The American economy is never at rest. New
technologies and trade links have expanded America's economy for
centuries, making historically impressive economic growth seem
routine. A side effect of high growth expectations is
hypersensitivity to the slightest downturn. Even the relatively
mild 2001 recession brought with it the undying myths of failure,
stagnation, and the internal contradictions of capitalism, all
summarized in one word: outsourcing.
Outsourcing is a new variant of the
timeless assertion that capitalism is good for capital (greedy
businessmen) at the expense of labor (hard-working Americans).
However, this rehash of liberal populism is not based on sound
economics. As stated by University of Chicago professor Daniel W.
Drezner, "[B]elieving that offshore outsourcing causes unemployment
is the economic equivalent of believing that the sun revolves
around the earth: intuitively compelling but clearly
One can only hope that an examination of
the facts will kill off the following myths before policymakers
Myth#1: America is losing
Fact: More Americans
are employed than ever before.
The notion of anemic
job growth during the recovery rests entirely on one measure of
employment: total non-farm payroll employment. However, the U.S.
Department of Labor's payroll survey has problems capturing a
as well as a history of large revisions, which are announced months
and even years after the initial data are released. While the
payroll survey has a vast sample size, its sample quality remains a
concern due to overcounts of job changers and miscounts of other
Most labor measures
show real gains over the past three years and even some record
highs. Real earnings are up; the rate of unemployment is low;
jobless claims are 10 percent below the 25-year average; and the
household survey-the only direct employment survey of
Americans-indicates that 2.2 million more Americans are employed
now than were employed before the recession ended in November 2001.
Never before have this many Americans-138.6 million to be
Myth#2: The low unemployment rate reflects
a discouraged workforce.
is dropping, despite a surging labor force.
The latest U.S.
unemployment rate has fallen steadily over the past few months and
is now 5.6 percent, below the average of 5.9 percent for 1959-2003
and well below the average rate of 6.3 percent between 1973 and
2003. Moreover, the U.S.
enjoys far better unemployment rates than other developed nations.
The average 2003 unemployment rate was 7.1 percent for the 30
members of the Organization for Economic Cooperation and
Recent 2004 data show that unemployment is 8 percent in the Euro
area (9.6 percent in France and 10.3 percent in Germany) and 7.4
percent in Canada.
The assertion that
unemployment is low in the U.S. only because many discouraged
workers have abandoned the labor force is incorrect. The
unemployment rate that includes discouraged workers is 5.9 percent:
only 0.3 percent higher than the official rate, which is no higher than
usual. In fact, the U.S. labor force has grown by 2.3
million people since November 2001. In other words, the
unemployment rate illustrates real gains because the ratio of
unemployed Americans to the total labor force is declining, even
though the size of the labor force is growing.
Myth #3: Outsourcing will
cause a net loss of 3.3 million jobs.
represents less than 1 percent of gross job turnover and brings net
gains to the economy.
Over the past
decade, America has lost an average of 7.71 million jobs every
The commonly cited Forrester Research prediction of jobs lost to
outsourcing estimates that 3.3 million service jobs will be
outsourced between 2000 and 2015-an average of 55,000 jobs
outsourced per quarter.
According to these numbers, at worst, jobs lost to outsourcing
represent only 0.71 percent of all jobs lost per quarter as part of
normal turnover in the economy.
firms have jumped on the bandwagon, but the author of the original
Forrester study "now says his numbers were hyped" and expresses
frustration that the issue has spun out of context. The context, of
course, is the net positive impact of trade and technology. America
has averaged gross gains of 8.11 million jobs per quarter over the
past decade-an average net increase of 400,000 jobs every quarter,
swamping the impact of outsourcing.
The new interest in
outsourcing is producing a wave of new research, and the
overwhelming consensus vindicates the position espoused by Greg
Mankiw, renowned Harvard economist and current chairman of the
Council of Economic Advisers, that trade-induced labor flows are a
net positive for the U.S. economy.
gains of trade have been shown to vastly outweigh the costs, even
when job dislocations are factored into account.
U.S. economy is going through a permanent structural change, so the
labor force dislocations are more severe than during normal
recessions, which means the productivity gains are higher as well.
The data support the theory here, with the U.S. economy
experiencing record high gains in productivity.
net jobs are gained due to outsourcing, as emphasized by a recent
Global Insight study:
IT software and service outsourcing displaces some IT workers,
total employment in the United States increases as the benefits
ripple through the economy. The incremental economic activity that
follows offshore IT outsourcing created over 90,000 net new jobs in
2003 and is expected to create 317,000 net new jobs in 2008.
Myth #4: Free trade, free
labor, and free capital harm the U.S. economy.
An underlying myth
is that economic freedom is a "race to the bottom" in which
American workers must accept lower wages and fewer benefits in
order to compete with low-cost labor in other countries.
Fact: Economic freedom is
necessary for economic growth, new jobs, and higher living
Countries that embrace economic
freedom-including freedom of trade, labor, and capital-experience
stronger economic growth than those that seek to thwart the market
through regulatory hurdles and policy restrictions. The 2004
Index of Economic Freedom confirms a strong, positive
relationship between economic freedom and per capita gross domestic
product (GDP). Moreover, average GDP growth rates increase as a
country's economic freedom score improves, as measured in the
In other words, policies that are
antithetical to economic freedom, including trying to protect the
jobs of a few workers from outsourcing, will inevitably retard
economic growth and lead to fewer jobs in the future. Trade freedom
is one aspect of economic freedom, of course, and the U.S. Trade
Representative confirms that the benefits of free trade are
Last year alone, hidden import taxes
cost American consumers $18 billion. Duty-free trade would
eliminate these hidden costs and lower prices for consumers. While
this proposal would offer substantial benefits to all Americans, it
would particularly help low-income families. A recent study by the
Progressive Policy Institute found that cutting U.S. import taxes
especially benefits single-parent, low-income families, who
typically pay a higher proportion of their income on import taxes
than other households. A University of Michigan study found that
the U.S. economy would expand by $95 billion as a result of
tariff-free trade-contributing to job-creation and higher wages.
A case in point is America's experience
with the North American Free Trade Agreement (NAFTA), which has
been a net boon for the U.S. economy and American workers.
Employment in the U.S. increased by 20 million jobs between 1993
and 2000. In the 10 years since NAFTA's enactment, real hourly
compensation has increased by 14.7 percent, including a 14.4
percent increase in manufacturing wages. Trade among the three
NAFTA nations has more than doubled, helping to lower prices for
While free trade can cause localized
pain for a few workers, the overall gains are overwhelming. The
myth of lower wages due to increased trade is wrong on theory and
wrong on the facts.
Myth #5: A job
outsourced is a job lost.
An underlying myth is
that trade is a zero-sum game in which prices do not matter.
Fact: Outsourcing means
In 1997, President
Bill Clinton "advocated outsourcing as a major budget-balancing
tool and the National Performance Review urged agencies to consider
farming out common computing tasks wherever feasible." Clinton was not
calling for job losses; instead, he recognized that efficiency in
government meant a lower burden on the taxpayer and that private
firms can often provide a service at a lower cost with higher
quality than the government can.
The larger point is
that "outsourcing" was never about exporting jobs. Outsourcing,
from a business perspective, simply means having a component
sourced externally from the firm that sells the final product. This
leaves the business free to focus its resources on their highest
and best use, producing and selling its products or services.
For example, a
typical American company needs office supplies, from pens to
computers. Yet producing these materials within the company makes
little sense. An economy in which each company produced from
scratch all of its own office supplies, uniforms, food, and
infrastructure would be extremely inefficient.
In recent years, the
trend toward outsourcing was viewed correctly as a positive
evolution of business practices toward nimbleness and flexibility.
Old jobs can be outsourced domestically, or to foreign firms, but
technology often replaces the old job, with machines replacing
workers. This is like the automation of farm labor, which has been
replaced largely by tractors and other agricultural equipment over
the past two centuries.
The result of this
drive toward efficiency is visible to all Americans in the form of
lower prices and a higher standard of living. For example,
computers and televisions today cost a fraction of their cost in
1980, thanks to a relentless process of efficiency-driven
is undoubtedly taking place and may increase, but it goes hand in
hand with higher wages, lower prices, higher profits, and enhanced
U.S. competitiveness. Punishing firms that outsource would only
erode standards of living by raising the prices Americans have to
Myth #6: Outsourcing is a
Fact: Outsourcing is a
There are currently
6.4 million jobs in the U.S. in which the employer is a foreign
company. The rate at which these "insourced" jobs are growing is
faster that the rate at which jobs in general are being lost.
According to the Organisation for International Investment (OFII),
"Over the last 15 years, manufacturing 'insourced' jobs grew by
82%-at an annual rate of 5.5%; and manufacturing 'outsourced' jobs
grew by 23 percent-at an annual rate of 1.5%."
jobs are often higher paying than those that are outsourced-e.g.,
the 4,300 workers at the BMW factory in South Carolina and the more
than 14,000 employed at Honda plants in Ohio. Senator Mitch
McConnell (R-KY) brought these facts to the Senate floor on March
4, citing data from the OFII and pointing out that every state has
thousands of insourced workers. Michigan has 244,200. Ohio has
242,200. Even Idaho has 13,900 insourced jobs.
Indeed, the nature
of economic development means that while some lower-paying jobs may
move overseas, higher-paying jobs move in. A study by the Institute
for International Economics (IIE) found that:
[O]f the 12 IT
occupations that earned more than $50,000 in 2002, 75 percent
increased their employment from 1999 to 2002. IT jobs earning more
than $50,000 expanded by 184,000 from 1999 to 2002, of which
computer software engineers earning approximately $75,000 per year
accounted for 115,000 jobs.
The IIE also
punctures the myth that white-collar jobs are fleeing American
shores in droves:
of US jobs, projected by the most widely quoted industry report on
the issue, to be lost in occupational categories threatened by
offshore outsourcing pays less than the US average wage, suggesting
that many of these jobs may face medium-term elimination through
technological change, regardless of whether they are outsourced to
offshore locations or not.
occupations have declined, but the declines are concentrated in
lowskilled IT occupations, and in occupations where economy-wide
trends dominate (managers and manufacturing). This mitigates the
overall macroeconomic impact to the US economy of such job
Myth #7: American
manufacturing jobs are moving to poor nations-especially
Fact: Nations are losing
manufacturing jobs worldwide-even China.
jobs are down by 2.45 million in the past three years. The zero-sum
view of the world imagines that these jobs went somewhere
else-specifically that American jobs were exported to a country
with lower wages.
However, America is
not alone in experiencing declines in manufacturing jobs. U.S.
manufacturing employment declined by 11 percent between 1995 and
2002, which is identical to the average world decline according to
a study by Alliance Capital Management. Contrary to the myth,
China's losses were even sharper: 15 percent of its industrial jobs
over the same period.
The real culprits
for declining numbers of manufacturing jobs in all countries are
increasing productivity, capital investment, and technological
innovation. Although manufacturing jobs have declined in America
over the past decade, U.S. manufacturing output has jumped by 38
Today, the U.S. manufacturing sector produces more than the entire
Trade should not be blamed for what is
really a technological process, especially because America has
experienced this job-winnowing productivity trend for decades.
Current job losses of 2.45 million in manufacturing are nearly
identical to the sharp hit that manufacturing experienced between
1979 and 1982. Employment recovered then, but only when new
companies created new jobs in new sectors.
Myth #8: Only greedy
corporations benefit from outsourcing.
benefits from outsourcing.
Critics err seriously in trying to
divorce benefits for corporations from benefits accruing to all
Americans. Outsourcing is about keeping costs down in response to
competition. As costs decline, every consumer benefits. The vast
benefits from lower costs are usually overlooked because the
benefits are diffused throughout the economy.
In contrast, the much smaller cost of
jobs lost to outsourcing is sharply focused. In other words, the
relative few who lose their jobs to outsourcing are far more vocal
than the millions of consumers who save a few hundred dollars each
year due to lower prices for such things as computers, cell phones,
Early studies found that the gains of
trade outweighed losses by 50 to 100 times. More recent studies
also take the serious matter of job dislocations into account. A
2003 study by Michael W. Klein, Scott Schuh, and Robert K. Triest
includes dislocation costs in its calculations, concluding that the
benefits of trade outweigh its costs by 100 percent, or 2 to 1. Overall, free trade
saves American consumers billions of dollars.
Myth #9: The government
can protect American workers from outsourcing.
The underlying myth is that free trade
is not fair trade because fair trade can "protect" American
companies and workers.
Fact: Protectionism is
isolationism and has a history of failure.
Lawmakers have a longstanding record of
pandering to specific interest groups on all issues, but the
economic damage can become acute when the issue is trade.
Misleading protectionist rhetoric fuels policies that are designed
to placate these special interests and should be called what it
really is: economic isolationism. One example is the recently
imposed-and later rescinded-steel tariffs, which raised steel
prices for all U.S. manufactures, hindered competitiveness,
destroyed jobs domestically, and violated trade agreements.
A recent flurry of anti-outsourcing
proposals in Congress and at least 36 states threatens businesses
that engage in free trade and investment. Aside from inviting
retaliation, clamping down on the ability of U.S. firms to open
subsidiaries abroad will simply erode their
Economic isolationism is not new, and
it has been an abject failure whenever adopted. A well-known example is the Smoot-Hawley
tariff, enacted by Congress in June 1930 to reduce imports and
protect American businesses and jobs. Smoot-Hawley did halve
imports between 1929 and 1933, but exports also declined by half
over that period. Subsequently,
the rate of unemployment grew from 3.2 percent in 1929 to 8.7
percent in 1930 and peaked at 24.9 percent in 1933. U.S. efforts to
constrict outsourcing can be expected to meet similar barriers
among U.S. trade partners, harming Americans and the global
It is not in America's interest to fall
victim to hostile trade rhetoric. Bills before Congress and the
states that restrict outsourcing are sending exactly the wrong
image: a wealthy America that jealously guards against its
prosperity and freedom leaking out to the Third World. This
hostility only breeds resentment against America and makes efforts
to adopt greater economic freedom around the world more
Myth #10: Unemployment
benefits should be extended beyond 26 weeks.
Fact: Jobless benefits are
The median duration of unemployment is
9.5 weeks, which means that the vast majority of workers who can
file for jobless benefits are fully covered by the existing
unemployment insurance program of 26 weeks. Calls for extensions
are inappropriate, given that new weekly jobless claims are down by
more than 100,000 in the past year (10 percent below the long-term
average) and continuing claims are down by 700,000.
The goal of unemployment insurance is
to help Americans make the transition to a new job, and it is
working. Extending the standard 26 weeks of coverage to 39 weeks
would cost billions of dollars and do little to help the workforce
reorient to new sectors.
deserve a more informative, less partisan debate on outsourcing.
Outsourcing's negative impact on the economy and American
employment has been greatly exaggerated, while its benefits have
been almost entirely ignored.
problem is not trade, investment, or low wages overseas. The real
culprit is not labor-related at all, but the reduced
competitiveness of the U.S. business environment. Instead of
focusing on the non-issue of outsourcing, Congress and the
Administration should cooperate to strengthen the U.S. economy and
benefit individual workers and all Americans by:
- Ending lawsuit
abuse. Frivolous lawsuits cost the U. S. economy between $180
and $233 billion in 2003,
which is enough to pay 1.8 million to 2.3 million additional
six-figure salaries. According to one study, this is up 13.3
percent over 2002, following a 14.4 percent increase over 2001, and
strongly suggests continued double-digit growth unless steps are
taken to end frivolous and abusive lawsuits.
Congress should take
steps to reform class-action lawsuits and restrain the growth of
medical malpractice lawsuits. Since one-third of the increase in
tort costs is driven by increasingly broad asbestos awards,
lawmakers should limit damages for non-sick claimants. Businesses
pay these costs in three ways beyond payment of tort claims:
through increasing product and general liability insurance, higher
employee health-care benefits due to medical liability costs, and
legal fees. The burden these costs impose on the economy is more
than two times greater than the burden on some major U.S. trading
partners (e.g., Japan and Canada), putting American businesses at a
- Eliminating overly
burdensome regulations. Regulatory compliance costs the U.S.
economy nearly $850 billion a year, approaching the amount
Americans pay in federal income tax. While some regulation is
necessary-such as rules to protect against fraud-much is unneeded
and overly burdensome. As the Council of Economic Advisers has
[T]he absence of
competition, enforceable property rights, or an ability to form
mutually advantageous contracts can result in inefficiency and
lower living standards. In some cases government intervention in a
market, for example through regulation, can create gains for
society by remedying any shortcomings in the market's operation.
Poorly designed or unnecessary regulations, however, can actually
create new problems or make society worse off by damaging parts of
the market that do work.
strengthen the review process for all proposed regulations, with
stricter guidelines for conducting and evaluating cost-benefit
analyses and greater resources for reviewers to critically examine
the effects of proposed regulations. Policymakers should target
regulatory reforms in areas ranging from burdensome
telecommunications rules that slow progress toward next-generation
Internet technologies, to unnecessarily costly environmental
regulations that make economic growth difficult, to outdated
workplace regulations that discourage job creation.
flattening the tax code.
America's tax code is overly complex
and incredibly inefficient. Special tax breaks to politically
connected businesses, groups, and voting blocs have resulted in a
bewilderingly complex mess that forces corporations and individuals
to spend at least $194 billion each year to comply with the
ever-changing tax code.
Adopting a simpler and flatter tax code would eliminate the need
for this waste of time and money, free billions of dollars for more
efficient uses, and remove incentives against saving that leave
many workers with little cushion during hard times.
counterproductive tax policies that undermine U.S. business
competitiveness, such as America's policy of worldwide taxation and
reducing the U.S. corporate tax rate (the second highest in the
industrialized world), would greatly benefit American businesses,
and hence American jobs.
President Bush's tax cuts move the tax code in the right direction
and should be made permanent, but substantial gains remain
affordable and reliable energy supplies.
readily complain about increases at the gas pump and in their
utility bills, the high costs of energy also hurt America's
employers. Manufacturers alone consume 30 percent of electricity
and 40 percent of natural gas.
Thus, national energy
policies directly affect the cost of American goods and the ability
of companies to create jobs.
should remove mandates that force the utility industry to use power
from renewable producers (e.g., wind) and instead allow the market
to equate real demand and supply and find the right role for the
renewable energy industries. Likewise, policymakers should reform
the current command-and-control regulatory scheme of the Clean Air
Act and replace it with a market-based approach that sets standards
and allows the electric industry the flexibility to meet those
standards in the most efficient and cost-effective manner possible
while simultaneously enhancing the nation's air quality.
should also address the needs of the electricity grid by
eliminating restrictive regulations that discourage investment-such
as the Public Utilities Holding Company Act-and utilize innovative
transmission pricing incentives. Finally, Congress should increase
domestic supplies of energy by opening up access to reserves that
are currently off limits or restricted.
Outsourcing is not a credible threat to the U.S. economy, and
objective research is quickly debunking its many underlying myths.
At worst, outsourcing is a politically charged trigger word that
has the potential to advance seriously flawed economic policy. For
example, if state governments begin to bar contracts with firms
that subcontract any work overseas, they will hamstring the
competitiveness of U.S. firms.
cannot stop the process of outsourcing any more than they can stop
gravity, but they can scare off profitable U.S. companies.
Businesses survive on slim profit margins, and threatening
competitiveness will be felt immediately where it hurts the most-in
U.S. jobs and salaries.
companies lead the world in developing sophisticated global supply
chains in close coordination with worldwide trading partners. Any
disruption to the efficiency of that supply-chain network will have
a negative ripple effect. By criticizing and regulating
multinational companies that trade, invest, outsource, and
insource, Congress is paving the way to major disruptions in
efficiency that will lead simultaneously to both inflationary and
policymakers should address the underlying reasons that would
induce a company from any country to site a business on foreign
soil instead of in the U.S. In a global economy with global
competition, the cost environment of taxes and regulation looms
larger than ever. Although America has the world's most productive
and skilled workforce, its high tax rates, tax complexity,
burdensome regulations, and frivolous lawsuits discourage job
is not the outsourcing of jobs, but the forcing out of jobs through
inept policy. Congress and states would be wise to continue
America's tradition of free and open markets.
-Timothy Kane, Ph.D., is
Research Fellow in Macroeconomics in the Center for Data Analysis,
Schaefer is Research Fellow in International Regulatory Affairs
in the Center for International Trade and Economics, and Alison Acosta
Fraser is Director of the Thomas A. Roe Institute for Economic
Policy Studies at The Heritage Foundation.
Shannon Klinger and M. Lynn Sykes, "A
Legal Analysis of State and Federal Outsourcing," National
Foundation for American Policy, April 2004, at