Who benefits from outsourcing? Who could benefit from outsourcing?

The Washington Post had an article two days ago on why this employment decline is different from all others. The answer is that many of the jobs that have disappeared aren’t coming back. The reason? Outsourcing:

Most past recessions have been followed by a rapid recovery of jobs, as companies that laid off workers during the downturn brought them back when business picked up. But a growing body of evidence suggests that this recession and recovery are different. Large industrial companies with such cyclical employment policies account for just 21 percent of the workforce, down from 49 percent in the early 1980s, according to the Fed study. Now, even as the economy has slowly expanded over the past 20 months, businesses have stepped up automation, sent jobs overseas and produced more while employing fewer people.

Mickey Kaus — who links to the story — gives one spin on this phenomenon:

This is a continuation of a long term trend, with one new wrinkle. This time white collar jobs “brain” jobs are going overseas (e.g. to India) along with blue-collar jobs.

And that’s Mickey’s optimistic interpretation of events!! Sounds bleak. Until you read these couple of grafs in the WaPo story:

A new study by the McKinsey Global Institute, the think tank of the consulting firm McKinsey & Co., suggests why [outsourced jobs won’t return]. When a firm ships a $60-an-hour software job to a $6-an-hour code writer in India, the most obvious benefit goes to the Indian. But, the McKinsey study reports, the U.S. economy receives at least two-thirds of the benefit from offshore outsourcing, compared with the third gained by the lower-wage countries receiving the jobs. American firms and consumers enjoy reduced costs. Larger profits can be reinvested in more innovative businesses at home. New and expanding subcontractors abroad create new markets for U.S. products. And, at least theoretically, displaced U.S. workers will find new jobs in more dynamic industries.

If you go to McKinsey Global Institute’s (MGI) summary of its own report, you run into this startling graf:

Of the $1.45 – $1.47 of value MGI estimates is created globally from every dollar spend a domestic company chooses to divert abroad, the U.S. captures $1.12 – $1.14 while the receiving country captures on average 33 cents. In other words, the U.S. captures 78 percent of the total value.

Click here to download the actual report (you’ll have to register). It’s not blind to the unemployment question. In fact, the report makes an intriguing proposal to cushion the blow:

[B]ecause the perceived risk of unemployment is higher than the actuarial risk, and because the pain of employment is greater than the economic cost of it, the situation lends itself well to highly targeted insurance products. Specifically, as part of a severance package, and for a small percent of the savings from offshoring, companies could purchase insurance for their displaced workers that would cover their loss in wages for the time a worker is unemployed. To avoid the “moral hazard of such insurance… the insurance program could cover occupational groups and not individuals, covering only the median period taken by an occupational group to be reemployed.

This proposal would convert the static gains from outsourcing into a Pareto-improving move — i.e., someone can be made better off without anyone being made worse off. Not eveyone understands this concept, but it’s an important one in making policy decisions. Dynamically, the gains from outsourcing will benefit all Americans. There will be a lag between the increase in the corporate rate of return, the concomitant increase in investment, and an uptick in the domestic economy. But it will happen.