Jobs on Another Shore

• Author: David T. Coe
• Position: Senior Advisor in the IMF's Asia and Pacific Department
• Pages: 48-51

Page 48

Outsourcing of service jobs to other countries could affect industrial countries' economies and attitudes toward globalization

CHINA and, more recently, India are emerging as major trading countries at the same time that a new form of international commerce is taking shape-technologically assisted offshoring of jobs, especially of jobs once thought immune to international competition.

China's burgeoning share of world exports and the increase in India's share (see Chart 1) have been recognized as a major development in international economics with a significant impact on employment, wages, and production in developed countries. Now it is becoming clear that offshoring-the outsourcing to other countries of jobs or tasks that produce intermediate inputs, including services- could have potentially long-lived effects on employment, relative wages, and the job security of workers in advanced economies.

In the long run, most economists and policymakers agree, this recent acceleration of globalization will have beneficial economic effects, in both advanced economies and their emerging market trading partners. But in the short run, particularly in countries with less flexible labor markets, there could be large disruptions. Moreover, the sizable number of potentially offshorable jobs has exposed new groups of workers to international competition, and these workers may increasingly be a receptive audience for special-interest protectionists. the recent phenomenon of the offshoring of business services has stimulated a debate in many advanced economies. the two sides of the academic debate in the United states are probably best exemplified by the attitudes of Harvard economist Gregory Mankiw and Princeton economist Alan Blinder.

In 2004, when he was chairman of the U.s. Council of Economic Advisers (CEA), Mankiw called offshoring a long-run plus for the economy, with effects that are not qualitatively different from those of conventional trade in goods. Blinder-a member of President Bill Clinton's CEA and former vice chair of the Federal Reserve Board-has said the debate is not about basic economic gains, which he acknowledges, but about whether offshoring and the entrance of China and India into the world economy are a "big deal" or simply "business as usual." Blinder (2007) says the developments are a big deal because they will force major changes in industrial structure and types of jobs, as well as in wages, job security, labor turnover, and-at least in the short run-employment and unemployment.

Whether offshoring is a big deal or business as usual depends on a number of factors: how many jobs have already been "lost," how many jobs might be lost, how rapidly new jobs are created, the potential impact on incomes and job security for different types Page 49 of workers, and how long or smooth the transition is likely to be.

The offshoring threat

Hard data are scarce on how many jobs in advanced economies have actually been lost because of offshoring, but estimates suggest the effects have been limited to about 0.3-0.7 percent of total employment in the United states and those European countries for which estimates are available (Baldwin, 2006). there is also evidence, however, that service offshoring has been steadily increasing in recent years.

The potential number of service sector jobs that could be affected by offshoring is much larger. Van Welsum and Vickery (2005) estimate that in 2003 close to 20 percent of total employment in the European Union countries, Australia, Canada, and the United states could potentially have been affected by offshoring of services enabled by information and communications technology. Blinder has higher estimates for the United states: 22-29 percent. Other studies also produce large estimates.

The distinction between estimates of the potential number of service sector jobs that could be exposed to international competition and the actual number of job losses is often missed in the public debate. that debate...