Shipping Jobs Overseas? Offshoring and Unemployment in the United States
When a company offshores part of its production chain abroad, it is then importing an intermediate good or service. For example, a company may import a part, component, or even an entire assembled product; or it may import business services by using accountants and/or call centers located abroad. As we discuss in the next section, the overall effects of trade in such intermediates are very similar to the trade in final goods that we have focused on up to now. Yet, when it comes to the effects of offshoring on employment, there is one additional dimension: the lower price of the imported intermediates not only benefits a firm’s owners and their consumers, it also benefits the firm’s remaining workers—because the lower price induces firms to increase their purchases of intermediates, which improves the productivity of the remaining workers.28
This productivity effect also induces the offshoring firm to hire additional workers dedicated to the remaining parts of the production process. In many cases, the overall employment effect for the offshoring firm is positive: Several studies of U.S. multinationals have found that when they expand their overseas employment, they concurrently also expand their U.S. employment.29
What about foreign outsourcers who no longer maintain ownership of their foreign suppliers? A recent study covering the entire U.S. manufacturing sector found that overall, increases in offshoring from 2001–2007 did have a negative impact on
U.S. manufacturing employment.30
However, those losses connected to offshoring accounted for only a tiny fraction (2.3%) of the total employment losses during that period. Those total employment losses were indeed substantial: The decrease in U.S. manufacturing employment totaled 2 million (manufacturing employment has been steadily decreasing over the past 30 years); but offshoring played a very minor role in this trend.
This study also found that the productivity effect for the remaining workers played a very important role: The cost benefits from offshoring lead firms to substantially expand their U.S. operations and hire additional workers. Nonproduction workers benefited most from this increased employment because they were much less likely to directly suffer from the displacement effect of offshoring in the first place. However, production workers also benefited from this expansion effect tied to offshoring: The initial displacement unemployment for those production workers was cut in half by this increased employment response.
Another channel mitigating the worker displacement effects of offshoring is that—just as with trade in final goods—intermediate goods and services are traded in both directions. In the United States, the popular press and many politicians single-out the employment losses associated with offshoring.31
Of particular concern are the losses of service jobs to offshoring, given the recent technological trends that have vastly expanded the scope of “offshorable’’ business services (see the discussion in Chapter 2). This has lead to headlines such as “More U.S. service jobs go overseas; Offshoring is expected to grow” in the USA Today.
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Yet, offshoring in one country is inshoring in another country: That is, for every import transaction of an intermediate good or service, there is a corresponding export transaction for the country hosting the offshored part of the production process. And it turns out that for the United States, this inshoring of service jobs (exports of intermediate services) is growing even faster than the offshoring of service jobs out of the United States (imports of intermediate services), leading to a surplus; and one that has been growing over time. Figure 8-11 plots all U.S. cross-border trade over time in service categories related to offshoring (financial, insurance, telecommunications, and business services; that is, all traded services other than tourism, transportation, and royalties).33
Clearly, there is nothing ominous in the time trend of trade in business services for overall U.S. employment.
Given all these facts on the impact of offshoring for U.S. employment, the view that offshoring simply amounts to “shipping jobs overseas” is misleading. True, when a firm based in the United States moves a call center to India, or moves the assembly of its product to China, then some specific jobs that used to be performed in the United States are now performed in India or China. However, the evidence shows that in terms of overall employment, those jobs are replaced
by other ones in the United States: some related to the expansion effect at the offshoring firms and others by firms providing intermediate goods and services to firms located abroad (inshoring).
Yet, just as with other forms of trade, trade in intermediates has substantial consequences for the distribution of income. Those call center or manufacturing workers displaced by offshoring are often not the ones who are hired by the expanding firms. Their plight is not made any easier by the gains that accrue to other workers. We discuss these overall welfare consequences in the next section.