The Impact of Global Human-Capital Outsourcing on the Employment Patterns in the United StatesConstantin OgloblinSchool of Economic DevelopmentMarch, 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 195,354India 129,000Japan 103,440Russia 82,409U.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 outsourcing Not threatened by outsourcing

11 Management 21 Community and social service

13 Business and financial operations 25 Education, training, and library

15 Computer and mathematical 29 Healthcare practitioner and technical

17 Architecture and engineering 31 Healthcare support

19 Life, physical, and social science 33 Protective service

23 Legal 35 Food preparation and serving related

27 Arts, design, entertainment, sports, and media

37 Building and grounds cleaning and maintenance

41 Sales and related 39 Personal care and service occupations

43 Office and administrative support 45 Farming, fishing, and forestry

47 Construction and extraction

49 Installation, maintenance, and repair

51 Production

53 Transportation and material moving

55 Armed forces

The Estimation Model

Average effects:

Skill specific effects of outsourcing:

P( 1) ( ) i i i iU Rα E γ C

P( 1) ( ) i i i i i iU R Rα E δ E γ C

Results – Average Effects2000 2004

Variable Coefficient

Marginal effect

Coefficient Marginal

effect No high school 0.176***

(0.049) 0.670 0.121***

(0.042) 0.794

Some college -0.089** (0.045)

-0.272 -0.102*** (0.037)

-0.576

Associate degree -0.127** (0.063)

-0.366 -0.167*** (0.050)

-0.879

Bachelor’s degree -0.271*** (0.056)

-0.735 -0.169*** (0.040)

-0.920

Graduate/professional degree

-0.234*** (0.085)

-0.614 -0.235*** (0.061)

-1.175

Occupation is at risk of outsourcing

-0.079** (0.038)

-0.255 -0.043 (0.032)

-0.257

The patterns of average effects of education on the probability of unemployment are virtually the same in 2000 and 2004.

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

2000 2004 Variable Coefficient Marginal

effect Coefficient Marginal

effect No high-school diploma

0.176*** (0.054)

0.668 0.100** (0.047)

0.642

Some college -0.093 (0.061)

-0.284 -0.045 (0.048)

-0.261

Associate degree -0.120 (0.086)

-0.348 -0.134** (0.064)

-0.714

Bachelor’s degree -0.214** (0.088)

-0.602 -0.308*** (0.069)

-1.543

Graduate/professional degree

-0.115 (0.139)

-0.336 -0.426*** (0.104)

-1.826

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

2000 2004 Variable Coefficient

(δ – ά) Marginal

effect Coefficient

(δ – ά) Marginal

effect High-school diploma -0.062

(0.055) -0.201 -0.065

(0.049) -0.386

No high-school diploma

-0.151 (0.158)

-0.586 0.006 (0.129)

0.050

Some college 0.097 (0.139)

0.295 -0.066 (0.111)

-0.344

Associate degree 0.104 (0.194)

0.297 0.060 (0.150)

0.302

Bachelor’s degree 0.126 (0.192)

0.336 0.509*** (0.148)

2.919

Graduate/professional degree

-0.069 (0.297)

-0.161 0.712*** (0.221)

4.008

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.