2009 Volume 12 Issue 3

Offshoring May Slow Impending U.S. Economic Recovery

Offshoring May Slow Impending U.S. Economic Recovery

When jobs return, they will likely be in developing countries where labor is more cost-effective.

Jobs will continue to be offshored from the United States, which will increase unemployment during the recession. Many of these jobs will not return, which will slow the coming of the eventual economic recovery. Although it will mean economic pain for workers in the developed world, it will mean a more productive allocation of resources worldwide.

Photo: Zorani

The United States and the world are in one of the worst recessions since the Great Depression of the 1930s. While unemployment levels are comparable to those during the 1980 to 1983 recession—when unemployment officially reached over 10 percent[1]—from a global, financial perspective, the current recession appears far more widespread.

Recovering from this recession will be more difficult because it is much deeper.[2] And when jobs return, they may not return to where they were lost because of the increasing cost-effectiveness of offshoring. Corporations can now choose to hire personnel on a global scale and may not necessarily hire people in the same locales where jobs were eliminated.

Developing-world and Eastern-European labor forces, approximately the same size as the labor force in the developed world, were added to the global labor market about 15 years ago. These new workers were hungry for jobs in the developed world along with their rewards. However, the global labor market has yet to absorb these workers, which has made for an asymmetrical relationship between labor and management. There are far more qualified workers than jobs matching those qualifications. This means that a job that disappears in St. Louis, USA, can reappear in Mumbai, India, and for a company looking to control costs, the likelihood of that job going to Mumbai is very high.

Calculating Unemployment

Today, unemployment is calculated differently than during the Great Depression.[3] There was no such thing as “discouraged workers,” at that time—workers were either employed or unemployed. If someone lost a job and was looking for work, that person was considered unemployed.

Today, if someone has been looking for work so long that their unemployment benefits have expired, he or she is not officially categorized as unemployed. For the purposes of unemployment statistics, they are categorized as “discouraged workers” or “persons looking for work”[4] and are not included in the Federal government’s official unemployment percentage.[5]

This discrepancy makes unemployment figures difficult to rely on as the recession continues. As people pass through the statistical categories of “unemployed” to “persons looking for work,” the system loses track of them and when these individuals do obtain employment, that fact is not necessarily reflected in the unemployment statistics.

To compare the unemployment statistics of the 1930s to today, “persons looking for work” must be included in the unemployment statistics. According to 1930s criteria, unemployment during the early 1980s recession may have actually been between 12 and 14 percent, roughly equal to that of the second half of the Great Depression.[6] In this current recession, unemployment is officially over 8 percent and headed higher.[7] Economists say that the recession started in December 2007[8] and that unemployment, always a lagging indicator, started to climb in April 2008,[9] so some of the workers have already fallen into the “persons looking for work” category, resulting in about 12 percent unemployment in May 2009 according to 1930s criteria.

The Global Market for Labor

There is worldwide competition for business and the jobs that businesses create.[10] People in America are not only competing with each other, but are also competing with people in China, India, and France. Companies must also remain competitive, which can result in draconian cost cutting. As labor is a major cost of doing business, labor’s functions are often the first that are outsourced or offshored to reduce costs.

Outsourcing can be a cost-effective way to keep jobs in the country because a company is not required to invest in operational costs, such as sites, equipment, and employee benefits. Instead, it pays another company to do its work.[11] Offshoring occurs when jobs leave a country to be performed at a fraction of the cost in another country. Labor costs are often much lower in developing countries than in the developed world and technologies such as the Internet enable companies to access foreign workers as if they were across the street.

Offshoring allows companies to effectively take advantage of the global labor market. In this interconnected economy, distance does not matter, but cost, time, and access do. The Internet, containerization, and supply chain management make it possible to use labor forces that were inaccessible to Western corporations until the end of the Cold War. Once the economy begins to recover and positions need to be re-filled, smart firms will be looking globally for the best, most economical and cost-effective solutions to labor requirements.

Photo: Baris Simsek

Jobless Recoveries

After the recession in the early 2000s, jobs returned to the American economy at such a dramatically slow pace that the recovery was sometimes referred to as the “jobless recovery.” The economic environment had suffered a sea change. With the advent and development of technological change, the labor market had evolved from a national to a global market.

Between 1995 and 2000, the Internet, the end of the Cold War, the advent of supply chain management, and other factors allowed companies to begin exploiting global labor markets. Highly developed labor forces that could perform tasks in the United States and other developed countries became available at significantly less cost. This increased the demand for skilled labor in places like India as they could replace more expensive skilled labor in the developed world.

Many of the jobs workers from developed countries lost were found in places like India, China, and Indonesia. Jobs in information technology were especially hard hit[12] as well as production positions in the pharmaceutical industry, which were offshored to China.[13] As demand increased for foreign labor, however, it also made that labor more expensive. The result is that Indian and Chinese labor is not as cost effective as they once were, and companies in those countries are now themselves outsourcing and offshoring.[14] In India, the local and global demand for denim is so great that they are offshoring to meet that demand.[15] This trickle-down effect may eventually benefit all societies as the influx of jobs helps strengthen developing economies and improve standards of living.

Jobs will continue to be offshored from the United States,[16] which will increase unemployment during the recession. Many of these jobs will not return, which will slow the coming of the eventual economic recovery. Although it will mean economic pain for workers in the developed world, it will mean a more productive allocation of resources worldwide.

The U.S. Economy Will Recover

Employers and employees should expect job recovery to be even slower than after the 2001 to 2003 recession. The Internet, technological advances, access to international labor forces, transportation, foreign exchange, U.S. dollar strength against key currencies, and other factors that caused the first “jobless recovery” are now more developed worldwide, and companies are more skilled at capitalizing on the global labor market.

The American economy always recovers from economic downturns and it will recover from this one. Naturally, we question how long will that recovery take and when will it begin, but there are additional questions that must be posed and answers sought. What form will the recovery take? What jobs will return to the country and what jobs will remain elsewhere? What skills will individuals need to perform the jobs that will be returning?

[1] Statistical Abstract of the United States, 2008, Table 567, (U.S. Government Printing Office, Washington, DC).

[2] J. Pethokoukin, “Obama’s Economic Albatross,” U.S. News and World Report, 145, no. 12, December 1, 2008.

[3] F. Maidment, “Unemployment to Rival the Depression,” The New York Sunday Times, January, 30, 1983, at Section III, 21.

[4] P. Kennedy, “On Journalists’ Use of Economic Concepts,” Economic Inquiry, 30, no.1 (1992): 194–202.

[5] United States Bureau of Labor Statistics, Schedule of Releases for the Employment Situation 2008-9, http://www.bls.gov/schedule/news_release/empsit.html.

[6] F. Maidment, “Unemployment to Rival the Depression,” The New York Sunday Times, January, 30, 1983, at Section III, 21.

[7] Neil Irwin, “Recession Deepening Across Regions, Industries, Fed Says,” The Washington Post, March, 5, 2009, at D01.

[8] D. Holland, R. Barrell, T. Fic, I. Hurst, I. Liadze, A. Orazgani, V. Pillonca, “Fiscal Expansions in North America,” National Institute Economic Review, 207, no.1 (2009): 18–22.

[9] Statistical Abstract of the United States, 2008, Table 567, (U.S. Government Printing Office, Washington, DC).

[10] Thomas L. Friedman, The World is Flat, (New York: Farrar, Straus and Giroux, 2006).

[11] M. Stack, R. Downing, “Another Look at Offshoring: Which Jobs Are at Risk and Why,” Business Horizons, 48, no. 6 (2005): 513–524.

[12] J. Gruenwald, “Outsourcing Dims High Tech’s Luster,” National Journal, 36, no.11 (2004): 822–823.

[13] P. Van Arnum, “Outsourcing R&D in Asia: A Case Study of Pfizer,” Pharmaceutical Technology, 32, no. 8 (2008): 40–43.

[14] Kerry A. Dolan, “Thrilla in Manila,” Forbes, 179, no. 2, July 23, 2007.

[15] Bhargav Trivedi, “Denim Companies Step on the Gas as Rupee Falls, China reels,” The Economic Times, November 8, 2008.

[16] William M. Bulkeley, “IBM to cut U.S. Jobs, Expand in India,” The Wall Street Journal, March, 26, 2009, at B1.

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Author of the article
Fred Maidment, PhD
Fred Maidment, PhD, is a professor of management at the Ancell School of Business at Western Connecticut State University in Danbury, Connecticut. He received his BS from the Stern School of New York University, his MBA from the Baruch College of City University of New York, his doctorate from the University of South Carolina, Columbia, and has done post-doctoral work at the Warrington College of Business of the University of Florida. He held positions with Chase Manhattan Bank and NCR as well as operating his own business and consulting on numerous projects. Dr. Maidment is the editor of Annual Editions: Management, Annual Editions: Human Resources, and Annual Editions: International Business from McGraw-Hill. He has also been published in numerous publications including The Journal of Individual Employee Rights, European Business Review, Human Resource Executive, Training, Human Resource Professional, Training and Development, and The New York Sunday Times.
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