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Exorcising Offshoring

Few economic issues are hotter in the United States this election year than the flow of information technology (IT) jobs overseas — "offshoring." But, for all the rhetoric, there have been little hard data on the phenomenon’s true impact. Until now. University of Pennsylvania emeritus economist and Nobel Laureate Lawrence Klein, together with the research ...

Few economic issues are hotter in the United States this election year than the flow of information technology (IT) jobs overseas — "offshoring." But, for all the rhetoric, there have been little hard data on the phenomenon’s true impact. Until now.

University of Pennsylvania emeritus economist and Nobel Laureate Lawrence Klein, together with the research firm Global Insight (www.globalinsight.com), examined the overall impact of IT offshoring on the U.S. economy in a recent report commissioned by the Information Technology Association of America, an industry alliance that supports outsourcing. By 2008, the report concludes, IT offshoring annually will account for roughly $125 billion in additional U.S. gross domestic product, a $9 billion jump in real U.S. exports, and, most importantly, 317,000 net new jobs in the United States.

Whereas other studies, including a vaunted 2002 report from Forrester Research (available at www.forrester.com), focus on estimating the number of IT jobs that could be outsourced, Klein’s report is the first to attempt to calculate the full range of impacts that outsourcing will have on the U.S. economy in the near term. "The outsourcing debate is too focused on job numbers," says Nariman Behravesh, chief economist for Global Insight. "Outsourcing leads to benefits in terms of productivity, prices, profits, and wages, but too often these benefits are more diffuse."

Klein believes offshore outsourcing is eight to 10 years old as a significant phenomenon, but it is getting increasing attention now because of the U.S. job slump. His study found that outsourcing accounted for only 2.8 percent of IT job losses to date. In other words, most of the 372,000 IT software and service jobs lost since 2000 disappeared because of the dot-com bust, the 2001 recession, and labor productivity gains — not outsourcing.

Not everyone agrees. Josh Bivens, an outsourcing expert at the Economic Policy Institute in Washington, D.C., says it is hard to judge Klein’s research. "It’s a little outrageous. If you’re going to wave research around, you’ve got to make your methods available," Bivens says. He’s especially curious because, despite studies showing a variety of downsides from offshoring, the Global Insight report cites not one negative consequence. "I’m a little skeptical about it all, frankly."

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