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Implications of offshoring

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The Offshoring of American Jobs is a great little book – a good airplane read – that was “written” by two famous economists, Jagdish Bhagwati and Alan Blinder.   (I use the term “written’’ in quotes because it is the outgrowth of a debate of sorts between Bhagwati and Blinder at a 2007 symposium held at Harvard.)

I grabbed the book as soon as it was published (in late 2009) knowing that I wanted to read whatever it is that Blinder had to say on this topic.  Not only is this topic of great interest to me, but I have extraordinary respect for Blinder’s point of view.  He is one of those rare masters in the economics profession, able to combine deep and vast scholarship with real-world insight and a common sense understanding of the world. 

As an aside, I know this from painful years as a graduate student in economics at both Cornell and Princeton.  I quickly became convinced that macroeconomists didn’t have a clue about what was going on in the real world.   (This point of view, while clearly heretical for a graduate student of economics, has now become the norm among much of the thinking public in the aftermath of the Great Recession.)  But Blinder, who I had the good fortune to have as a macroeconomics professor at Princeton, was a rare exception.  He is a truly gifted teacher-economist.

But I digress.  Here are the important insights from the book, the vast majority of them, as I expected, being attributable to Blinder:

  • In thinking about the future of offshoring, it is important to make a distinction between “personal” service jobs (those where a person must be physically present to perform the task) and “impersonal” service jobs (where physical proximity is not a necessity because the work can be done remotely through technology, with little or no degradation in quality). 
  • “Impersonal” service jobs will continue to be offshored.  Only personal service jobs are secure in high-wage nations that do not limit offshoring through legislative or regulatory actions (such as the U.S.).
  • That means that in the future, offshoring will increasingly penetrate higher and higher levels of the educational spectrum.  We see this happening already, for example, with high-end medical services (such as reading and analyzing medical lab tests and diagnostic imaging being done offshore). 
  • Blinder estimates that the number of U.S. jobs that could potentially be lost to offshoring in the foreseeable future is in the 30-40 million range. 

 What does this mean for those of us living in the U.S.?  Here are a few of the immediate implications that occur to me:

  • Even more than in the past, our future prosperity will depend on our ability to innovate, which provides the “first-mover advantage.”  It is really our only hope if we want to avoid having our “wages set in Beijing.”  [This is a quote from another famous economist and Nobel Prize winner, Joseph Stiglitz.]
  • Education will continue to be key.  Both in our school systems and in our work places, we need to focus on interpersonal skills and learning environments that foster (rather than impede) learners’ creativity.
  • Economic uncertainty will continue to be a fact of life. 

 When I combine Blinder’s analysis with my own observations of the world of work, I come to the conclusion that, as economic uncertainty continues to grow, workers will place a growing premium on certainty.  So paradoxically, the employers who get this and attempt to provide their employees with a modicum of certainty will gain a competitive advantage by doing so.  

(By this point, you may have noticed that I have been silent on the contributions that Bhagwati made to the debate.  That’s because, in my view, they were negligible.  Bhagwati, a famous trade theorist, essentially argued that offshoring is no big deal, and that it doesn’t represent a significant future disruption to the U.S. economy.  As I sat on the airplane trying to make sense of this argument, I realized this perspective comes from the classic – and in my view, ridiculous – assumption that so many economists make: that the economy is and always will be at “full employment.”  In other words, Bhagwati comes to the conclusion that he does, because he has assumed away the problem.  Otherwise the mathematics gets too messy.)

So it should be pretty evident that I concur with Blinder’s perspective.  Offshoring will reach deeper and deeper into the American wage and education spectrum, disrupting the lives of more and more people, reaching higher and higher up the economic spectrum. 

Meaningful opportunities to learn at work will become ever-more important both to the  economic security of workers and to firms’ ability to innovate.  Employers who “get” this and respond appropriately are in a much better position to compete (and survive) than those that ignore this stark reality.