Testimony to the Joint Legislative Audit Committee on Offshore  Outsourcing of White-Collar Jobs
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Testimony to the Joint Legislative Audit Committee on Offshore Outsourcing of White-Collar Jobs

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Opportunities and Pitfalls in the Offshoring of California Services Jobs Testimony to the Joint Legislative Audit Committee on Offshore Outsourcing of White-Collar Jobs, Sacramento, May 19, 2004 Cynthia A. Kroll, Senior Regional Economist Fisher Center for Real Estate and Urban Economics Haas School of Business, University of California, Berkeley Offshore and Outsourcing--A Clarification of Terms An offshore activity is one that is done on foreign soil. An outsourced activity involves the purchase of a good or service used in the production process from an outside vendor. Outsourcing may occur within the domestic market, between foreign and domestic markets (in either direction), or entirely offshore, between a US foreign branch and a foreign arms-length provider. These alternatives are illustrated in Figure 1. Figure 1Forms of Offshore and Outsourced ProductionDomestic Foreign Producion ProductionWithin Firm Domestic Branch Offshore Branch /SubsidiaryAcross Firms Domestic Offshore Outsourcing Outsourcing California firms have been engaged in all four types of production for decades. Current policy discussions focus on the shaded squares--offshore branches/subsidiaries and offshore outsourcing by California firms. In fact, the production process tends to be much more complex, with domestic outsourcing and domestic branches out-of-state also affecting the California employment base--in positive as well as negative ways. White Collar ...

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Opportunities and Pitfalls in the Offshoring of California Services Jobs
Testimony to the Joint Legislative Audit Committee on Offshore Outsourcing of White-
Collar Jobs, Sacramento, May 19, 2004
Cynthia A. Kroll, Senior Regional Economist
Fisher Center for Real Estate and Urban Economics
Haas School of Business, University of California, Berkeley
Offshore and Outsourcing--A Clarification of Terms
An offshore activity is one that is done on foreign soil. An outsourced activity involves
the purchase of a good or service used in the production process from an outside vendor.
Outsourcing may occur within the domestic market, between foreign and domestic
markets (in either direction), or entirely offshore, between a US foreign branch and a
foreign arms-length provider.
These alternatives are illustrated in Figure 1.
Figure 1
Forms of Offshore and Outsourced Production
Offshore
Outsourcing
Domestic
Outsourcing
Across Firms
Offshore Branch
/Subsidiary
Domestic Branch
Within Firm
Foreign
Production
Domestic
Producion
California firms have been engaged in all four types of production for decades.
Current
policy discussions focus on the shaded squares--offshore branches/subsidiaries and
offshore outsourcing by California firms. In fact, the production process tends to be much
more complex, with domestic outsourcing and domestic branches out-of-state also
affecting the California employment base--in positive as well as negative ways.
White Collar Offshore and Outsourced Production
Figure 2 shows the range of white-collar jobs that are at risk to being outsourced.
These
jobs require little face-to-face customer contact.
Their primary product is information
and can be transmitted electronically, via remote communications networks. These are
occupations that require relatively little physical capital in the work process, as compared
to manufacturing.
Neither industry of employment nor wage levels are a good predictor
of what type of white collar job can be outsourced to a different producer or shifted
offshore.
High wage differentials and routine tasks make it attractive to send sales call-
centers abroad, while technical skills and advanced research institutes may be more
important than wages in drawing research and development activities to India, China or
Russia.
Figure 2
Occupations At-Risk to Outsourcing
Business and Financial Support
-
Claim Adjusters
-
Cost Estimaters
-
Benefits Specialists
-
Management Analysts
-
Accountants/Auditors
-
Budget Analysts
-
Credit Analysts
-
Financial Analysts
-
Insurance Underwriters
-
Tax Preparers
Computer and Mathematical
Occupations
-
Computer and Information Scientists,
Research
-
Computer Programmers
-
Computer Software Engineers,
Applications
-
Computer Software Engineers, Systems
Software
-
Computer Support Specialists
-
Computer Systems Analysts
-
Database Administrators
-
Network and Computer Systems
Administrators
-
Network Systems and Data
Communications Analysts
-
Actuaries
-
Mathematicians
-
Operations Research Analysts
-
Statisticians
-
Mathematical Technicians
Legal
-
Paralegals, Legal Assistants
Medical
-
Radiologic Technicians
-
Medical Transcriptionists
Office Support
-
1
st
Line Supervisors/Managers
-
Switchboard Operators
-
Telephone Operators
-
Bill and Account Collectors
-
Billing/Posting Clerks
-
Bookkeeping/Accounting Clerks
-
Payroll/Timekeeping Clerks
-
Procurement Clerks
-
Brokerage Clerks
-
Correpondence Clerks
-
Credit Authorizers, Checkers
-
Customer Service Representatives
-
Interviewers (ex. Loan, Eligibility)
-
Loan Interviewers/Clerks
-
Order Clerks
-
Human Resources Assistants
-
Production Clerks
-
Computer Operators
-
Data Entry Keyers
-
Desktop Publishers
-
Insurance Processing Clerks
-
Statistical Assistants
Source:
FCREUE; Occupations identified as at-risk if the task description is consistent with the
characteristics that make a job outsourceable.
Further discussion in Bardhan and Kroll 2003.
Several factors have converged to make this type of offshoring both feasible and
attractive.
First, US firms operate in a competitive environment, where cost and
timeliness of delivery help to determine the success of a product. Many of the firms
involved in offshore production face particularly strong competitive situations.
Second,
political and institutional changes in some of the world’s largest countries have opened
up the possibility of global production as well as global trade.
India, China and Russia
have all undergone changes in their political and economic systems that have opened up
options for business linkages.
Third, advances in telecommunications and the
development of the Internet have made the offshoring of information activities much
easier to accomplish.
Information can be transferred costlessly over the Internet.
Under
these conditions, comparative labor market conditions between the US and offshore
locations become relevant.
The much lower wages in India, China, and eastern European
nations provide an incentive for shifting jobs abroad.
Highly trained technical workers
and a steady supply of new graduates in these locations make it feasible to plan for the
long-term shift of a wide range of services activities abroad.
These conditions suggest
that globalization of services activities is likely to continue.
1
Regional Vulnerability
Nationwide, about 11 percent of the employed labor force is in services occupations that
could be moved to remote locations.
California’s share is similar to the nation’s.
States
with the highest share of workers employed in these occupations include Delaware,
Connecticut, and Virginia, all states that have attracted back office operations from large
metropolitan center (New York and Washington DC).
The states with the lowest shares,
Wyoming, Mississippi and Montana, are smaller than many major metropolitan areas and
have economies that are not heavily based on either office activities or high-tech.
Figure 3
Share of Employment in At-Risk Services Occupations
Selected California MSAs, 2002
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
US
Califiornia
San Jose,
CA PMSA
San
Francisco,
Sacramento,
CA PMSA
Orange
County, CA
Oakland,
CA PMSA
San Diego,
CA MSA
Los
Angeles-
Santa
Barbara
Ventura, CA
PMSA
Santa Cruz-
Watson.
Modesto,
CA MSA
Santa Rosa,
CA PMSA
Riverside-
San Bern.
Office Support
Business Support
Computer and Math
Medical and Legal
Source:
Computed by FCREUE from US Bureau of Labor Statistics occupations data.
Statewide, the share of workers in at-risk occupations varies from a high of almost 16
percent in the San Jose MSA to below 10 percent in many of the smaller metropolitan
1
This discussion is drawn from a presentation by my colleague, Ashok Deo Bardhan, “East Meets West:
Offshoring and the Indian Perspective,” Presented to the Haas Alumni Reunion, Berkeley, May 8, 2004,
available at http://www.haas.berkeley.edu/alumni/reunions/sess_ashok.ppt.
areas, as shown in Figure 3.
Bay Area MSAs are particularly vulnerable because of their
high share of at-risk occupations, combined with high salary levels, as shown in Table 1.
Table 1
Average Annual Salaries for Selected Occupations
Metropolitan Statistical Area
Financial
Analyst
Computer
Programmer
Data Entry
Clerk
Bakersfield, CA MSA
$
62,010 $
66,950
$
24,240
Fresno, CA MSA
$
62,000 $
59,840
$
23,310
Los Angeles-Long Beach, CA PMSA
$
73,380 $
67,120
$
23,830
Oakland, CA PMSA
$
71,140
$
75,210
$
27,670
Orange County, CA PMSA
$
67,450 $
71,050
$
25,800
Riverside-San Bernardino, CA PMSA
$
55,700 $
67,600
$
24,100
Sacramento, CA PMSA
$
59,720 $
68,840
$
25,570
San Diego, CA MSA
$
72,250 $
67,860
$
25,230
San Francisco, CA PMSA
$
84,770 $
78,570
$
28,250
San Jose, CA PMSA
$
78,610 $
77,690
$
27,900
Santa Barbara-Santa Maria-Lompoc, CA MSA $
71,990 $
58,990
$
26,260
Santa Cruz-Watsonville, CA PMSA
$
64,210
$
76,320
$
25,680
Santa Rosa, CA PMSA
$
80,400
$
69,450
$
28,370
Stockton-Lodi, CA MSA
$
54,020 $
50,820
$
23,190
Vallejo-Fairfield-Napa, CA PMSA
$
67,120 $
62,800
$
24,950
Ventura, CA PMSA
$
60,220 $
72,840
$
24,750
US
$
67,180 $
63,690 $
23,190
Note:
Numbers in
bold
indicate salaries at least 15% above the US average for the occupation.
Source: FCREUE from Bureau of Labor Statistics occupational data for 2002.
The areas vulnerable to outsourcing of at-risk occupations may also be the areas best
situated to take advantage of the benefits of offshore outsourcing.
While there may be
pressure to lower wages or reduce employment of the at-risk occupations, earlier
experience has shown that the underutilized human capital, resources, and networks in
California’s high-cost high-tech areas can become the source of new industry
development in the next round of innovation.
For this to occur, an area must have a
preexisting base of skilled workers and institutions that can nurture new business, in
contrast to some older manufacturing or resource regions where economic transformation
to new economic activities has been more difficult.
Impacts on Workers
2
Research on displaced workers has shown that experiences with reemployment and long
term career impacts can vary widely.
Lori Kletzer (2001), of the University of California
2
The material in this section is drawn from Lori G. Kletzer, “Measuring the Costs of Trade-Related Job
Loss,” Testimony prepared for the Committee on Finance, US Senate, Washington D.C., July 20, 2001.
Santa Cruz found that close to two thirds of displaced workers were reemployed at the
time of a follow-up survey. Displaced manufacturing workers were less likely than
displaced nonmanufacturing workers to find reemployment, and workers in import-
sensitive manufacturing fared somewhat worse than all manufacturing workers.
Many of
the differences could be explained by differences in worker characteristics.
Younger
workers (workers under 45) were more likely to be reemployed than older workers, and
there was a direct relationship between likelihood of reemployment and education.
At
the extreme, the likelihood of a college-educated worker being reemployed was 25
percentage points higher than for a high-school dropout.
Reemployment was also much
more likely to occur in a healthy economy than during a downturn.
These findings suggest some reason for concern and also for optimism in the current
situation.
The current wave of offshoring of services jobs is occurring during a time
when some parts of the state continue to lose jobs.
The vulnerable occupation categories
in Silicon Valley, for example, are also among the occupations that have experienced
large losses due to the dot-com bust. The sector has not yet turned around, making
reemployment much more difficult.
At the same time, the laid off workers are often
young and well-educated, suggesting that their long-term prospects for reemployment are
good.
Salary impacts are a second concern.
The ability to maintain a previous salary level was
closely tied to the ability to move to a position in the same detailed industry, Kletzer
found.
In contrast, workers who needed to change industries to find jobs had substantial
earnings losses.
She reports that about one third of these workers had earnings losses
greater than 30 percent, and that salary decreases were particularly large for those
reemployed in retail occupations.
These findings on salary impacts suggest that some
salary losses may occur in the current wave of services outsourcing, if employees must
change careers to become reemployed.
Data Issues in a Further Understanding of the Problem
Based on the share of jobs at risk to outsourcing, the potential exists for significant
adjustment problems for displaced workers.
However, looking at the problem only from
the point of view of jobs with the potential of transferring abroad can distort the full
picture.
First, not all jobs with the potential of offshoring will go. It is likely that the
majority of jobs will stay in the US.
Within higher cost locations, jobs that do not go
abroad may still migrate to other parts of the state or nation, continuing to displace local
workers.
Second, offshoring may play a role in expanding business growth locally.
Hiring talent abroad may enable a company to explore more avenues of new product
development locally.
Third, in an expanding economy, extensive reemployment
opportunities may make offshoring seem more of an opportunity and less of a problem.
When reemployment opportunities are not available, offshoring becomes a problem for
displaced workers.
When labor market conditions are very tight, offshoring becomes a
means of growth beyond what can be supported by the local labor force.
Fourth, while
offshoring is a loss of jobs for some workers, other California workers are employed
because their firms export services to other countries.
In this situation, California
becomes the “offshore” provider to foreign markets.
This has been an important part of
business services growth in the state. In our research on software and computer services
firms, for example, we found that the period from 1997 through 2002 was one of global
expansion, with firms beginning to outsource software and services occupations and also
to expand sales to foreign markets. The same trade agreements that allow offshoring of
California jobs to occur also allow these business opportunities and their related job
benefits.
In making policy decisions, it will be important to know which of these trends is
occurring, and the strength of different trends.
Data limitations make it difficult to
measure the importance of the trends described above.
Federal and state data provide
extensive aggregate data on employment, unemployment, industry and occupation.
However, because of changes in definitions over time, and the lags in reporting of some
data, it is difficult to measure the long-term effects of economic changes over the past
two decades and to identify occupational changes in a timely manner.
In addition, firm
structure is generally not reported in much detail.
The estimates that are available on the
number of services jobs actually outsourced are reliant on private surveys of companies,
such as the recent work by Forrester Research (2004).
The ability to measure job gains
from services exports is also lacking.
The data on services exports is much less detailed
than data on the exports of goods.
The development of a better understanding of all of
the flows related to globalization will require a combination of analysis and interpretation
using aggregate statistics and more detailed collection of current data at the firm level,
either through selective surveys or through more standardized information gathering
mechanisms.
The state may be able to help this process by providing information drawn
from detailed employment and tax records (with appropriate confidentiality restrictions
on the information released and its use).
Some Policy Considerations
California is not in a position to stop the process of globalization that is affecting the
state’s services, and even if it were, it is likely that stopping the process would generate at
least as many problems as it would solve.
The state does have resources for dealing with
some immediate and some longer term issues associated with the offshoring of services.
Worker displacement is an immediate issue.
Adequate unemployment coverage will
be required, and assistance in finding new employment.
Training programs face the
challenge of identifying new employment opportunities at a time when many of the
jobs which were targeted by retraining efforts are on the list of at-risk occupations.
Kletzer and Litan (2001) recommend a wage insurance program that would supplement
a worker’s earnings in a new occupation, allowing the employer to do on-the-job
training for an existing job.
New business development, in the form of R&D, venture capital, and tax credits, can
provide alternative opportunities for some displaced workers and can also provide
support for the next growth sectors for the state.
With the role played by education in international competitiveness and in the
employability of workers, investment in the educational system, from primary grades
through university graduate level study, will continue to be crucial to the state’s
economic strength.
The question of outsourcing of state contracts is also being raised in the state
legislature and the press.
It makes sense to ask the question whether state contracting
can be used to generate job training and business development opportunities within the
state.
In contrast, policies to target response to a small number of jobs exported abroad
are likely to backfire by affecting opportunities for services exports by California
employers.
In a time of limited resources, the state will need to leverage assistance from other
resources as much as possible to deal with these problems.
Existing institutions will
provide some resources, use of federal programs is an additional resource, and finding
ways to partner with businesses will also be key to developing successful programs.
References
Bardhan, Ashok Deo, and Cynthia A. Kroll.
“The New Wave of Outsourcing.”
Research Report
. Fisher Center for Real Estate and Urban Economics, University of
California Berkeley. October 2003.
Bardhan, Ashok Deo, Dwight M. Jaffee and Cynthia A. Kroll.
Globalization and a High-
Tech Economy
. Boston: Kluwer Academic Publications. 2004.
Kletzer, Lori G.
“Measuring the Costs of Trade-Related Job Loss.” Testimony to the
Committee on Finance, United States Senate, Washington, DC.
July 20, 2001.
Kletzer, Lori G. and Robert E. Litan. “A Prescription to Relieve Worker Anxiety.”
Policy
Brief 01-2
. Institute for International Economics. February 2001.
McCarthy, John C., Bill Martorelli and Stephanie Moore, “Near Term Growth of
Offshoring Accellerating.” Forrester Research, Inc. (part of press release from
www.forrester.com). May 2004.