Outsourcing: a policy agenda.

Key Points

* Although the number of U.S. service jobs lost to outsourcing is currently small relative to the total work force, the fear of a seemingly limitless loss of jobs to lower-wage countries has caused widespread anxiety.

* U.S. companies dominate global services outsourcing, and India is the top developing-country destination.

* National and state legislators have introduced a flurry of anti-outsourcing bills, but corporations are mounting a strong counter-attack.

"Don't worry; they'll get better jobs in the service sector." During the last three decades of the 20th century, this was the mantra of most government and business leaders when corporations transferred auto or apparel jobs to Mexico or China. That line doesn't work anymore, since U.S. companies have started shifting a wide range of service jobs as well--from high-skill computer programming to entry-level call center jobs--to India and other lower-wage nations. This breaching of the final frontier of American jobs has caused understandable anxiety and has become a hot-button issue in the presidential election campaign.

The trend toward foreign "outsourcing" of service jobs is an extension of a longstanding practice of cutting costs by subcontracting parts of business operations to nonunion shops within the United States. The practice has gone global, in part because of technological changes. Massive amounts of information can now be transmitted across the world at low cost, making geographic distances less important. International financial institutions and trade agreements have also facilitated the trend by promoting investment liberalization and privatization of public services, creating new opportunities for U.S. corporations in overseas markets.

Forrester Research estimates that about 40 percent of Fortune 1,000 firms have already outsourced some work and that at least another 3 million service jobs will leave the United States by 2015, led by information technology work. A study by the University of California, Berkeley estimates that 14 million U.S. jobs (11 percent of the total work force) are vulnerable to being outsourced.

Although the number of jobs lost so far is small relative to the total work force, these layoffs have a huge impact on the affected communities, and the potential for white-collar jobs to be offshored is deeply unsettling for many American workers. In addition to job cuts, service workers must now also contend with the enhanced power of highly mobile, increasingly unregulated global corporations to bargain down U.S. wages and working conditions by threatening to move jobs elsewhere.

According to McKinsey and Company, a consulting firm that helps businesses develop offshore operations, U.S. companies make up about 70 percent of the global outsourcing market. Their top destination in the developing world is currently India, where domestic subcontractors perform a range of services for the U.S. market. At the low-skill end, Indian workers earn $1 or less per hour to handle customer service calls for firms like Earthlink and Travelocity. Among the higher-skill workers are Indian computer programmers, who earn about one-tenth the pay of their U.S. counterparts to write code for multinational corporations like Citigroup. Given a lack of other economic opportunities, Indian workers are often eager to secure new jobs catering to the U.S. market. However, there is also a nagging fear that these jobs may evaporate as soon as companies can find lower costs elsewhere.

China, of course, looms on the horizon. It is already the second-biggest developing-country draw for service work, offering rock-bottom wages and an official ban on basic union rights. Though it lacks India's English-speaking advantage, this may not be the case forever, as Beijing is heavily promoting English-language education. Mexico's experience in competing with China over manufacturing jobs could foreshadow events to come. Although employment in Mexico's border export zone more than doubled after the implementation of the North American Free Trade Agreement (NAFTA) in 1994, the country has in recent years lost several hundred thousand of these jobs, partly in economic flight to lower-wage China. India has even lost some foreign manufacturing jobs to China.

Public pressure has galvanized U.S. state and federal legislators to introduce a flurry of bills to curb outsourcing, primarily by requiring that government contract work not be performed overseas. However, there is stiff resistance from the corporate lobby, such as the new Coalition for Economic Growth and American Jobs, which represents some 200 trade groups, including the U.S. Chamber of Commerce and the Information Technology Association of America. These and other pro-outsourcing groups argue that the practice is good for U.S. workers, because it lowers the cost of services for U.S. consumers and enhances the overall competitiveness of U.S. companies. Another common claim is that recent job losses are due to productivity gains, not outsourcing. However, because workers are facing a "jobless" recovery and see few personal benefits from enhanced productivity, these arguments convince very few.

One reflection of public opinion is that concerns about U.S. trade policy have spread up the income ladder. Lower- and middle- class workers have been consistently skeptical of U.S. trade policies, but a February 2004 University of Maryland poll showed that even among Americans earning over $100,000 a year, support for actively promoting more "free trade" has dropped from 57 percent in 1999 to 28 percent in 2004.