Thursday, June 16, 2005


First there was outsourcing. But that didn't necessarily capture an accurate description of the phenomenon. So we got offshoring. But Lou Dobbs gave offshoring too much of a negative connotatin, so the globamaniacs countered. They invented world sourcing and tried to shift the terms of the debate to something ludicrously dubbed insourcing.

Now the good folk over at McKinsey Global Institute have opted to throw their hat into the name game ring (alongside their misleading analyses on outsourcing/offshoring/whatever you want to call it). Are you ready? Here it is: global resourcing, the process a company goes through to decide which of its activities could be performed anywhere in the world, where to locate them, and who will do them.

As it happens, McKinsey has a new report out on the "overblown" threat of offshore outsourcing. But they don't gives these reports away for free. So if you're like me and don't work for consultancies and the Fortune 500, you have to settle for reading about the report on

There, you will learn:

The McKinsey report is the first to come up with authoritative estimates of how many service jobs could move from rich countries to poor ones.

I guess it depends how you define authoritative. Ashok Bardhan and Cynthia Kroll of Cal Berkeley's Haas School of Business released this fine research report back in October 2003.

Putting aside the promotional hyperbole, what does the McKinsey report say (at least according to the Financial Times)? The threat of offshore outsourcing is overblown because on their forecast trajectory offshored service jobs will only account for 1.2 percent of all service jobs in rich countries. Well that's misleading. Most service jobs can't be offshored. Plumber, retail clerk, janitor, nurse, security guard, landscaper, dentist, you name it--most of the jobs in every economy are service jobs, and most of those are geographically specific. A barber in Mumbai may earn one percent of what my barber in Dupont Circle gets, but I can't very well outsource my haircut.

As I've said before, the employment effects of service job offshoring appear small at present. But the employment level is the tip of iceberg in terms of the effects on the labor market. In the mid- to long-run it's easy to expect that workers dislocated by trade and offshoring will be re-employed elsewhere, but what does this do to distribution and wages?

Now that US manufacturing is moribund, and high-skill service jobs are at risk, where will workers dislocated by trade go? It is fairly easy to expect that, in an economy like the US, that displaced workers will in the mid- to long-run will be re-employed to other productive uses, and the Department of Labor's Occupational Outlook Handbook provides some guidance as to what that might be:

Retail sales, customer service reps (highly outsourcable), food prep and fast food workers, cashiers, janitors, waiters, orderlies, receptionists, security guards, home care providers, landscapers...not exactly high wage, skill-intensive, upwardly mobile occupations.

Perhaps the most important threat of service offshoring is in fact the threat of service offshoring. As I wrote below:

When capital is freely mobile to locate investment/production anywhere of its choosing, communities will bid against each other in terms of wages and tax breaks in order to attract investment and jobs. This can result in eroded wages and social safety nets even if no trade or movement of production/jobs takes place. Even though this decline in living standards may be due to globalization, because no trade or foreign direct investment occurs, economists have a hard time measuring its effects.

It's really difficult to measure threats (what is a threat, how do we know when a threat has been issued, how do we know a threat is credible, etc.), but it is clear that just the mere threat of jobs moving overseas is enough to make workers cower, accept longer working hours, lower wages and benefits, and foresake the strength of unionization. Threats might hellp explain a substantial part of the heretofore unexplained portion of increasing wage inequality as well as the reason we have seen such large productivity growth in recent years combined with such low wage growth. In classical economic theory, workers should be paid according to their productivity (or even more than their productivity to evoke effort and overcome informational problems of adverse selection). The fact that we see a growing wedge between wages and productivity suggests that capital is capturing a larger share of income distributed between capital and labor.


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