South-Western College Publishing - Economics  
The Long Run Effect of Offshoring Jobs in Technology
Subject Jobs in the Technology Sector
Topic Employment, Unemployment, and Inflation
Key Words Offshoring, Technology Jobs, and Job Migration
News Story

Recent economic news has been good and it raises hopes that the American economy is well on the road to recovery. One remaining weakness is the continuing migration of jobs in the technology sector from the U.S. to foreign firms that offer lower cost alternatives for technological services. This trend has been described with terms like "offshore outsourcing" and "offshoring". From an economic point of view, the trend is referred to as job migration.

The concern and response to the trend is evidenced in the political arenas already: The State of Indiana pulled a state contract for technological services that previously was awarded to a company in India to save U.S. jobs. Similarly, a bill has been proposed in New Jersey that would restrict the use of offshore workers by companies who do work for the state.

As is often the case with economic events, the short-run impact and response is likely to be different from the long-run implications of the current job migration. In the short-run, it should be recognized that in pure economic terms the trend is most likely irreversible as the U.S. economy takes another step toward globalization.

The trend will present short-run challenges to industry, government and individual workers, as American jobs will have to be matched with American skills and abilities. In the process, some American workers may have to retrain to be able to provide higher- level skills to the technology industry. "To be competitive and to maintain and improve American living standards, we have to move up the technology food chain," said Craig R. Barrett, the chief executive of Intel.

In the long-run, the trend of job migration is necessary for America to be competitive in a world market. In the new information economy, technological services must be viewed as an "input" in the same way that glass, steel, and rubber are parts of an automobile. If a firm can reduce its costs of production, it serves to keep prices low while improving American workers' efficiency and productivity. In fact, the McKinsey Global Institute has estimated that every dollar of costs saved by an American firm by using offshore suppliers, yields a benefit of $1.12 to $1.14 to the American economy and steers U.S. workers toward jobs that add more value than the jobs that were replaced.


(Updated February, 2004)

Questions
1.

What kinds of jobs would be most likely to be lost to "offshoring"? How would the loss of those kinds of jobs affect you and your peers?

2. How can the government help ease the burden of job migration to foreign firms?
3. Do you think the long-run benefits of "offshore outsourcing" outweigh the short-term costs to the American economy? Why or why not?
Source Steve Lohr, "Offshore Jobs in Technology: Opportunity or a Threat," New York Times Online, December 22, 2003.

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