American Jobs and the Rise of Service Outsourcing to China and India

[The authors] estimate very small positive effects of in-shoring and even smaller negative effects of offshore outsourcing. These effects are estimated with substantial precision. The net effect of in-shoring and offshore outsourcing is positive for U.S. workers.

With the rise of service work being outsourced to China and India has come something new for Americans: for the first time ever, educated U.S. workers are competing with educated but low-paid foreign workers. Despite the public concern about this development, though, there has been almost no rigorous research on the subject. Most previous studies have simply counted the number of workers who are in industries or occupations that are exposed to offshore outsourcing. Many (but not all) of these studies then conclude from the resulting large numbers that bad things must be happening to American workers.

In Much Ado about Nothing: American Jobs and the Rise of Service Outsourcing to China and India (NBER Working Paper No. 14061), authors Runjuan Liu and Daniel Trefler study the actual, as opposed to the conjectured effects, on U.S. labor markets. Using March-to-March matched Current Population Survey (CPS) data for 1996-2006, the authors examine the effects of offshore outsourcing as well as the reverse flow (termed "in-shoring"), which is the sale of services produced in the United States to unaffiliated buyers in China and India. They consider impacts on occupation and industry switching, weeks spent unemployed as a share of weeks in the labor force, and earnings. They estimate very small positive effects of in-shoring and even smaller negative effects of offshore outsourcing. These effects are estimated with substantial precision. The net effect of in-shoring and offshore outsourcing is positive for U.S. workers, they find.

The authors quantify this net effect using something of a fear-mongering experiment, which they term the rapid-growth effect: they propose that over the next nine years, in-shoring and offshore outsourcing may continue to grow at rates experienced during 1996-2005 in business, professional, and technical services - that is, in segments where China and India have been particularly strong. Under that assumption, they estimate that for workers in occupations that are exposed to offshore outsourcing, occupational switching (at the 4-digit SIC-code level) would decline by 2 percent; the share of weeks spent unemployed would fall by 0.1 percent; and earnings would rise by 1.5 percent. In other words, American workers on average would benefit. Of course, these numbers are not annual changes - they are changes over an entire nine-year period - and thus they represent only small benefits each year. Still, the authors point out that this extreme, fear-mongering exercise does not indicate adverse effects on U.S. workers.

There are nonetheless some darker spots in the U.S. labor market experience with offshore outsourcing. The effects tend to be negative for workers without a college degree, or for those who work in less skilled, white-collar jobs. As with all labor market impacts of international trade, there are winners and losers and, in the current United States, the losers tend to be the less educated.

The authors acknowledge that the loss of one's job can be enormously damaging both financially and psychologically. However, they point out that these darker spots should not obscure the big picture, which is of relatively small effects associated with offshore outsourcing.

-- Lester Picker