The Political Economy of Services Offshoring in North America

In recent years, the phenomenon of offshoring service-related jobs has emerged as one of the primary arguments against economic globalization. The practice of exporting work overseas first began to appear decades ago in low-skill labor-intensive manufacturing sectors; now, it affects a broader range of services and occupations in the United States and in other industrialized countries, including Canada. The issue has been particularly salient in public and policy debates in the United States, most notably in the 2004 presidential election campaign, and has again become important in the current U.S. electoral campaign discourse.

On March 12th, 2008, the Canada Institute and the Program on Science, Technology, America, and the Global Economy (STAGE) hosted a program featuring Pierre Martin of the Université de Montréal and J. Bradford Jensen of Georgetown University, to promote a better understanding of the true impact of offshoring on Canada and the United States.

Services Offshoring: What is it? Where is it?

Offshoring is particularly common in the manufacturing sector; firms specializing in the production of goods have been taking advantage of lower-wage labor overseas for decades, noted Martin. Recently, the practice has expanded, and has begun to affect jobs in the services industry, a sector previously thought to be immune from outsourcing because of the higher skill level required to perform jobs in that industry. This development has caused concern among policymakers in some developed nations, explained Martin, particularly the United States, where there are fears that offshoring could drain jobs out of the economy in both the service and manufacturing sectors.

During his presentation, Martin said that in economic terms, offshoring is not a significant problem; he quoted Gregory Mankiw, former chairman of the president's Council of Economic Advisors, in saying outsourcing is just another way of conducting international trade. Most of the controversy surrounding offshoring, and especially services offshoring, is political in nature and not economic, said Martin. There is a feeling within developed countries, he maintained, that jobs are being taken from workers and sent overseas. He said that while there is a degree of truth to this, the level of alarm is out of proportion with the actual impact of offshoring on the labor markets and on the economies of developed nations. Jobs are "offshored" to the United States and Canada as well.

The Effect of Services Offshoring in North America

Martin referred to one of many studies that have been done on the effects of offshoring on the United States that found that 3.3 million jobs were sent overseas between 1995 and 2002, at an average annual rate of 220,000 jobs a year. This is a small number relative to the 153.1 million workers in the U.S. labor force in 2007; it is also less than the average amount of frictional unemployment—the natural amount of unemployment from people searching for new jobs—that can be found in any given month. Martin's own research found that between 17 to 20 percent of American jobs are affected by outsourcing, but only 8 to 9 percent of jobs are at risk of being moved overseas. In Canada the situation is similar, with approximately 17 percent of all jobs affected by offshoring, and 8 percent at risk of being sent overseas.

Martin stressed that the benefits of offshoring are similar to the benefits of trade: both countries are able to specialize in areas where they have a comparative advantage. The United States and Canada have an advantage in having a highly educated workforce with high levels of capital, whereas China and India have an advantage in large populations and low wages. Many jobs which are seen to be at risk for offshoring, such as programmers and engineers, have actually increased in North America. Martin also explained that the United States is now trading more with poor countries than with rich ones.

Jensen provided insight into which jobs are most at risk of being lost in the United States. He maintained that approximately 15 to 20 million jobs are currently susceptible to being offshored in the United States. The bulk of these at-risk U.S. jobs are in the low-skill, low-wage labor category. In fact, argued Jensen, those jobs in any sector earning an annual salary of $40,000 or less are much more at risk of being sent overseas. That 60 percent of U.S. manufacturing jobs earn less than $40,000 helps to explain why this sector is particularly vulnerable to offshoring.

Nevertheless, manufacturing is not the only U.S. sector at risk to losing jobs overseas. Jensen's analysis of the professional services industry revealed that approximately a third of U.S. service workers earn less than $40,000. These figures indicate that while jobs in the services industry are not at the same level of risk to being lost overseas as those in manufacturing, they are not nearly as immune to offshoring as once believed. Should offshoring increase in the services and other sectors outside of manufacturing, cautioned Jensen, the issue could become an even more contentious issue in U.S. politics.

The Public's Reaction to Offshoring in North America

In his presentation, Martin discussed the results of the Chicago Council on Foreign Relations 2004 survey, which found that 64 percent of the American public viewed globalization favorably, as did 87 percent of people deemed to be "leaders." However, the same survey found that 72 percent of the public viewed outsourcing negatively, while 56 percent of civil leaders viewed outsourcing favorably. These results reflect the need to address the disconnect between the general American population and the country's leaders with respect to the risks and benefits of offshoring, noted Martin.

Martin concluded his presentation by highlighting specific measures that could be taken by the U.S. government to reduce offshoring. Restrictions, he said, could be put into place on public procurement, as well as the amount and content of data that can be sent overseas; in addition, the government could enact a mandate requiring service providers to reveal their location, or some other method of increasing the transparency of business practices. To date, however, although several bills have been introduced into Congress concerning offshoring within the last decade, only one minor bill has been adopted since 2002. On the state level, 274 bills concerning offshoring were introduced into state legislatures between 2003 and 2006; the majority of these concern restrictions on offshoring companies, or calls for greater transparency of offshoring practices. A few of the bills were calls for studies on offshoring, indicating that states want more information about the practice before moving on to drafting and implementing legislation. While the reaction of the American government has been mild to date, Martin cautioned, "If this issue and others actually tip the balance against an open trade policy for the U.S. economy, this would not be good news for trading partners such as my own country and others."

Drafted by Cami Woolam
David N. Biette
Director, Canada Institute
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