The Impact of Global Human-Capital Outsourcing on the Employment Patterns in the United States Constantin Ogloblin School of Economic Development March, 2005

 An established view: global economic integration tends to shift low-skilled jobs from developed to developing countries while creating high-skilled jobs in the developed world.  The new round of globalization challenges this view.  Anecdotal evidence of companies in developed economies shipping high-skilled jobs offshore piles up, raising fears of job losses among high-skilled workers in the West and sparking hot political debates. 830,000 white-collar jobs will be outsourced from the U.S. offshore by 2005, and by 2015 the number is expected to rise to 3.4 million (Forrester Research Inc.). The supply of IT services is the most global: 16% of all the work done by the world’s IT-services is carried out away from where these services are consumed (in the software industry the proportion is 6%). The Problem

Why?  Growth of human capital in the developing world relative to the U.S. Undergraduate degrees in engineering granted annually: China 195,354 India129,000 Japan103,440 Russia82,409 U.S.60,914 The K-12 system does a good job of weeding out any students interested in math and science.— Craig Barrett CEO, Intel  Low price of human capital in developing countries Typical monthly salaries: Chip designer: $1,000 in India, $7,000 in the U.S. Info-tech support:$500 in India, $10,000 (up to) in the U.S. Financial analyst: $1,000 in India, $7,000+ in the U.S. Accountant: $300 in the Philippines $5,000+ in the U.S.  Low cost of transportation and communication

 Although the literature on the labor market effects of international trade is ample, international outsourcing of human capital has been studied very little.  Direct data on the number and composition of jobs outsourced are not publicly available.  Much of the current research has been conducted or ordered by politically or financially interested groups. Literature

 One of the first independent attempts to examine the influence of human-capital outsourcing on the incidence of unemployment in the U.S.  Does belonging in an “outsourceable” occupation increase the risk of unemployment for a worker in the U.S.?  Are high-skilled workers more likely to be involuntarily unemployed than low-skilled workers?  Is the incidence of unemployment across different skill levels related to outsourcing? The Purpose of the Study

 Statistical inference based on the individual-level data from CPS combined with the best available information on occupational categories threatened by offshore outsourcing  Probit equation that estimates the expected rate of involuntary unemployment conditional on the worker’s level of education and on whether his/her occupation is at risk of outsourcing  The analysis is empirical: no formal theoretical model of job loss to outsourcing is presented. Approach

 The April basic CPS datasets for 2000 and 2004  Individuals in civilian labor force, aged 18-64, who are either wage employed or involuntarily unemployed  In all descriptive statistics and estimation procedures observations are weighted using the CPS final weights. The Sample

Major SOC groups threatened by outsourcing Threatened by outsourcingNot threatened by outsourcing 11Management21Community and social service 13Business and financial operations25Education, training, and library 15Computer and mathematical29Healthcare practitioner and technical 17Architecture and engineering31Healthcare support 19Life, physical, and social science33Protective service 23Legal35Food preparation and serving related 27Arts, design, entertainment, sports, and media 37Building and grounds cleaning and maintenance 41Sales and related39Personal care and service occupations 43Office and administrative support45Farming, fishing, and forestry 47Construction and extraction 49Installation, maintenance, and repair 51Production 53Transportation and material moving 55Armed forces

The Estimation Model  Average effects:  Skill specific effects of outsourcing:

Results – Average Effects  The patterns of average effects of education on the probability of unemployment are virtually the same in 2000 and  In general, the new wave of global outsourcing has not shifted the risk of unemployment from low-skilled to high-skilled workers.  Outsourcing has no significant influence on overall involuntary unemployment.

Results – Specific Effects, Occupations not at Risk  In 2004, the negative relation between the level of education and the probability of involuntary unemployment holds only for the occupational categories that are not threatened by outsourcing.

Results – Specific Effects, Occupations at Risk  For the outsourceable occupations, more highly educated workers are at a greater risk of unemployment than those with lower education.

Concluding Remarks  Currently, belonging in an outsourceable occupational category does not increase the risk of unemployment for an average U.S. worker.  Global outsourcing has not shifted the risk of unemployment from lower-skilled to higher-skilled workers in general.  But more highly educated workers in the outsourceable occupations are currently significantly more likely to be involuntarily unemployed than workers with lower education.  It remains to be seen whether or not this relation continues to hold and becomes prevalent for the entire economy as the new wave of global outsourcing gets more strength.  Further research: the influence of the global human-capital outsourcing on wages in the U.S. across different skills categories.