Off-Shoring Essay ⋆ Business Essay Examples ⋆ EssayEmpire

Off-shoring is the migration of jobs rather than people between countries and regions. Firms ship at least part of their production and jobs abroad and then reimport the products and services into their home country. Examples include the relocation of call center and medical transcription jobs from the United States to India. In a sense, off-shoring is simply a different manifestation of the principle of comparative advantage. India has a well-educated, English-fluent labor force willing to work for less than comparably educated Americans.

Jobs can be off-shored from a rich country to a poorer one, as in the call center example. But jobs can also be moved in the opposite direction. Legal services, computer programming, engineering, and management services are all examples of jobs offshored from other countries to the United States. (The United States has a substantial surplus in services trade—more than $50 billion in 2003.) What makes off-shoring a controversial topic is the qualitative difference between traditional trade in goods and services (paired with labor mobility between countries and regions) and the actual shift of the jobs.

When taking advantage of the lower labor costs in another country required either moving an entire factory or encouraging the low-wage workers to emigrate, trade in services was limited by the high cost of relocation. As communication costs fall, however, offshoring makes possible trade in specific service jobs that previously was not cost-effective. In particular, low communications costs make it possible to outsource many high-skill jobs as well as low-skill ones. Thus, medical radiographs taken in the United States are routinely transmitted digitally to radiologists in India to be read for U.S. hospitals.

Candidate Jobs

Recent estimates are that as many as 11 percent of U.S. jobs are at risk of off-shoring, based solely on industries in which some off-shoring is already taking place. Which jobs can be off-shored depends on a wide range of factors. India shares both English and a common law legal heritage with the United States. As a result, some routine legal work is also already being off-shored from the United States to India, highlighting the importance of cultural factors in making off-shoring possible. Some jobs, of course, require a physical presence, and these jobs are less vulnerable to off-shoring. But even jobs traditionally performed in person sometimes can be performed virtually. Security firms are already off-shoring the monitoring of security cameras, for example.

On the other hand, the ability to off-shore jobs has important limits. Although some countries offer significantly lower wages for particular occupations, labor costs must be compared on a productivity adjusted basis. (Unit labor costs statistics provide productivity-adjusted wages.) When these adjustments are made, the cost advantage of the low-wage country often is significantly less than it initially appeared. Moreover, off-shoring is driving up labor costs in the low-wage economies. Wages in the computer programming industry in India have been rising at a rate of almost 15 percent per year recently, reflecting the high demand for skilled labor due to off-shoring. Such rapid increases erode the cost advantage of the off-shoring operation.

Policy Issues

Off-shoring raises three important policy issues. First, if off-shoring continues to expand, groups that previously did not view themselves as vulnerable to international competition will experience disruption and insecurity. If the gains from trade are worth these costs, an important policy question is whether and how to compensate individuals and firms that suffer dislocation costs as a result of off-shoring through transition assistance, retraining, and other programs.

Second, the expansion of economic vulnerability due to off-shoring threatens the political coalition supporting free trade in some rich countries. Although the consensus among economists is that the gains from increasing the scope of trade to include service sector jobs are large enough to outweigh, in the aggregate, the costs of the resulting disruptions, this situation could lead to a change in the post–World War II worldwide trend toward trade liberalization.

Third, some people argue that particular jobs produce benefits for the countries where they are located. In particular, research and development work is widely thought to produce significant benefits through the creation of innovation clusters like Silicon Valley in California.

Bibliography:

Ashok Deo Bardhan and Dwight Jaffee, Innovation, R&D and Offshoring (University of California, Berkeley, Fisher Center for Real Estate and Urban Economics Research Report, 2005);
Alan E. Blinder, “Offshoring: The Next Industrial Revolution?” Foreign Affairs (v.85, 2006);
Francesco Daveri and Cecilia Jona-Lasinio, Off-Shoring and Productivity Growth in the Italian Manufacturing Industries (CESifo, 2008);
Thomas L. Friedman, The World is Flat: A Brief History of the Twenty-First Century (Farrar, Straus & Giroux, 2005);
Douglas A. Irwin, Free Trade Under Fire, 2nd ed. (Princeton, 2005);
Harbhajan S. Kehal and Varinder Singh, Outsourcing and Offshoring in the 21st Century: A Socio-Economic Perspective (Idea Group Publishing, 2006);
National Academy of Public Administration, Off-Shoring: An Elusive Phenomenon (National Academy of Public Administration, 2006);
National Academy of Public Administration, Off-Shoring: How Big Is It? (National Academy of Public Administration, 2006);
New Jersey, Final Report [of Assembly Outsourcing and Off-Shoring Commission] (New Jersey Office of Legislative Services, Public Information Office, Hearing Unit, 2008);
Frédéric Robert-Nicoud and Bernard Hoekman, Off-Shoring of Business Services and Deindustrialization: Threat or Opportunity—and for Whom? (Centre for Economic Policy Research, 2006).

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