Offshoring in the Service Sector: Economic Impact and Policy Issues

By Garner, C. Alan | Economic Review - Federal Reserve Bank of Kansas City, Third Quarter 2004 | Go to article overview

Offshoring in the Service Sector: Economic Impact and Policy Issues


Garner, C. Alan, Economic Review - Federal Reserve Bank of Kansas City


The United States continues to run an international trade surplus in services, but business stories frequently appear about service sector jobs moving offshore. Many Americans are particularly concerned about the loss of skilled, well-paid jobs in such fields as computer programming and accounting. These jobs seemed relatively secure at a time when many manufacturing jobs were being lost to import competition. Similarly, telephone call centers, once viewed as an economic development opportunity in some areas, increasingly are moving to low-wage countries, such as India and the Philippines. Reflecting this growing concern, some members of Congress and state legislators have focused attention on the offshoring of service jobs and production, even introducing legislation to limit the outsourcing of jobs to other countries.

Offshoring raises many questions for policymakers and the general public. For example, which service jobs will be affected most by import competition? What are the most likely effects of service-sector off-shoring on U.S. output, employment, and, most important, our standard of living? Is offshoring really a problem that requires restrictive government actions, or are other kinds of policies more appropriate to give Americans the highest possible living standard?

This article examines the economic effects of offshoring and possible policy responses. The first section summarizes recent trends and the outlook for service-sector offshoring. The second section explains the economic, technological, and regulatory factors driving the process and identifies characteristics that make a service job susceptible to offshoring. The third section analyzes the effects of offshoring on U.S. output, employment, and standards of living. The fourth section evaluates various policy options for dealing with the economic challenges created by offshoring. Although the offshoring of service jobs hurts some workers, offshoring should not permanently lower U.S. employment or production. Moreover, the average living standard can benefit over the long run if the nation adopts policies to retrain displaced workers and move them into expanding industries.

I. RECENT TRENDS AND PROJECTIONS

To judge by the headlines, service-sector jobs have been leaving the United States in large numbers. Reliable information on the offshoring of service jobs and production is rather limited, however. This section examines recent evidence on service-sector offshoring as well as projections for the years ahead. Offshoring of service jobs has actually been smaller than the headlines might suggest, but projections that offshoring will accelerate are plausible, though subject to considerable uncertainty.

Trends in offshoring

The term "offshoring" refers to the relocation of jobs and production to a foreign country. The relocated jobs and production could be at a foreign office of the same multinational company or at a separate company located abroad. In contrast, the term "outsourcing" does not necessarily imply that jobs and production are relocated to another country. Outsourcing of such jobs as janitorial services and payroll accounting by manufacturing firms to domestic service companies has long been an important factor driving the growth of business services employment.

The loss of service jobs and production caused by offshoring is difficult to measure. Government statistical agencies provide useful measures of international trade in services, which are described in the accompanying box, but there is no official measure of service jobs moved abroad. It is also difficult to determine the impact of offshoring from data on total services employment in the United States. Service-sector jobs have taken much longer to rebound from the 2001 recession than from previous recessions, a phenomenon that some commentators have blamed on offshoring (Chart 1). However, service-sector jobs have held up much better than manufacturing jobs during the current recovery. …

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