December 21, 2009, 2:36 PM — Ron Hira, Rochester Institute of Technology professor and author of Outsourcing America, talks about the broad consequences of offshoring.
As a serious researcher of the outsourcing phenomenon, you have taken to warning that outsourcing has grave implications for the well-being of the nation. Could you elaborate? Standard economic theory tells us that offshoring could be good or it could be bad for the American economy and standard of living. It is ambiguous at the macro level, but there's good reason to believe that it will be bad. When a country outsources what it is good at, building up the capabilities of the country it trades with, it can be worse off. I think that's precisely what's going on right now with software and engineering offshoring. And companies are even offshoring innovation and R&D, something that would have been unthinkable even a few years ago. By doing so, America is undercutting its technological and economic future.
Standard theory also tells us that many American workers will be much worse off from offshoring, as their jobs move overseas and they face major wage competition from workers in low-cost countries. This isn't going to hit just a small segment of workers. Princeton economist Alan Blinder estimates that as many as 40 million jobs are newly offshorable, including nearly all science and engineering jobs. While not all of those jobs will be lost overseas, those workers will face wage pressures. We're already seeing it -- Hewlett-Packard has asked many of its EDS employees to take 50% pay cuts.
There's no disputing this negative effect on American workers. Even the most pro-offshoring report, written by McKinsey Global Institute's Diana Farrell, which asserted that the U.S. will be better off with offshoring, concedes that American workers will experience major losses in wages and jobs.
Offshoring is a major structural shift in the way the economy works. Alan Blinder has called it a shift equivalent to the industrial revolution. Ponder that!