social services. There are two critical issues for workers and communities impacted by off-shoring—the size and severity of the problems described above and their significance relative to difficulties experienced for other reasons.

Role of temporary workers and foreign students in meeting labor-market needs for particular worker skills. Temporary workers, admitted under several different migrant visa programs, provide a means of meeting increased demands for particular skills in the U.S. labor market. Foreign students have accounted for an expanding share of college and university graduates, particularly in the science and engineering disciplines, with many looking for employment in the United States after graduation. Business groups and individual firms seeking such help maintain that this labor source allows them to retain high-skilled jobs within the United States. A key issue is whether off-shoring has altered the traditional roles played by temporary workers and foreign students in meeting U.S. demands for particular skills. The adequacy of current data to support such analyses is also unclear.

Demographic trends affecting the quality and experience of the U.S. workforce. The pending retirement of “baby boomers” over the next decade has identified the need for skilled replacement workers. Some disturbing recent trends in educational achievement levels and dropout rates among U.S. students have raised questions about the country’s ability to meet this need. If these emerging labor quality issues and projected declines in the U.S. labor force materialize, businesses may try to meet increased demands for specific skills through various means, including technological changes (e.g., substituting different forms of capital for the skilled labor in short supply), increased use of legal immigrants, or off-shoring business activities requiring particular skills to areas where the skills are more abundant.

Ability of U.S. educational system to meet the changing demands for worker skills. The emergence of large populous countries, like China and India, into the global labor market creates challenges for the current U.S. dominance in developing and employing scientific and engineering workers and researchers. Off-shoring activities can compound these challenges if they result in declining employment prospects for certain professionals and occupations newly perceived to be vulnerable to international competition. Since previous academic studies and reports have documented this increase in the supply of foreign trained engineers, scientists, and high-skilled technical workers, a key question is how those changes have affected the employment and earnings of U.S. workers in jobs requiring such skills. Further research is also needed into how current off-shoring activities affect students’ career choices and how the education and training system responds.

CHAPTER 1

INTRODUCTION

The migration of U.S. jobs off-shore and its impact on America’s workforce and economy is neither new, unfamiliar, nor unstudied. It has been the focal point of frequent national debates about the benefits and costs of globalization, open markets, trade expansion, and economic growth. However, these periodic debates have not produced consensus on the magnitude and significance of the net migration of U.S. jobs off-shore or the impact on U.S. workers and the economy.

Recent national concerns about potential job losses and other economic effects from business decisions to relocate operations off-shore have introduced some new dimensions to this familiar debate. Slower than expected growth in employment during the recovery from the 2001 recession is one new element that has increased public anxiety, partly because reasons for this are not fully understood or effectively explained. Recent, rapid technological changes, especially those involving the Internet and related information and communications technologies, have lowered geographic barriers and facilitated changes in the way businesses operate, workers perform their jobs, consumers shop, and people interact. These changes provide a wide range of benefits: businesses can improve their efficiency, serve new markets, and develop new or improved products; workers can increase their productivity, undertake new tasks, and operate in different environments, such as telecommuting; and consumers can choose from a wider range of products with differing price and quality mixes.

But these changes can also impose substantial costs, particularly on those who must adjust to them. Adjusting to a job loss is frequently traumatic and costly for many workers. This reality may also explain the heightened public anxiety about the prospect of job losses from off-shoring activities, especially if jobs now vulnerable to migration overseas were previously thought to be firmly anchored in this country. Although the continuing loss of U.S. manufacturing jobs remains an issue, much concern about recent off-shoring job migration focuses on service-sector, white-collar, and high-technology jobs, rather than on more traditional manufacturing jobs.

Previous difficulties in assessing aggregate economic and social impacts, as well as specific sectors and individuals affected by manufacturing job migration have been compounded by the dearth of detailed, reliable, valid, and timely data on service-sector, white-collar and high-technology jobs, and different groups involved. A number of recent off-shoring studies by the Government Accountability Office (GAO), U.S. Senator Joseph Lieberman’s staff, The Brookings Institution, and others have reinforced a growing consensus about the need for better data.

Origins of the Academy Study

Public Law 108-447 gave the BEA authority to offer a grant to the Academy to conduct a comprehensive study of off-shoring. Recognizing the disparity of views on the issue, Congress also indicated that “information and opinion should be collected from stakeholders in business, education, and government, as well as professional associations and employee organizations.”

In an April 27, 2004, letter to the Secretary of Commerce, Frank Wolf, chair of the House Appropriations Subcommittee for Commerce, Justice, State, the Judiciary, and Related Agencies, cited the lack of reliable data on off-shoring as a major impediment to better understanding and responding to the issue of job losses. Chairman Wolf’s letter highlighted the need to obtain and disseminate data on the following:

1. numbers and types (by occupation, skill level, and wages) of jobs moving offshore

2. reemployment experience and prospects for American workers displaced by off-shoring

3. numbers and types of jobs created overseas by U.S.-owned companies for the purpose of exporting to U.S. markets and serving foreign markets

4. numbers and types of jobs created in the United States by foreign-owned companies for the purpose of selling in the U.S. market and exporting to overseas markets

5. near-term and long-range plans for relocating company facilities and transferring jobs to overseas locations

6. impact of off-shoring on academic and career choices by American students

7. role of the H1B and L-1 temporary visa programs in off-shoring operations by U.S.- and foreign-owned companies

Although Chairman Wolf’s letter cited unemployment among electrical, electronics, and computer engineers in the United States and potential impacts on the nation’s ability to create high-wage, high-technology jobs in the future, the seven categories of additional data needs he identified were not limited to the technology sector.

Objectives of the Academy Off-Shoring Study

The current debate over off-shoring and its impact is heavily laced with anecdotes about specific firms. While these anecdotes highlight problems for displaced workers, they do not provide comprehensive information needed by policymakers, analysts, and citizens to fully understand the extent and significance of current off-shoring. Without that information, it is difficult to develop effective policy interventions.

A comprehensive study of off-shoring should also acknowledge the vast array of existing studies examining different aspects of off-shoring. Although some studies cite the need for additional or better data to measure or estimate off-shoring’s economic and employment effects, there appears to be little consensus on other critical elements. Indeed, many studies acknowledged lack of a consistent definition and often used different terminology for off-shoring. In addition, these studies used a variety of analytical techniques, a number of data sources, and examined different industries or occupations over different time periods.

The Academy and BEA agreed that a comprehensive study of off-shoring should address these fundamental issues:

1. How should off-shoring be defined?

2. What do currently available data indicate about the extent of U.S. off-shoring?

3. What additional data are needed to provide a more complete assessment of U.S. off-shoring?

4. What factors account for current U.S. off-shoring?

5. What are the major impacts of off-shoring on U.S. workers and the economy and implications for the educational system?

This is the first of several reports prepared for BEA conveying the Panel’s findings and recommendations on off-shoring.

STUDY METHODOLOGY

The Academy established an expert Panel of Academy Fellows and specialists, knowledgeable about international trade statistics and statistical systems, to direct the project and provide guidance to Academy staff in conducting this research. The Panel has already held three meetings—and will hold additional meetings at strategic points during the study—with key stakeholders to obtain their perspectives on off-shoring issues, review developments, examine specific research results, assess the study’s progress, and provide guidance and advice to the project staff.

Addressing each of the five fundamental issues involves a combination of different research methodologies and analyses, including reviews of available data and studies; interviews with government officials and business, labor, academic, and other experts; identification of inconsistencies and/or information gaps that need to be addressed; and assessments of alternatives for resolving inconsistencies or gaps. The Panel will consider some limited data collection or estimation using industry studies to determine the adequacy, validity, and reliability of additional data and the feasibility of extending the approach to meet broader data needs.

Issue 1: How should off-shoring be defined?

Without a clear, accepted definition of off-shoring and use of consistent terminology to describe the same phenomena, it is impossible to address off-shoring issues. To assess these definitional issues, the Panel reviewed and analyzed official domestic and international studies and data on employment shifts. The Panel also reviewed nonofficial data that may supplement or extend official data. Analyses of previous research, interviews with selected researchers, and interviews with other experts from government data collection agencies, academe, business groups, employee organizations, and other entities constituted principal sources of information. Studies and interviews included both domestic and international sources.

The Panel examined the range of definitions used in studies, evaluated their relative strengths and weaknesses, established selection criteria for choosing a preferred definition, recommended a preferred definition, and assessed it relative to the criteria and other currently used off-shoring definitions.

Issue 2: What do currently available data indicate about the extent of U.S. off-shoring?

The Panel will review estimation methodologies and collection processes used to develop currently available trade and employment data that might help measure or estimate the economic and employment effects from off-shoring. These database assessments will examine the rigor or limitations of approaches used to develop existing data and identify any inconsistencies or gaps in coverage, level of detail, and timeliness of these official data sources. The Panel will also review previous estimates of employment effects from off-shoring to identify effective, replicable approaches for using current data or overcoming data gaps. In addition, the Panel will determine whether data deficiencies account for inconsistencies among these estimates. Follow-up interviews with analysts who produce the data and researchers who use the data will help the Panel focus on the reliability and utility of data from both official and unofficial sources.

While a definitive answer may not be feasible, the Panel will assess what can be concluded about the economic and employment effects from off-shoring activities based on currently available studies and data.

Issue 3: What additional data are needed to provide a more complete assessment of the economic and employment effects from off-shoring?

The Panel will use information from its database assessment to identify potential data gaps, including not only missing information, but also incomplete or inconsistent data, as well as estimates with large or variable error ranges. Additional interviews with researchers and other data users and reviews of previous research—including case studies that have used additional unofficial data to supplement available official data—will help identify the value of supplementary data in measuring or estimating the impact of off-shoring activity.

The Panel plans to undertake several industry studies to develop estimates of employment and other economic effects from off-shoring in critical functional areas and to assess the need to fill potential data gaps, the most feasible way to fill them, and the likely costs of filling them. These studies will employ a range of analytical techniques and will attempt to link existing databases to determine how much of the potential data gaps can be filled without seeking additional data.

Issue 4: What factors account for current U.S. off-shoring?

The Panel will review academic and other research that examines the conditions contributing to, and the expectations arising from, business decisions to off-shore operations. This review will include case studies from academics, industry groups, and employee organizations on specific off-shoring decisions and their effects on individual companies or specific occupations. Interviews with principal researchers and authors of major studies will provide additional information and perhaps indicate the feasibility of updating, augmenting, or extending some of them. The Panel’s industry studies will also examine, if possible, firms’ decision processes, expected outcomes, and information used in deciding to off-shore certain business processes. Interviews with corporate leaders, knowledgeable industry experts, and off-shoring facilitators will provide some of the information for these studies.

Issue 5: What are the major impacts of off-shoring on U.S. workers and the economy, and the implications for the educational system?

Workers displaced by off-shoring are expected to endure unemployment and income loss, the severity and duration of which remain uncertain. It is also unclear whether the impacts on workers displaced from off-shoring differ from the impacts on workers displaced for other reasons—such as demand shifts or technological change—who have similar skills and experience in the same occupation or industry.

To assess the impacts on displaced workers, the Panel will review previous studies, evaluate certain case studies of job off-shoring and the effects on specific industries and/or occupations, and interview selected academic experts and officials from corporations, labor organizations, and business and trade groups who have experienced off-shore job shifts. We will also interview government officials familiar with adjustment assistance programs to obtain their views and estimates of unemployment duration and severity and income losses for covered displaced workers. Additional research will use longitudinal data files from BLS and/or the U.S. Census Bureau to estimate worker displacement effects.

In order to identify the broader implications of off-shoring on the U.S. labor market and educational and training systems, a literature review will be undertaken to assess these relationships. In addition, interviews will be conducted with academic leaders and officials from research groups representing or focusing on the educational system to obtain their perspectives on the implications of off-shoring for the educational and training system.

ROAD MAP TO THE FIRST REPORT

Chapter 2 provides additional background information on the conditions surrounding off-shoring activities and presents a conceptual framework for evaluating the significance of economic and employment effects from off-shoring relative to similar effects from other changes affecting the U.S. economy. The chapter describes the complex, direct and indirect economic and employment effects derived from off-shoring business processes or operations, the importance of estimating both types of effects, the need for econometric modeling to estimate these effects, and additional measurement and data challenges resulting from this inherent complexity. The chapter defines the international trade and domestic labor-market dimensions applicable to off-shoring activity and identifies those other trade and labor-market changes that can result in economic and employment effects similar to those caused by off-shoring.

Chapter 3 reviews various definitions of off-shoring and the often confusing and conflicting terminology describing aspects of off-shoring. After reviewing the relevant terminology currently used in off-shoring studies, the Panel recommends that three key terms be used to describe various aspects of off-shoring activity: “outsourcing,” “off-shoring,” and “off-shore outsourcing.” The Panel also identifies and defines “in-shoring”—the foreign counterpart to U.S. “off-shoring”—as another key term pertinent to an assessment of off-shoring. The Panel establishes four selection criteria for choosing a definition for off-shoring, recommends a broad-based definition of off-shoring, and then uses the proposed selection criteria to compare the advantages and disadvantages of its recommended definition to other definitions.

Chapter 4 compares estimates of employment effects from off-shoring and discusses potential jobs vulnerable to off-shoring, projections of future employment effects, and estimates of actual job shifts. Although they vary widely, the range of estimated job shifts from off-shoring appear relatively small when compared to total annual U.S. job gains and losses from all sources. The chapter also identifies different methodologies used to develop estimates of job shifts from off-shoring. This review notes that there is no agreed-upon methodology for assessing off-shoring’s economic effects, especially its employment effects: each has strengths and weaknesses. For each major methodology used in current studies, the chapter describes the application, identifies reasons that analysts selected the particular methodologies, and examines their relative strengths and weaknesses.

Chapter 5 describes additional research the Panel has planned, which will include conducting specific industry studies, utilizing existing data, linking currently independent data sets, and applying additional data to estimate the economic and employment effects from off-shoring activities. This additional research will also determine the significance of potential data gaps, demonstrate the feasibility of filling those gaps (or overcoming them with alternative estimation techniques), and estimate the cost of developing improved estimates of the economic and employment effects from off-shoring.

CHAPTER 2

OVERVIEW AND CONCEPTUAL FRAMEWORK

Over the past few years, the shifting of some operations off-shore by U.S. corporations has heightened concerns about the impact on America’s workforce and economy. Some of these heightened concerns may reflect frustration with the slower than expected growth in employment as the U.S. economy recovered from the 2001 recession. Although growth in the fourth quarter of 2001 caused real GDP at the end of 2001 to exceed its prerecession peak, total nonfarm employment did not exceed its prerecession peak of 132.5 million (February 2001) until January 2005. But, these heightened concerns may also reflect the impact of recent technological changes, especially those in Internet and related information and communications technologies that facilitated restructuring of business processes and lowered geographic barriers to relocating business activities. These changes, in turn, have increased the number and types of jobs potentially vulnerable to obsolescence from technology and have generated competition from other domestic and new foreign sources.

Current concerns over off-shoring emphasize the loss of service-sector, white-collar, and high-technology jobs, rather than heavy manufacturing jobs previously the focal point of public debate about international trade’s benefits and costs. The migration off-shore of jobs that were previously thought to be firmly anchored in this country, raises issues about current off-shoring activities imposing different and perhaps more adverse economic impacts than past activities. For example, past concerns about the loss of manufacturing jobs to overseas competitors raised issues about the loss of American economic dominance, increased reliance on foreign sources for critical supplies and manufactured goods, and the national security implications of this growing dependence should those foreign sources be interdicted or interrupted. Current concerns have raised additional issues about American leadership in research and development and the application of technological advances on future economic growth. While these concerns are well publicized and known, the basis for them is much less clear, reflecting confusion over, and at times inappropriate and interchangeable use of, terms such as “off-shoring,” “outsourcing,” or “global sourcing.” This confusion also reflects the widespread and complex economic effects of relocating certain business activities and functions outside the United States, which reinforces the need for better, more complete, and timely data on the services sector—the increasingly dominant segment of the U.S. economy.

This chapter examines major elements and effects of off-shoring activities, provides an overview of off-shoring activities relative to other major trends in the U.S. economy, and develops a conceptual framework for assessing off-shoring issues in relation to other significant economic issues confronting the U.S. economy and workforce. The major off-shoring elements help account for the varied reasons for off-shoring decisions that, in turn, determine their economic effects. The significance of the economic effects from off-shoring, and the issues raised, must be evaluated relative to other economic changes. In short, off-shoring activities need to be viewed from an appropriate perspective. That perspective must also encompass the complexities underlying off-shoring decisions, their economic and employment effects, and the lack of a commonly accepted definition of off-shoring. These complexities compound the difficulty in measuring and estimating off-shoring activity and its effects. Any assessment of the adequacy of off-shoring data must acknowledge and address these difficulties.

MAJOR ELEMENTS OF OFF-SHORING

Despite the myriad of definitions characterizing off-shoring, virtually all analysts, commentators, and discussants agree that off-shoring reflects economic and financial decisions made by U.S. businesses to locate activities or functions overseas. There is less agreement on the reasons for those decisions, reflecting the complex array of conditions, assumptions, and calculations underlying them. The varying estimates of off-shoring’s effects likewise reflect the wide range of potential economic impacts and the number of significant public-policy issues raised. While this report focuses primarily on U.S. off-shoring, the phenomenon is not unique to U.S. businesses. The foreign counterpart to U.S. off-shoring—foreign companies shifting some of their operations to the United States—results in in-shoring of new business activities and employment for the United States. The next section of the report examines the complexities surrounding off-shoring issues in greater detail.

Outsourcing versus Off-Shoring

Any overview of off-shoring must distinguish it from another commonly used, but distinct term—outsourcing. Outsourcing refers to a business restructuring or change in current business practice that shifts operations or processes previously performed within the company to an outside entity—an independent third party. One result of outsourcing is that the locus of work shifts, and associated jobs migrate, outside the company. For both private firms and the federal government, outsourcing or “contracting out” shifts or redistributes jobs among employers, but does not necessarily reduce the number of jobs in the United States. Employment changes depend upon the realization of efficiency gains, productivity increases, or cost saving.[5]

Outsourcing decisions are made for different reasons, but improved efficiency or cost reductions are key.[6] Cost reductions can be achieved by reducing the number of workers, using lower cost workers, or introducing more efficient production techniques that increase labor productivity and lower labor costs. Only the first of these results in direct employment losses, although job migration to other locations displaces current workers.

Off-shoring refers to the shifting abroad of business activities or processes. Off-shoring can be a subset of outsourcing, if the new supplier of the outsourced activity is located in a foreign country. In this case, one result of off-shoring should be an increase in imports of goods and services to meet the company’s production needs or customer demand. However, off-shoring[7] can also represent business expansions abroad to serve foreign markets, which may occur without restructuring business activities or processes in the United States. In this instance, the off-shoring activity may not immediately affect U.S. imports. However, it could reduce current or future U.S. exports to the extent that the new off-shored operation provides goods and services to foreign markets that had been or might have been satisfied by U.S. exports.

Key Off-Shoring Components

Off-shoring decisions arise in different ways; they can have different purposes and expected benefits and can face different risks, all of which can change over time. Indeed, off-shoring decisions themselves can change over time and in some instances those decisions have been reversed. These aspects of off-shoring reflect the inherent complexity underlying these business decisions.

Complexity occurs because off-shoring decisions are often included in broader decisions to restructure an ongoing business process into a series of separable, discrete functions, some of which can be performed outside the firm. While this is the most commonly cited “model,” an off-shoring decision can also reflect a simpler decision to reorganize activities among affiliates within the corporate entity and relocate certain business operations or expand existing operations in select (foreign) affiliates.

Off-shoring decisions are made for many of the same reasons as outsourcing decisions, which adds to the inherent complexity of off-shoring activities. Virtually all of the studies examining business off-shoring decisions and their anticipated benefits identify cost savings as the leading expected benefit. However, previous studies[8] cite a number of other reasons for off-shoring certain business activities, including:

· expanding service delivery (e.g., 24-7 operations)

· providing new services that lower costs can make economically viable (e.g., certain telemarketing services)

· restructuring work activity to meet peak demand requirements (e.g., lower labor costs may permit increased staffing at peak demand hours)

· upgrading the quality of service by using higher-skilled (but lower-cost) workers to lower error rates

· accelerating the formulation of innovative products and services using different technology and cost structures

· increasing revenues by pursuing previously marginal revenue opportunities (e.g., more follow-up of smaller loan delinquencies)

· supplying new (foreign) markets

· acquiring new sources for certain types of workers when there is a domestic shortage for those workers (e.g., temporary foreign worker limits could induce some firms to shift work overseas to obtain the necessary skilled workers)

While off-shoring and outsourcing decisions anticipate many of the same expected benefits, access to new markets or new sources of supply for inputs facing domestic shortages distinguish off-shoring from domestic outsourcing decisions.

Specific off-shoring decisions may anticipate realizing several of these benefits; moreover, the set of expected benefits from off-shoring decisions can change over time as firms become more familiar with the capabilities of their off-shored operations, or as unanticipated problems arise. Some studies have also indicated that not only can expected benefits from off-shoring change over time, but that off-shoring decisions themselves are not necessarily immutable. For example, a 2004 Deloitte Consulting Outsourcing Study of 25 large U.S. companies found that “70 percent of participants have had unsatisfactory outsourcing experiences, encountering 2 to 10 problems and that 18 percent encountered 5 or more problems causing them to go through in-sourcing.”[9] A 2004 report from the European Foundation for the Improvement of Living and Working Conditions cited a broader survey of information technology (IT) using firms that identified similar risks of failure. “A survey of over 5,000 IT user companies in the United States, Canada, and Europe by Ventoro found that of the 19 percent which had an off-shore strategy, only 45 percent said it was a success, and 36 percent claimed it had failed.”[10] The Ventoro survey of 5,231 executives in North America and Europe (3,139 U.S.) also found that “over one in three executives reported they have had to ‘on-shore’ work (moving work from their off-shore team back to their on-shore team) due to performance problems with their off-shore strategy.”[11]

POTENTIAL ECONOMIC EFFECTS FROM OFF-SHORING

Since the economic effects depend upon the reasons for off-shoring, those decisions can generate a number of different economic effects:

· operational efficiency

· quality of products and services

· growth opportunities

· changes in income

· reduction (or avoidance) of regulatory and other market barriers

· price changes for the off-shored goods and services

· wage impacts for affected workers

· employment shifts and changes

Employment effects are sensitive as well as controversial because they are complex and difficult to define and measure. The emergence of specific economic effects depends on the off-shoring activity that occurs and the relative success or failure of the relocated activities. These are derivative effects because an off-shoring decision can involves only the relocation of a whole business process, a piece of a business, a function, or a discrete piece of work. These shifts, in turn, can have employment, wage, price, productivity, profitability, efficiency, and economic growth implications. Business off-shoring decisions do not directly export U.S. jobs, growth opportunities, or competitive advantages. But, these important, derivative economic effects can be estimated independently from the business activities shifted off-shore that generated them. This introduces an additional layer of complexity compounding off-shoring measurement difficulties.

Employment Effects

Employment effects from off-shoring decisions can include both quantitative and qualitative components—not only numbers of jobs but differences in occupations and skills. There are also direct and indirect effects on domestic employment that vary over time—short-run effects can differ from long-run effects. Moreover, these employment effects depend upon the business activity off-shored and the reason for off-shoring. Off-shoring that relocates a domestically outsourced activity overseas generates different short- and long-run employment effects than off-shoring an activity to obtain access to new foreign markets or to meet growing overseas demands. A decision to outsource part of a business process or activity off-shore will eliminate the jobs associated with that off-shored activity, assuming that activity would have maintained its level of domestic operation. Off-shoring activities to meet overseas expansion needs may forego future export growth and associated employment opportunities, while off-shoring activities to secure access to new overseas markets may have little or no direct employment effects.

The most common public perception of the effect of off-shoring is that direct job losses occur as activities are relocated. But, this direct, short-run effect of a gross loss in jobs is difficult to measure[12] and may differ over time if the expected gains from the decision do not materialize as anticipated. Not surprisingly, decisions to reverse an initial off-shoring move are not as well publicized as the initial off-shoring decision. In addition, public concern over direct job losses assumes that current domestic operations would have remained unchanged, but this assumption may not always be appropriate. If that activity were facing significant competitive pressures, demand for that activity might have fallen without some improved efficiency, thereby producing a decline in employment. Alternatively, to maintain current demand for the activity, the firm might seek efficiency gains by substituting capital for labor, thus reducing current employment levels. In short, direct, short-run job loss estimates may attribute to off-shoring some job losses that competitive pressures might have generated anyway, due to demand shifts or technological changes. Finally, the change in overseas employment associated with the off-shored activity may not be an accurate proxy for estimating direct, short-run job losses because lower wages for overseas labor suggest that more labor-intensive techniques most likely have been used. These examples show the complexity involved in measuring or estimating even these direct employment effects.

Most importantly, initial direct job-loss estimates ignore the following indirect effects associated with an off-shoring decision:

· impact of efficiency improvements on the costs of providing the off-shored goods or services and any derived demand effects from associated lower prices

· increased demands for goods and services from the increased income produced by the off-shoring activity (this can be both additional income in the foreign country and increased profits for the off-shoring firm)

· export growth from demands for additional equipment or services required to support the off-shored activity in its new locale

· reduction in exports (and associated domestic employment) as off-shoring activities expand to serve foreign markets currently or potentially served by U.S. exports

· increased requirements for management oversight and control over the off-shored activity

· multiplier effects associated with the changes in production, employment, and income from off-shoring (these can be positive and negative and may be offsetting)

Each of these potential indirect economic effects has employment implications. Several economic studies have attempted to estimate some of these indirect effects and their derived

employment effects relative to the initial direct, gross job losses from off-shoring.[13] Estimating these indirect effects requires an econometric model; they cannot be measured directly. In addition, many indirect effects accrue over time. While some—e.g., increased demand for equipment, services support, and management oversight—can occur in the short run, others, particularly derived effects from efficiency gains and lower prices and any increased demand from higher income, will emerge over the long run.

These direct and indirect employment effects from off-shoring are not new—they have for years been an issue for years in relation to manufacturing jobs that are vulnerable to increasing international competition. However, recent technological changes may have widened the potential scope of off-shoring employment effects to include a number of service-sector, white-collar jobs not considered vulnerable to increased competition from international trade.

Other Potential Economic Effects

While the employment effects of off-shoring receive the most attention, off-shoring’s economic effects include the following:

· efficiency and competitiveness of the off-shoring firm

· prices of goods and services provided through the off-shoring activity

· profitability of the off-shoring firm

· wages of impacted and other workers

· income and employment opportunities for impacted workers

· broader economic factors including changes in imports and exports, aggregate demand, and national income

If the off-shoring decision is successful, the lower cost or improved quality of the off-shored goods and services should increase competitiveness, allow price reductions, and expand market share and profits. Consumers or other businesses using the off-shored product or service will also benefit from improved quality or lower cost. If the off-shored activity serves U.S. needs, there should be an observed increase in imports. However, if the off-shored activity is focused primarily on meeting overseas demands that are being met, in part, by current U.S. exports, those exports could decline or grow more slowly in the future. Alternatively, off-shoring activities that meet foreign demands may also open those foreign markets to U.S. businesses providing new growth opportunities, including potential future exports. Off-shoring’s potential impact on U.S. exports thus appears uncertain.

Economic theory suggests that an increase in labor supply affects wages and employment levels, depending upon the elasticity of the demand for labor. Because off-shoring activities reflect a shift to a larger worldwide supply of labor, several analysts have suggested that the potential effect on wages may be as significant as the potential employment effects. For example, Brainard and Litan suggest off-shoring can have divergent effects on wages, depending upon the vulnerability of a particular sector to trade. “In services for example, some workers whose jobs are vulnerable to off-shoring could suffer erosion of their wages while others in supervisory positions may see compensation gains.”[14] In addition, the AFL–CIO notes that “as it becomes easier for companies to move work overseas, employers use the threat of sending work overseas to squelch union organizing drives and win concessions at the bargaining table.”[15] Whether due to market adjustments or the exercising of market power, or both, wages of workers in activities at risk of being off-shored are likely to grow more slowly or possibly decline. However, estimating these wage effects raises additional measurement issues.

Two separate dimensions of off-shoring

Off-shoring and its derived employment effects have an international trade and a domestic-labor-market dimension, each providing slightly different perspectives on assessing economic effects and their relative significance. These two perspectives also contribute to the differences in definitions of off-shoring in use.[16] From the international-trade perspective, off-shoring is one element affecting the expansion of worldwide trade, the changes in the U.S. balance of payments accounts and terms of trade, and any shifts in the United States’ historical comparative advantage in trading knowledge-intensive goods and services. From a domestic-labor-market perspective, off-shoring is one source of the continuous job shifts that characterize the dynamic job market. While job shifts include both gains and losses, job losses can impose significant costs on individuals affected and on impacted communities, especially if the job losses are concentrated. In addition, off-shoring can be a way for employers to respond to shortages in the supply of skilled labor. However, it can create additional uncertainty about employers’ long-term needs for U.S. workers with specific skills and imposing challenges for the nation’s education and training system in meeting the labor market’s future skills needs.

The International Trade Perspective

International trade has become an increasingly important component of the global economy. As figure 2-1 from the World Trade Organization’s (WTO) 2005 World Trade Report indicates, the annual growth in merchandise exports has exceeded the growth in world GDP between 1994 and 2004, except in 2001. Indeed, the average annual growth in exports over the decade was almost twice the growth in GDP.

Figure 2-3

Exports and Imports of Goods and Services in the United States

This growth has exceeded the growth in goods exports, accounting for the substantial increase in the U.S. trade deficit, particularly for the last four years. U.S. imports of private services have also increased over the last decade, from $120.3 billion in 1994 to $258.1 billion in 2004, but, unlike goods trade, services exports have continued to exceed imports. The private services trade surplus in 2004—$65.3 billion—was about the same as it was in 1994—$66.3 billion—even though service imports have grown slightly faster than exports over this decade. During this period, the services trade surplus peaked in 1997 at $86.7 billion and has declined unevenly since.

The continued growth in services imports, particularly since the end of the 2001 recession, has received increased attention as public concerns about off-shoring of services have deepened. BEA divides total private-services trade into five subcategories: royalties and license fees, travel, passenger fares, other transportation, and other private services. Although royalties and license fees have been the fastest growing component of services imports, other private services—the component most likely to be affected by the off-shoring of services—also increased substantially and accounted for over 42 percent of the total growth in services imports over the past decade ($59.1 billion of the $137.8 billion total growth between 1994 and 2004).

Table 2-1 shows the growth in other private-services imports for both affiliated and unaffiliated trade, where affiliated trade represents international transactions by U.S. MNC parent companies and their affiliates in another country. Unaffiliated trade accounts for the majority of other private-services imports, 62 percent of total other private-services imports in 2004. However, for the category of business professional and technical (BPT) services, one of six subcategories into which BEA divides other private services, affiliated imports have grown more rapidly than unaffiliated trade and account for 69.3 percent of BPT services imports in 2004. BPT services include the following types of services, many of which have been cited in press reports and previous studies as potentially vulnerable to off-shoring:

· accounting, auditing, and bookkeeping

· architectural, engineering, and other technical fields

· computer and data processing

· database and other information

· legal

· management, consulting, and public relations

· research, development, and testing

Unfortunately, published BEA data on affiliated trade are not disaggregated by specific BPT service and country of origin. While unaffiliated data provide this detail, they indicate that developed countries—particularly Canada, the United Kingdom, Japan, and Germany still account for over half of the U.S. imports of BPT services. In 2004, unaffiliated BPT services imported from India were $528 million[17], but still accounted for only 4.2 percent of total U.S. unaffiliated BPT imports.

A comparison of trade data trends, even with detailed, disaggregated data for specific services (e.g., intermediate services) from countries of origin, cannot distinguish the effects of off-shoring from other sources of import changes, such as shifts in relative demand, technological changes affecting relative prices, and cyclical changes. A recent report by the Organization for Economic Cooperation and Development (OECD) noted that “it remains difficult to interpret these data and link them to different sourcing activities. It is not possible to tell what share of these exports (of other business service from foreign countries to the U.S.) result from international sourcing activities.”[18] Estimating the independent effects of off-shoring on the flow of services imports, even at a disaggregated level of analysis, requires more sophisticated econometric models that control for other economic factors affecting these import flows.

Trade Benefits and Costs and Off-Shoring Implications

Economic literature on international trade acknowledges that trade involves both benefits and costs. Moreover, although most economists believe benefits from trade normally exceed costs in the aggregate, the benefits are often widely dispersed, while costs—principally initial direct loss of jobs from imports and associated economic impacts on individual workers, specific industries, and local communities—are frequently narrowly concentrated. Off-shoring employment effects are one significant and sensitive component in the debate over net benefits from trade and options to ameliorate the gross costs through various transfer mechanisms or other policies.

From an international trade perspective, off-shoring is consistent with historical U.S. efforts to liberalize trade rules, promote access to international markets, encourage greater flexibility and mobility of capital and labor, and secure efficiency gains expected from the expansion of international trade. Concerns about the net employment effects of off-shoring mirror similar concerns about the costs of trade imposed on those workers, firms, and communities adversely affected by job displacement, wage declines, business shutdowns, and secondary employment, income, and tax-base losses.

International-trade literature thus supports a broad, extensive assessment of the net employment effects of off-shoring, including estimates of the indirect, derived effects from income expansion and efficiency gains associated with increased trade. This tradition of assessing net job changes raises some unique data collection and measurement challenges, because trade data reflect only the value of goods and services traded, not labor and capital inputs required to produce those exports and imports. Estimates of these net employment changes from trade data also require econometric modeling.

The Domestic Labor-Market Perspective

Off-shoring employment effects also occur within a large and dynamic U.S. labor market historically perceived as a flexible and responsive generator of new jobs. Despite periodic cyclical interruptions, most recently the 2001 recession, the U.S. economy has supported substantial growth in total employment over time. Since 1980 total employment has increased over 41 million (45.3 percent) from 90.5 to 131.5 million in 2004. During the decades of the 1980s and 1990s total U.S. employment grew at an average annual rate of 1.9 percent. Between 2000 and 2004 total U.S. employment initially declined 1.9 million (1.4 percent) to its 2003 nadir and then increased 1.6 million in 2004 (1.2 percent), reflecting an abnormally slow employment recovery from the 2001 recession. The distribution of employment has changed substantially over the past two decades, with growth in services offsetting the long-run decline in manufacturing employment. Within services, employment in professional and business services and education and health services has more than doubled since 1980.

Long-term growth in total U.S. employment is determined primarily by macroeconomic policies supporting aggregate demand, population growth (including immigration), and changes in productivity. For a given industry or occupation, changes in average wages and total labor compensation reflect productivity growth and competitive conditions.

However, this positive trend in aggregate employment growth can mask some specific labor-market problems for specific groups. Benefits of aggregate job growth are not equally shared by all individuals; even within an expanding job market, some individuals encounter extended durations of long-term unemployment, stagnant wage growth, income loss, and inadequate health care and pension benefit coverage. A critical issue is the extent to which net job losses from off-shoring add to or even compound these structural labor-market problems.

Annual U.S. Job Losses and Off-Shoring

Another significant feature of the U.S. labor market is the substantial job turnover that occurs as new jobs are created and existing ones destroyed. While the extent of this churning of jobs is often cited as a positive example of the dynamic character and flexibility of the U.S. labor market, it also means that at any time a substantial number of workers are in the market seeking new jobs. Data from BLS’ BED data series indicate that from 2002 quarterly gross job losses and gains have averaged between 7 and 8 million, with the gains exceeding the losses since the second quarter of 2003 (see Figure 2-4).

These BED data show the relatively consistent levels of job turnover over the last decade, even during cyclical downturns. Relative to total employment, quarterly job losses have ranged between 6.7 percent and 8.4 percent since 1994; quarterly job gains have ranged between 6.9 percent and 8.5 percent over this same period. During the 2001 recession, quarterly job losses increased from about 7.6 percent of total employment to a peak of 8.4 percent of total employment (third quarter of 2001), while quarterly job gains fell from 7.9 percent to 7.1 percent. However, even during the nadir of the 2001 recession, over 7.7 million new jobs were created (third quarter 2001).[19]

Figure 2-8 also depicts a decline in the rate of quarterly, gross job gains after the first quarter of 2001. From 1994 through early 2000, the rate usually exceeded 8 percent, but it has been consistently below 7.5 percent since the third quarter of 2002. The rate of gross job losses has also fallen since its recession peak; since the last half of 2003 it has been below 7 percent. It is not clear whether or how much off-shoring has contributed to this recent change.

These aggregate data on gross job gains and losses mask some significant differences in the data for different industries. Services industries (Figure 2-10) have consistently experienced lower rates of gross losses relative to goods-producing industries. Within goods-producing industries, the construction sector encounters the highest rates of job turnover, with the 2004 rate of construction job gains and losses averaging 11.87 percent and 11.27 percent, respectively. Among major services industries, professional and business services (8.93 percent gains, 8.33 percent losses) and leisure and hospitality (9.3 percent gains, 8.87 percent losses) had the highest rates of job turnover on average during 2004. Previous studies of off-shoring have identified the professional and business services sector as having some vulnerability to off-shoring. However, neither the construction nor the leisure and hospitality sectors were found to be susceptible to off-shoring employment losses. High rates of job turnover are not necessarily indicative of vulnerability to off-shoring

Assessing the Significance of Direct Short-Term Off-Shoring Job Losses

Several previous studies have compared their estimates of net employment effects from current off-shoring activities to this extensive and continuous job churning in the U.S. labor market. Relative to these substantial aggregate quarterly job gains and losses, most previous estimates of off-shoring employment effects appear minor.[20] However, more disaggregated industry data on gross job losses and gains might indicate a more significant off-shoring impact for particular industries. Of course, the relative size of job shifts due to off-shoring is not important to those who lose their jobs from off-shoring and bear the costs of adjusting to that loss. It is also important to identify potential sources of change in specific jobs when assessing the relative significance or insignificance of current off-shoring activity. The major sources of change appear to include the following:

· temporary or transitory changes

· cyclical changes

· structural changes, of which some reflect

o technological changes

o shifts in demand

o changes in terms of trade

o business process changes

This last type of structural change—business-process change—includes job changes at specific establishments due to outsourcing decisions or relocations of parts of current business operations. Off-shoring activities are included within this category of structural changes. Unfortunately, BED data do not disaggregate gross job losses by these conceptual sources of job change.

Within this labor-market context, there are several reasons for distinguishing the direct, gross job losses from off-shoring activities from the net employment effects. First, and perhaps most important, these displaced workers bear the major adjustment costs from off-shoring activities and it is important to identify how many of them are displaced and how quickly and successfully they can adjust to the adverse conditions they face. Second, the size of direct, gross job losses from off-shoring relative to other structural sources of job losses will identify whether off-shoring is a major and growing source of these structural job losses, or not. Third, if the gross job losses from off-shoring have become more concentrated in specific occupations, industries, or regions, they may be more problematic than simple aggregate comparisons would suggest. Evaluating this possibility will require further analysis of more disaggregated BED data. Finally, off-shoring activities may have different derived or indirect employment effects than other structural sources of job changes. Because a number of derived employment effects are likely to reduce the net employment effects from off-shoring activities, these derived effects and any changes relative to direct effects will determine the relative importance of off-shoring activities among structural sources of job changes.

These direct short-term off-shoring job losses often also have a different time dimension than the net employment effects. Many indirect effects emerge over time, whereas those workers who lose their jobs due to off-shoring face immediate adjustment problems. The extent of these adjustment problems, their severity relative to adjustment problems from other sources of structural job losses, and their distribution among different economic and social groups will influence the need for particular policy responses. The net employment effects can indicate whether the gains from off-shoring outweigh the adjustment costs.

Distinguishing Characteristics of Current Off-shoring Effects

From either an international-trade or domestic labor-market perspective, the extent of and adjustment to net job losses from off-shoring or other structural changes is not new. As Robert Atkinson of the Progressive Policy Institute has observed, “while the past is never fully prologue, it is worth noting that our economy has faced similar kinds of challenges, and experienced similar kinds of reactions in the past.”[21] A key issue is whether the scope, scale, characteristics, and implications of current off-shoring differ from previous incidents.

Several studies cite the role of technology in distinguishing the current off-shoring phenomenon from other structural changes or prior off-shoring activities. Recent technological changes—improvement in international telecommunications capacity, reduction in global telecommunications costs, and computerization and digitization of business services facilitated by personal computer improvements[22]—have expanded the scope of potential job losses to a wider set of occupations and industries. At the same time, business-process restructuring appears to have reduced the scale of many outsourcing and relocation decisions by reengineering and disaggregating current business processes into smaller, discrete, and highly specialized components. How extensive and significant this shift toward service-sector, white-collar jobs is or will become remains unclear. Displaced white-collar service workers will still bear the adjustment costs of job losses due to off-shoring activities, but an important concern is whether their costs will be lower or greater than the adjustment costs born by blue-collar manufacturing workers in the past. To the extent these white-collar service workers are better educated and younger than their blue-collar counterparts, previous research suggests that their adjustment costs may be lower.[23]

Another issue that may distinguish current off-shoring activities and their associated employment effects from similar past concerns is the impending retirement of the baby boomers and its impact on the long-run domestic labor supply, particularly for high-skilled labor. Off-shoring decisions reflect a number of considerations, including the availability of an adequate supply of high-skilled labor. Thus, off-shoring may be an alternative for addressing potential long-run domestic shortages for specific skills since it can relocate activities to areas where sufficient skilled labor exists. This has implications for immigration policy, particularly temporary worker programs—although these programs have been used primarily to meet short-term skill needs. The clearest and most recent example was the expansion in the H1B program to meet the short-term demand for computer programmers to address Y2K (Year 2000) programming issues. Off-shoring also has implications for the nation’s education and training system and its ability to meet long-run demands for high-skilled labor.

A final issue is the effect current off-shoring activities can have on the quality of skills that U.S. workers have relative to the skill needs of employers. As noted above, off-shoring activities can help address employer skill needs by relocating certain business processes and activities to areas where those skills are relatively abundant. On the other hand, job shifts create additional uncertainty about employers’ long-term demand for U.S. workers with specific skills. Again, there are clear implications for the nation’s education and training system, particularly the system’s flexibility and adaptability in meeting the labor market’s future skills needs.

Conclusions

This conceptual framework for assessing off-shoring issues suggests several tentative findings or conclusions. These will guide the Academy Panel’s research for the next phases of this off-shoring review.

Off-shoring activities are highly complex due to the following:

reasons for locating activities overseas

range of potential direct and indirect economic effects, especially for employment

two different trade and labor-market dimensions

Off-shoring’s complexity complicates estimation and measurement efforts.

The lack of a commonly accepted definition for off-shoring adds to these difficulties.

A complete assessment of off-shoring involves estimating its direct and indirect economic effects, particularly for employment, and that requires the use of economic models.

Assessing the significance of off-shoring activities requires both trade and labor-market perspectives, including combining data from each dimension.

From a trade perspective, the direct effects of off-shoring should increase imports, but the effect on exports is less certain.

From a labor-market perspective, off-shoring is one of the structural sources of job shifts in a dynamic labor market that creates and destroys between 7 and 8 million jobs a quarter.

Assessing the significance of any off-shoring job shifts relative to those from other sources requires disaggregated analysis of BLS’ BED and other data.

Even if aggregate impacts appear small, the distributional effects of off-shoring can still be severe and therefore significant for individuals, industries, and communities that bear them.

The costs imposed by job dislocations cannot be ignored.

Adjustment problems of workers displaced by off-shoring are important from both perspectives; employment estimates need to distinguish direct from indirect effects.

The current off-shoring phenomenon has widened the types of jobs that are potentially vulnerable to international trade competition to include some white-collar service jobs. The extent of this change and its economic significance are still unclear.

CHAPTER 3

ALTERNATIVE DEFINITIONS OF OFF-SHORING

There is neither a clear, universally accepted definition of what constitutes off-shoring, nor agreement on a term of reference. A comprehensive literature review on off-shoring confirms the absence of a standard definition and terminology.

After reviewing the literature, the Panel believes that the terminology needs to be simplified to improve clarity and understanding of off-shoring issues. The Panel suggests that three key terms be used to describe various aspects of off-shoring activity—“outsourcing,” “off-shoring,” and “off-shore outsourcing”—and recommends definitions for each term. The Panel notes that “in-shoring” is another important term relevant to any assessment of U.S. off-shoring.

The Panel identified four selection criteria in choosing its definition of off-shoring:

1) clearly understood

2) clearly differentiable from other sources of employment change

3) consistent through time

4) policy relevant

The first section of this chapter discusses multiple off-shoring terminologies used. The second section reviews the wide array of off-shoring definitions, describes what is included and excluded, and classifies them accordingly. The final section explains how the Panel applied its selection criteria to determine the definition of off-shoring.

Multiple Off-shoring Terminology

Currently, there are multiple terms to describe various definitions of off-shoring. The terms most widely used are “outsourcing,” “off-shore outsourcing,” and “off-shoring,” while others use “international sourcing” or “global resourcing.”

Outsourcing, Off-Shore Outsourcing, and Off-Shoring

Building on Hira’s work, the May 2004 white paper from the Office of Senator Joseph I. Lieberman distinguishes between “off-shoring,” “outsourcing,” and “off-shore outsourcing.”[24] According to the Lieberman paper, off-shoring “is used to describe multinational corporations relocating work from their domestic sites to foreign locations.”[25] This definition is limited to MNCs and thus excludes those firms without foreign affiliates relocating work to unaffiliated firms located outside the United States. The definition also requires direct substitution of work performed in the United States with work performed at a foreign location, thus excluding job opportunities lost due to forgone domestic expansion or future export growth.

Lieberman’s staff defines outsourcing as “a generic term used when companies contract out certain business functions to an external supplier, eliminating the need to maintain an internal staff necessary to perform that function,” and off-shore outsourcing as “the contracting of these business functions to companies in lower-cost areas, primarily in developing nations.”[26] The distinction between outsourcing and off-shore outsourcing is the geographic location of the unaffiliated supplier. Off-shore outsourcing is limited to contracted unaffiliated suppliers located in lower-cost, primarily developing nations, outside the United States. This limitation raises questions about what constitutes a low-cost country and where dividing lines fall between developed and developing nations. Also, the distinction between low-cost and high-cost overseas locations creates ambiguity about decisions by U.S. firms to outsource business activities to unaffiliated firms located in high-cost, developed countries—e.g., England and Japan. If this is not also “off-shore outsourcing,” what is it and how does it differ from the Hira and Lieberman staff definition?

Bhagwhati, Panagariya, and Srinivasan define off-shore outsourcing as unaffiliated firms located outside national boundaries of the buyer in the transaction, but do not limit their definition to low-cost, primarily developing nations. They reviewed the four modes of production developed by the WTO under its General Agreement on Trade in Services (GATS), suggesting that the WTO “Mode 1” concept of off-shore trade in unaffiliated services, where both buyer and seller remain in their respective locations outside the other’s national boundaries, was the most appropriate definition of services outsourcing to off-shore entities. Their definition of off-shore outsourcing does not include direct foreign investment by firms.[27]

International Sourcing

According to van Welsum and Vickery, off-shoring is “international sourcing,” comprised of “international in-sourcing” and “international outsourcing.” They use the terms “in-sourcing” and “outsourcing” to signify the “control” of the service supplied, with “in-sourcing” referring to services that are supplied internally, and “outsourcing” referring to services from an external supplier. Van Welsum and Vickery add the qualifiers “domestic” and “international,” to describe the “location” of the supplied service. The terms used to define off-shoring are “international in-sourcing,” “giving rise to foreign direct investment and affiliated trade in services,” and “international outsourcing,” “giving rise to unaffiliated trade in services.”[28]

Figure 3-1

Off-Shoring, Outsourcing, and In-Sourcing—An Illustrative Matrix

Global Resourcing

The McKinsey Global Institute (MGI) uses “global resourcing” to describe “the process a company goes through to decide which of its activities could be performed anywhere in the world, where to locate them, and who will do them.”[29] Any activity not needing customer contact or local knowledge to be performed, or is not constrained by a system of complex interactions, can be globally resourced to any location outside the United States the company deems most appropriate.[30]

Similar to van Welsum and Vickery, MGI defines off-shoring in terms of “control” and “location.” However, with regards to control, MGI refers to “captive” as a wholly owned affiliated unit where resourced activities are performed, and “outsourcing” as the practice by which the company buys resourced activities from an unaffiliated supplier.[31] MGI’s terms “off-shore” and “on-shore” differ from those of van Welsum and Vickery, with “off-shore” referring to those services a company decides to have performed in “another country outside the market where they are sold,” and “on-shore” as those services a company decides to have performed “in the same market in which it sells them.”[32] Thus, the terms used by MGI to define off-shored services are “captive off-shoring” and “off-shore outsourcing.”[33] MGI’s captive off-shoring definition includes only wholly owned affiliated units, excluding partially owned U.S. affiliates and all unaffiliated firms. MGI’s off-shore outsourcing definition includes only unaffiliated suppliers, excluding all U.S. affiliates. Both definitions exclude resourced activities that are performed outside the United States and serve the foreign market in which they are located.

The Panel’s Choice of Terms

The Panel finds the multiplicity of terms currently used to describe various aspects of off-shoring activity complex. The Panel suggests that three key terms be used: “outsourcing,” “off-shoring,” and “off-shore outsourcing.” The Panel recommends they be defined as follows:

— Outsourcing—firms contracting out service and manufacturing activities to unaffiliated firms located either domestically or in foreign countries

— Off-shoring—U.S. firms shifting service and manufacturing activities abroad to unaffiliated firms or their own affiliates

— Off-shore outsourcing—a subset of both outsourcing and off-shoring in that it refers only to those service and manufacturing activities of U.S. companies performed in unaffiliated firms located abroad

Alternative Off-shoring Definitions

With a variety of distinctions, off-shoring has been generally defined as either a substitution of imported goods and services for domestic inputs by U.S. firms or as the movement of production and related jobs to off-shore locations of affiliates of U.S. MNCs or unaffiliated firms through direct foreign investment and outsourcing practices, respectively. Despite differences, most definitions focus on the displacement of U.S. employment and production and imply an increase in U.S. imports.

Import Substitution Definitions

The broadest off-shoring definition in the import substitution category includes U.S. firms shifting purchases of both intermediate and final goods and services from domestic sources to unaffiliated foreign suppliers and U.S. foreign affiliates[34], in turn displacing domestic workers and production. In some cases, the definition is limited to intermediate goods and services imports. Import substitution definitions typically limit the shifting of activities and related jobs from U.S. firms located domestically to unaffiliated firms and U.S. foreign affiliates located abroad that supply U.S. imports, and in turn exclude those firms supplying foreign markets.

Definition Limited to U.S. Imports

The GAO defines off-shoring of services in an import substitution context, defining it as “an organization’s purchases from abroad (imports) of services that it previously produced in-house or purchased from another domestic source.”[35] GAO includes purchases of imported services, both intermediate and final, from foreign affiliates and unaffiliated firms, but excludes any services imports that do not directly replace services that were previously produced in-house or from unaffiliated domestic suppliers. The GAO definition thus excludes U.S. job opportunities lost due to growing imports from U.S. firms expanding their operations abroad. Because the definition is limited to imports, job opportunities lost due to foregone exports from U.S. foreign affiliates or U.S. contracted unaffiliated firms supplying foreign markets are also excluded.

Definition Limited to Intermediate U.S. Imports

Bardhan and Jaffee define “off-shore outsourcing” as “using imported inputs, from both arms-length firms and affiliates in foreign countries.”[36] Their definition of off-shore outsourcing includes firms shifting their purchases of intermediate goods and services to affiliated and unaffiliated suppliers located outside the United States, as well as job opportunities lost due to imports replacing intermediate goods and services that otherwise could have been produced domestically. Bardhan and Jaffee limit their definition to intermediate goods and services, thus excluding final goods and services imports. Again, because the definition is limited to imports, U.S. job opportunities lost due to forgone exports from U.S. foreign affiliates or U.S. contracted unaffiliated firms supplying foreign markets are excluded.

Relocation Definitions

The broadest off-shoring definition focusing on relocation includes U.S. firms moving the production of goods and services, either intermediate or final, and related jobs to unaffiliated firms and U.S. foreign affiliates located outside the United States. These unaffiliated and affiliated firms either supply imports to U.S. markets, or supply foreign markets, including the market in which the firm is located. In some cases, the definition is limited to the relocation of part of a firm’s production process, but the most significant disagreement involves whether U.S. foreign affiliates directly supplying foreign markets should be included in the definition. Some argue that U.S. foreign affiliates are not off-shoring if they relocate production and related jobs to overseas locations to directly supply the market in which they are located, because these markets would not otherwise be served if the move had not taken place. Other definitions include overseas relocations that directly supply the market in which the unaffiliated or U.S. foreign affiliate is located, because some U.S. exports and related jobs are lost to the relocation. Relocation definitions are limited to a single event, and in turn, exclude job opportunities lost due to growing imports and forgone exports resulting from growth in foreign markets following relocation.

Single-Event Limitations

Van Welsum and Vickery suggest that there is a time element to the off-shoring phenomenon in that it can be unclear when off-shoring ceases to be off-shoring, and when it becomes just another transaction occurring in a foreign location.[37] Definitions including relocation of production and related jobs to locations outside the United States imply that off-shoring is a single event that includes only actual displacement of U.S. workers from an initial movement of production to a foreign location. Thus, off-shoring definitions employing this single event concept include the initial relocation of production and related jobs to unaffiliated firms and U.S. foreign affiliates located abroad that serve either U.S. or foreign markets, but exclude job opportunities lost due to growing imports and forgone exports resulting from growth in foreign markets following the initial relocation.

Garner of the Federal Reserve Bank of Kansas defines off-shoring broadly, focusing on the movement of production and related jobs to off-shore locations: “the term “off-shoring” refers to the relocation of jobs and production to a foreign country. The relocated jobs and production could be at a foreign office of the same multinational company or at a separate company located abroad.”[38] This definition includes U.S. firms moving production and related jobs to unaffiliated firms and U.S. foreign affiliates located outside the United States. Because Garner defines off-shoring in terms of relocation of production and related jobs, his definition is limited to a single event, excluding job opportunities lost due to growing imports and forgone exports resulting from U.S. firms expanding their operations abroad.

In its MLS survey, BLS also uses a broad definition for off-shoring to distinguish those movements of work from others occurring within the United States. As Sharon Brown has noted, “the BLS decided to use the MLS program as the vehicle for collecting additional information on what is usually referred to as “outsourcing” and “off-shoring.” In doing so, the following definitions were used.

“Outsourcing” is the movement of work that was formerly conducted in-house by employees paid directly by a company to a different company. The different company can be located inside or outside of the U.S. The work can occur at a different geographic location or remain on-site.

“Off-shoring” is the movement of work from within the U.S. to locations outside of the U.S. “Off-shoring” can occur within the same company and involve movement of work to a different location of that company outside of the U.S., or to a different company altogether (off-shoring/outsourcing).”[39]

The MLS applies this broad definition to only certain off-shoring activities. The survey excludes small firms (employing fewer than 50 workers) and small layoff events—those involving less than 50 workers over a 5 week period. Most importantly, there must be a large layoff event. Off-shoring activities that do not involve direct job losses are not included.

Definition Limited to a Single Relocation Event Combined with the Movement of Portions of a Firm’s Production Chain

Grossman of Princeton University defines off-shoring as the migration of portions of the production chain to foreign locations. Off-shoring differs from overall import substitution because it reflects a more specific fragmentation or segmentation of the production process, more akin to overall outsourcing of production decisions made domestically.[40] Similarly, the Department of Commerce’s Technology Administration (TA) broadly defines off-shoring as “the relocation of a whole process, a piece of a process, a function, or a discrete piece of work outside the geographic boundaries of the United States. Work can be done in an off-shore location either within the boundaries of the company or outside the boundaries of the company.”[41] Both definitions include the relocation of portions of a firm’s production chain to foreign locations; however, unlike Grossman’s definition, the TA’s definition specifies that this relocation can go to either an unaffiliated firm or a U.S. foreign affiliate located outside the United States. Both definitions are also limited to a single relocation event, thereby excluding job opportunities lost due to growing imports and forgone exports resulting from growth in foreign markets following the initial relocation.

Definition Limited to a Single Relocation Event and U.S. Imports

The U.S. Chamber of Commerce refers to off-shoring as “worldwide sourcing,” defining it as the process by which a company relocates production to another country outside the United States, excluding the investments and jobs U.S. firms place overseas in order to sell products or serve customers in foreign markets.[42] Behravesh of Global Insight uses the term “global sourcing,” defining it as transferring a particular activity that was previously performed in-house, to U.S. foreign affiliates and unaffiliated firms located outside the United States that produce goods or services for import to the United States.[43] Both definitions specifically state that a firm is not engaging in off-shoring practices if it chooses to relocate any of its activities outside the geographic boundaries of the United States in order to supply foreign markets. Thus, both definitions are limited to U.S. imports and to a single relocation event.

The Panel’s Definition of Off-shoring

Following careful review of a wide range of off-shoring definitions, the Panel identified four selection criteria in choosing its definition of off-shoring:

1) clearly understood

2) clearly differentiable from other sources of employment change

3) consistent through time

4) policy relevant

Taking into account its criteria, the Panel recommends defining off-shoring as follows:

U.S. firms shifting service and manufacturing activities abroad to unaffiliated firms or their own affiliates

This definition is broader than most of the definitions currently used and is similar to the BLS definition for movement of work to an overseas location used in the MLS survey and TA’s definition, except that it is not limited to a single relocation event and does not presume direct job losses. The Panel’s broad definition satisfies the four selection criteria.

1) Clearly Understood

The definition of off-shoring needs to be clearly understood, providing an unambiguous way of distinguishing what the definition includes. The Panel’s definition clearly states that off-shoring includes U.S. firms shifting service or manufacturing activities to either affiliated or unaffiliated firms located outside the United States in order to provide intermediate or final goods or services imports back to the United States, exports to foreign markets, or to directly supply the market in which the activity is occurring. The definition is not limited by import substitution or relocation conditions, and therefore includes job opportunities lost due to forgone exports and imports from either the expansion of U.S. foreign affiliates or expanded unaffiliated contracts.

2) Clearly Differentiable

According to the Panel’s second criterion, the definition of off-shoring needs to be clearly differentiable from its economic impacts, and distinguish those off-shoring economic effects from other sources of change. If the employment effects covered in the off-shoring definition are not easily distinguishable from employment changes caused by, for example, new technology, increased productivity, or trade liberalization, then the definition has limited use in identifying the employment effects attributable to off-shoring.

Distinguishing off-shoring activities from their economic effects is important because a firm’s off-shoring decision may not necessarily reduce its employment levels or even the work activity within the firm. This can occur if the off-shored activities are intended to meet increased foreign demand. It can also occur if a firm decides to change suppliers for an outsourced activity from a domestic supplier to a foreign supplier. The firm making the off-shoring decision does not experience any employment change, nor does its activity level change. What changes is the source of purchased inputs used in its current production process. The previous domestic supplier of the activity being off-shored incurs the direct economic effects of job losses and declines in activity.

The Panel’s definition is not limited to U.S. imports or MNCs. For example, Hira’s definition, adopted by Lieberman staff, includes only MNCs as entities participating in off-shoring and therefore excludes those U.S. firms without foreign affiliates that are contracting activities out to unaffiliated firms located outside the United States. This is an artificial distinction, differentiating between virtually identical economic effects, suggesting that economic effects from MNCs contracting out activities to unaffiliated firms located abroad differ substantively from economic effects generated by nonmultinational entities contracting out activities to unaffiliated firms located abroad.

3) Consistent Through Time

To the extent possible, the definition of off-shoring needs to be consistent through time, capturing different outcomes due to event changes over time. The Panel’s definition avoids any narrow limitations that would make it obsolete or outdated in the future—such as limiting it to low-cost countries or to either affiliated or unaffiliated firms.

One problem with narrow definitions is that the restriction can change over time, creating ambiguity about the definition. For example, wages in some low-cost developing countries can rise over time, sufficiently reducing wage differentials, and in turn eliminating them from consideration for off-shoring. For those countries, the low-cost limitation makes this definition obsolete in the future.

The type of firm, either affiliated or unaffiliated, that has control of a good or service being supplied to a U.S. firm can also change over time. A U.S. firm can choose to contract an activity out to an unaffiliated firm located in another country for a given period of time, and then choose to open a foreign affiliate in order to directly replace its transactions with that unaffiliated firm. Although this particular change in the control of the firm does not affect domestic employment, an off-shoring definition that is limited to either affiliated or unaffiliated firms would attribute new off-shoring activity and employment effects to such a mere change of control. Thus, in such cases, definitions limited to either affiliated or unaffiliated firms are not consistent through time.

4) Policy Relevant

The definition of off-shoring should be policy relevant, measuring what is of interest and pertinent to U.S. policymakers. While employment effects are currently a critical concern, the definition should also be able to distinguish other policy-relevant effects of off-shoring, such as effects on the U.S comparative advantage in knowledge-intensive goods and services.

The Panel’s definition of off-shoring is not limited to a single event, but rather recognizes that the accumulation of impacts over time due to expansionary activity of U.S. firms abroad can cause significant domestic employments effects in the future. Thus, this broader definition acknowledges that future employment changes have policy relevance. Current job losses may be of more immediate concern, but future changes should not be excluded from consideration. Moreover, off-shoring decisions are not immutable, because firms can and do reverse their decisions when expected benefits from initial off-shoring decisions fail to accrue. A static, one-time event definition can exclude these types of future changes that have direct policy relevance.

The Panel acknowledges that its broader, dynamic definition may raise additional measurement and estimation issues. Eliminating some narrow distinctions currently used will reduce some of the complexity and associated measurement issues from current off-shoring definitions. However, off-shoring remains an abstract and complex concept that raises significant measurement and estimation challenges. The proposed additional research described in Chapter 5 of this report will help assess the adequacy of currently available data in meeting those challenges and whether additional data would improve estimates of off-shoring activity and its derived economic effects.

Table 3-1: Alternative Definitions of Off-Shoring
Off-shoring limited to multinational corporations Off-shore outsourcing limited to unaffiliated firms in lower-cost, primarily developing nations	Off-shoring: “multinational corporations relocating work from their domestic sites to foreign locations” Off-shore outsourcing: “. . . the contracting out of certain business functions to an external supplier . . . in lower-cost areas, primarily in developing nations” Office of U.S. Senator Joseph I. Lieberman, Off-Shore Outsourcing and America’s Competitive Edge: Losing Out in the High Technology R&D and Services Sectors, May 2004, p. 7. Lieberman staff define these terms according to those found in Ron Hira’s 2004 paper, “Implications of Off-Shore Outsourcing,” submitted for the Globalization, Employment, and Economic Development Workshop, a Sloan Workshop Series in Industry Studies held in January 2004.
Off-shore outsourcing limited to unaffiliated trade	Off-Shore Outsourcing: “Mode 1” trade in service under the WTO’s General Agreement on Trade in Services—trade in unaffiliated services, with supplier and buyer located in different countries Jagdish Bhagwhati, Arvind Panagariya, and T.N. Srinivasan, “The Muddles Over Outsourcing,” Journal of Economic Perspectives, vol. 18, no. 4, Fall 2004, p. 96.
International outsourcing limited to unaffiliated trade International in-sourcing limited to foreign direct investment and affiliated trade	International outsourcing: “giving rise to unaffiliated trade in services” International in-sourcing: “giving rise to foreign direct investment and affiliated trade in services” The terms used to define off-shoring are “international in-sourcing,” “giving rise to foreign direct investment and affiliated trade in services”, and “international outsourcing”, “giving rise to unaffiliated trade in services” Organisation for Economic Co-operation and Development, Potential Off-shoring of ICT-Intensive Using Occupations, April 2005, p. 5.
Captive off-shoring limited to wholly owned U.S. foreign affiliates serving U.S. and foreign markets (excluding the market in which they are located) Off-shore outsourcing limited to unaffiliated firms located outside the U.S., serving U.S. and foreign markets (excluding the market in which they are located)	Captive off-shoring: resourced activities performed in wholly owned affiliated units located outside the United States, serving U.S. and foreign markets, excluding the market in which they are located Off-shore outsourcing: resourced activities performed by third-party suppliers located outside the United States, serving U.S. and foreign markets, excluding the market in which they are located MGI, The Emerging Global Labor Market, June 2005, pp. 14-16.
Off-shoring limited to imports	Off-shoring: “an organization’s purchases from abroad (imports) of services that it previously produced in-house or purchased from another domestic source” United States Government Accountability Office, Current Government Data Provide Limited Insight into Off-Shoring of Services, September 2004, p. 2.
Off-shore outsourcing limited to intermediate imports	Off-shore outsourcing: “using imported inputs, from both arms-length firms and affiliates in foreign countries” Ashok Deo Bardhan and Dwight Jaffee, “On Intra-Firm Trade and Multinationals: Foreign Outsourcing and Off-Shoring in Manufacturing,” Haas School of Business, University of California Berkeley, April 2004, p. 2.
Off-shoring limited to a single relocation event	Off-shoring: “the relocation of jobs and production to a foreign country. The relocated jobs and production could be at a foreign office of the same multinational company or at a separate company located abroad” C. Alan Garner, “Off-Shoring in the Service Sector: Economic Impact and Policy Issues,” Economic Review, Third Quarter, 2004, p. 6.
Off-shoring limited to a single relocation event combined with the movement of portions of a firm’s production chain	Off-shoring: the migration of portions of the production chain to foreign locations The Brookings Institution, Brookings Data Workshop: Services Off-Shoring: What Do the Data Tell Us?, Session 4: “Off-Shoring and the U.S. Labor Market,” Gene Grossman (presenter), June 2004. Off-shoring: “the relocation of a whole process, a piece of a process, a function, or a discrete piece of work outside the geographic boundaries of the United States. Work can be done in an off-shore location either within the boundaries of the company or outside the boundaries of the company” Department of Commerce, Technology Administration, Assessment of the Extent and Implications of Workforce Globalization in Knowledge-Based Industries, July 2004, p. 4.
Global sourcing limited to a single relocation event and U.S. imports	Global sourcing: transferring a particular activity that was previously performed in-house, to U.S. foreign affiliates and unaffiliated firms located outside the United States that produce goods or services for import to the United States Staff interview with Nariman Behravesh, chief economist of Global Insight, on the Global Insight paper written for the Information Technology Association of America (ITAA), The Comprehensive Impact of Off-Shore IT Software and Services Outsourcing on the U.S. Economy and the IT Industry, May 4, 2005.
Worldwide sourcing limited to a single relocation event and U.S. imports	Worldwide sourcing: the process by which a company relocates production to another country outside the United States, excluding the investments and jobs U.S. firms place overseas in order to sell products or serve customers in foreign markets U.S. Chamber of Commerce, Jobs, Trade, Sourcing, and the Future of the American Workforce, April 2004, p. 10.

Table 3-1: Alternative Definitions of Off-Shoring

Limitations

Definition and Source

Off-shoring limited to multinational corporations

Off-shore outsourcing limited to unaffiliated firms in lower-cost, primarily developing nations

Off-shoring: “multinational corporations relocating work from their domestic sites to foreign locations”

Off-shore outsourcing: “. . . the contracting out of certain business functions to an external supplier . . . in lower-cost areas, primarily in developing nations”

Office of U.S. Senator Joseph I. Lieberman, Off-Shore Outsourcing and America’s Competitive Edge: Losing Out in the High Technology R&D and Services Sectors, May 2004, p. 7. Lieberman staff define these terms according to those found in Ron Hira’s 2004 paper, “Implications of Off-Shore Outsourcing,” submitted for the Globalization, Employment, and Economic Development Workshop, a Sloan Workshop Series in Industry Studies held in January 2004.

Off-shore outsourcing limited to unaffiliated trade

Off-Shore Outsourcing: “Mode 1” trade in service under the WTO’s General Agreement on Trade in Services—trade in unaffiliated services, with supplier and buyer located in different countries

Jagdish Bhagwhati, Arvind Panagariya, and T.N. Srinivasan, “The Muddles Over Outsourcing,” Journal of Economic Perspectives, vol. 18, no. 4, Fall 2004, p. 96.

International outsourcing limited to unaffiliated trade

International in-sourcing limited to foreign direct investment and affiliated trade

International outsourcing: “giving rise to unaffiliated trade in services”

International in-sourcing: “giving rise to foreign direct investment and affiliated trade in services”

The terms used to define off-shoring are “international in-sourcing,” “giving rise to foreign direct investment and affiliated trade in services”, and “international outsourcing”, “giving rise to unaffiliated trade in services”

Organisation for Economic Co-operation and Development, Potential Off-shoring of ICT-Intensive Using Occupations, April 2005, p. 5.

Captive off-shoring limited to wholly owned U.S. foreign affiliates serving U.S. and foreign markets (excluding the market in which they are located)

Off-shore outsourcing limited to unaffiliated firms located outside the U.S., serving U.S. and foreign markets (excluding the market in which they are located)

Captive off-shoring: resourced activities performed in wholly owned affiliated units located outside the United States, serving U.S. and foreign markets, excluding the market in which they are located

Off-shore outsourcing: resourced activities performed by third-party suppliers located outside the United States, serving U.S. and foreign markets, excluding the market in which they are located

MGI, The Emerging Global Labor Market, June 2005, pp. 14-16.

Off-shoring limited to imports

Off-shoring: “an organization’s purchases from abroad (imports) of services that it previously produced in-house or purchased from another domestic source”

United States Government Accountability Office, Current Government Data Provide Limited Insight into Off-Shoring of Services, September 2004, p. 2.

Off-shore outsourcing limited to intermediate imports

Off-shore outsourcing: “using imported inputs, from both arms-length firms and affiliates in foreign countries”

Ashok Deo Bardhan and Dwight Jaffee, “On Intra-Firm Trade and Multinationals: Foreign Outsourcing and Off-Shoring in Manufacturing,” Haas School of Business, University of California Berkeley, April 2004, p. 2.

Off-shoring limited to a single relocation event

Off-shoring: “the relocation of jobs and production to a foreign country. The relocated jobs and production could be at a foreign office of the same multinational company or at a separate company located abroad”

C. Alan Garner, “Off-Shoring in the Service Sector: Economic Impact and Policy Issues,” Economic Review, Third Quarter, 2004, p. 6.

Off-shoring limited to a single relocation event combined with the movement of portions of a firm’s production chain

Off-shoring: the migration of portions of the production chain to foreign locations

The Brookings Institution, Brookings Data Workshop: Services Off-Shoring: What Do the Data Tell Us?, Session 4: “Off-Shoring and the U.S. Labor Market,” Gene Grossman (presenter), June 2004.

Off-shoring: “the relocation of a whole process, a piece of a process, a function, or a discrete piece of work outside the geographic boundaries of the United States. Work can be done in an off-shore location either within the boundaries of the company or outside the boundaries of the company”

Department of Commerce, Technology Administration, Assessment of the Extent and Implications of Workforce Globalization in Knowledge-Based Industries, July 2004, p. 4.

Global sourcing limited to a single relocation event and U.S. imports

Global sourcing: transferring a particular activity that was previously performed in-house, to U.S. foreign affiliates and unaffiliated firms located outside the United States that produce goods or services for import to the United States

Staff interview with Nariman Behravesh, chief economist of Global Insight, on the Global Insight paper written for the Information Technology Association of America (ITAA), The Comprehensive Impact of Off-Shore IT Software and Services Outsourcing on the U.S. Economy and the IT Industry, May 4, 2005.

Worldwide sourcing limited to a single relocation event and U.S. imports

Worldwide sourcing: the process by which a company relocates production to another country outside the United States, excluding the investments and jobs U.S. firms place overseas in order to sell products or serve customers in foreign markets

U.S. Chamber of Commerce, Jobs, Trade, Sourcing, and the Future of the American Workforce, April 2004, p. 10.

CHAPTER 4

MEASURING the IMPACTS OF SERVICES OFF-SHORING—

ESTIMATES, METHODOLOGIES, and DATA IMPLICATIONS

INTRODUCTION

Off-shoring of production and service activities from the United States to other countries, particularly those with lower-costs or other strategic advantages, not only poses a public-policy dilemma for Congress and the administration, but an analytical and research challenge. Critical research questions include the following:

Which service and manufacturing industries and occupations are most affected by shifts in business activities and operations overseas?

How significant are these shifts in business activities and operations?

Why are they occurring and are they likely to change over time?

What are the likely effects on U.S. output, U.S. employment, and the standard of living of U.S. workers affected by these changes?

What are the characteristics of affected workers?

What are the costs and benefits to society as a whole?

What are the responses of government agencies, workers, firms, and institutions providing education and training?

In particular, policymakers and researchers are interested in structural changes to the economy that may be occurring, and whether the movement off-shore of business activity and operations in this decade is different from movements of manufacturing operations and related jobs during the 1980s and 1990s.

Off-shoring of services is a relatively new public-policy concern, and over the past few years there have been an increasing number of studies and reports attempting to measure its economic impact and employment effects. These studies vary widely in scope, data sources and quality, analytical methodology, timeframe, and findings. Some differences reflect the inherent difficulty in directly measuring or estimating the extent and effects of off-shoring, and limitations in currently available official data.[44]

This chapter presents representative estimates of the number of service jobs at risk to be off-shored, projected to be lost, and off-shored already, and summarizes the principal methodologies used to estimate those effects. The chapter discusses significant studies that attempt to describe or estimate the number and types of industries, occupations, and jobs affected by off-shoring. It presents a broad overview of the methodologies used and suggests some implications for the statistical agencies. Appendix C provides a more complete bibliography of works reviewed for this report.

The Panel does not endorse any of the estimates presented below. This review is intended to inform the Congress and the public about the range of current estimates and to examine whether any consensus exists. Similarly, while this chapter also describes possible new data proposals suggested by these studies, the Panel believes that additional research is needed before it can recommend any changes. (Chapter 5 explains the additional research that needs to occur.) This review of existing sources and uses of data and analytical methodologies is a necessary first step for determining additional research needed to evaluate the importance and feasibility of potential new data directions.

ESTIMATES OF THE IMPACT OF OFF-SHORING ON JOBS

A number of recent studies and reports attempt to measure or estimate the extent of off-shoring and its economic effects, particularly its impact on U.S. jobs. The discussion and tables below summarize the major studies selected for review into three broad groups based on the nature of their employment impact estimates:

descriptions of the types of occupations and estimates of the number of jobs potentially at risk of being off-shored

forecasts of the number of jobs likely to be off-shored

estimates of the number of jobs already off-shored

The studies reviewed for this report vary widely in scope and methodology, time frame covered, data sources employed, definitions of off-shoring used, and types of jobs included in their estimates.

While estimates of the number and types of occupations and jobs that are either potentially or likely to be affected by off-shoring vary widely, the number of jobs impacted appears relatively small, when compared to total annual job losses in the United States. However, this aggregate comparison does not account for potentially significant distributional issues for particular occupations or areas affected, nor does it consider the severity of impacts on workers displaced by off-shoring. Many studies appear to agree on some of the key characteristics of service jobs that make them vulnerable to off-shoring, but these characteristics frequently rely on nonempirical judgments and distinctions difficult to verify or replicate independently.

A number of other off-shoring studies that do not provide specific employment impact estimates are discussed in the methodologies section on page 80.

Estimates of Occupations and the Number of Jobs Potentially At Risk of Being Off-Shored

Table 4-1 summarizes studies that have attempted to identify service jobs that may be at risk for off-shoring. The estimates cover the periods 2000 to 2003 and range from 9.4 percent to 18.1 percent of U.S. employment. Most studies acknowledge that these potential jobs at risk reflect upper bound estimates for likely job shifts. Actual job shifts within these bounds depend upon other requirements, such as the need for a physical presence, specialized knowledge of local culture, institutions, or markets, or nonroutine interactions with workers or customers.

AFL-CIO	American Federation of Labor-Congress of Industrial Organizations
BEA	Bureau of Economic Analysis
BED	Business Employment Dynamics
BLS	Bureau of Labor Statistics
BPT	business, professional, and technical services
CPS	Current Population Survey
EIN	Employer Identification Number
FDI	foreign direct investment
GAO	Government Accountability Office
GATS	General Agreement on Trade in Services
GDP	gross domestic product
IT	information technology
ITAA	Information Technology Association of America
LEHD	Longitudinal Employer Household Dynamics Data
MGI	McKinsey Global Institute
MLS	Mass Layoff Statistics
MNC	multinational corporation
NAICS	North American Industry Classification System
OECD	Organisation for Economic Co-operation and Development
PUMS	public use microdata sample
QCEW	Quarterly Census of Employment and Wages
QWI	Quarterly Workforce Indicators
SIPP	Survey of Income and Program Participation
TA	Technology Administration (Department of Commerce)
UI	unemployment insurance
WTO	World Trade Organization
Y2K	Year 2000