Cutting the Losses From Outsourcing
July 3 2005 by Chief Executive
OUTSOURCING will inevitably eliminate many more American jobs, says Ron Hira, assistant professor of public policy at the Rochester Institute of Technology.
It’s time for the federal government to take action to limit the damage, says Professor Hira, co-author with Anil Hira of “Outsourcing America: What’s Behind Our National Crisis and How We Can Reclaim American Jobs” (American Management Association, $22). Here are excerpts from a conversation.
Q. Will more jobs be lost offshore?
A. We’re just at the beginning of this trend, particularly in the services area. The manufacturing sector is much more mature, but in the services area we’re just scratching the surface.
Q. What jobs are likely to move next?
A. Information technology jobs and call-centers jobs were the first movers. Now it’s snowballing in industries that are information intensive. Companies in insurance and financial services, in particular, have seen that I.T. operations can be successfully offshored. Because of that, they’re beginning to think about types of other jobs like claims processing or financial analysis. We’re also seeing it in engineering and design.
Q. How can this trend be stopped?
A. There’s nothing that can be done to stop it. The question is, how do we adapt to it and deal with the negative effects? Nobody has done anything on the policy front. We’ve more or less ignored it. We need to take some steps to deal with this new reality.
Some steps are pretty much no-brainers, like extending trade-adjustment assistance to service workers. If you lose your job in manufacturing because of trade, you get extended unemployment insurance. You get training and health benefits so that you can “adjust,” as economists put it – so that you can find a new job in a different occupation. We do that for manufacturing workers, although the plan is underfunded, but we don’t do it for service workers. Congress decided to kill that bill last year, and the reason was that we couldn’t afford it, which is surprising.
Q. How well do retraining efforts work?
A. Most people think retraining doesn’t work very well. We need to start experimenting with free training programs right away because there is a new class of workers who are being displaced. They are no longer blue-collar workers. These workers have degrees, sometimes advanced degrees, in computer science or engineering.
Over the longer term, we need basic things like gathering some data. The Department of Commerce spent $335,000 to do one outsourcing study, and that hasn’t been released yet. When the government spends almost $1 trillion a year, it’s pretty surprising they can’t come up with more money to study this problem.
Q. Should companies face penalties for eliminating jobs?
A. There’s a reasonable case to be made to extend the Worker Adjustment and Retraining Notification Act to these situations. The idea is to give some advance notification to workers that they’re going to be laid off. That gives those workers enough time to begin the adjustment process. Companies don’t like this. It’s in their self-interest to keep it secret until the end. Companies would look at extending the WARN Act as a penalty. I would look at that as smart economics.
Q. You suggest that in some ways the government actually encourages the outsourcing of jobs. How?
A. One policy that was part of the presidential campaign last year was about tax deferrals that companies got for expanding offshore operations. Companies are able to defer their taxes on profits that are earned offshore as long as they don’t repatriate those profits. What Senator John Kerry was proposing, and companies have been lobbying for, was to get a moratorium, or a holiday, for one year to bring those profits back in. Kerry wanted that as a quid pro quo for eliminating the policy. There was $600 billion involved, according to J. P. Morgan. Companies not only got the moratorium but they also got the deferral back in. So the perverse incentive is already back in place. In a few years, they’ll say: “We have another $500 billion overseas. Why don’t you give us a tax break for a year?” This game will go on.
Q. How else does the government encourage outsourcing?
A. You’ve got programs like the H-1B visa. The intent of the program is, when you can’t find American workers, you bring in highly skilled foreign workers who work on temporary visas. They can stay up to six years. The way it’s been used traditionally is as a bridge to immigration. You capture the best and the brightest, and they become permanent residents.
Unfortunately, some businesses have started using this in a different way. They’re using it as a purely temporary means to bring in rank-and-file employees who will work for less money. They’re not even bothering looking for American workers. This is pretty rampant in the I.T. sector in particular. Those workers then gain experience in the U.S. on the latest technologies, interfacing with customers, and then they are
able to take that back to their home country.
Q. How can this situation be corrected?
A. The main thing is to ensure that American companies are looking for American workers first. That’s the way Congress believes the program works, but more and more it doesn’t.
William J. Holstein is editor in chief of Chief Executive magazine.