Offshoring creates jobs in California

Yesterday, Virginia Postrel posted and linked to several stories about a Public Policy Institute of California study on the effect of offshore outsourcing on the Californian economy. Postrel wrote, “The study found that outsourcing actually increases employment in California. Now the Assembly is sitting on the study.” The Assembly may have sat on the study, but it now appears to be available to the public. I clicked over to the PPIC web site and found the report by Jon Haveman and Howard Shatz, which is dated today. Some of their analysis sounds awfully familiar. The good parts (from p. 22-24):

[T]here is evidence that some California jobs eliminated by offshoring are similar to those likely to be created in the state by offshoring. Offshoring can allow the economy to reallocate labor and capital from one set of tasks to another set of higher-level tasks, and California has a strong supply of highly skilled workers who can take on these higher-level tasks. A second mitigating factor for the U.S. economy, and especially for California, is that there is growing world demand for the U.S. provision of services that are similar to those being sent offshore. This is a source of job creation for workers dislocated because of offshoring. California is a significant producer and exporter of these services, and this fact should ease the transition for affected workers in the state. These two points suggest that jobs are being created in industries and occupations that are relatively similar to those being eliminated. For example, computer programming is one occupation that is projected to be negatively affected by offshoring, and evidence suggests that this is in fact the case. Between 1999 and 2002, 71,000 computer programmer jobs were eliminated, 23,000 of which were in California. Note, however, that offshoring is only responsible for a small fraction of these lost jobs; the technology bust explains most of them. At the same time that opportunities for computer programmers were declining, more than 115,000 software engineering jobs were created, a disproportionately large share of which – 24,000 – were in California. The transition between these occupation categories – programmers and software engineers – may be unsettling but also may be easier than the transition between many other jobs, and the software engineering jobs pay over $10,000 more per year on average. It is certainly true that not all the workers who held computer programmer jobs became software engineers, and tracing how any such transition might have taken place is difficult. However, the decline of programmers and the rise of software engineers illustrates the fact that as old opportunities disappear – through economic cycles, technological change, and offshoring – the U.S. economy has the capacity to create better opportunities, and in this case, the skill sets required are similar. As a result, the economy’s adjustment to this new phenomenon need not be as difficult as it was to the shift from manufacturing to service sectors in the 1980s and 1990s. Many of the workers displaced by offshoring have significant skills, and this bodes well for their future employment prospects. This observation is consistent with the evidence suggesting that workers with more skills have less difficult transitions to new jobs; the transitions are faster and involve less wage erosion. This is not to minimize the effect on workers who lose their jobs, especially less-skilled workers, but merely to put it in perspective…. An additional item is worthy of note. It is likely that “outstating” – outsourcing to another state – is a much more important phenomenon than is offshoring for California. The recent mass layoffs report of the Bureau of Labor Statistics noted that of the job relocations where the destination was known, more than 68 percent took place within the United States, rather than overseas. California companies have actively engaged in outstating back-office processes for years. These are the very same processes that are the most vulnerable to offshoring. It is possible that many jobs being moved offshore by California companies would have left the state anyway. Newspaper accounts in places such as Phoenix express the fear that back-office jobs that have only recently arrived from California are headed abroad.

I look forward to the California state legislature’s efforts to impose a tariff on services from Arizona. Here’s the report’s conclusion regarding the bills designed to block the offshore outsourcing of government contracts (from p. 31):

In the end, the policy of restricting government contractors to vendors employing only domestic labor falls short of the optimal choice in several respects. First, on a per worker basis, it is likely to be more expensive than other options. Second, it is likely to assist a very small subset of workers displaced by offshoring. Third, policies banning offshoring are most likely to assist relatively skilled workers with high earnings capacity. In this time of tight budgets, more cost-effective means of assistance are available and should be investigated.

Red Herring has more on the California situation. Daniel Weintraub concludes in the Sacramento Bee:

The bottom line, though the researchers don’t put it this bluntly, is that politicians, either from ignorance or malevolence, are trying to scare Californians into believing that offshoring is bad for the economy, and bad for them. The reality is that the opposite is true, and that the proposals seeking to freeze the economy in place will do far more harm than good.

Indeed. [Sure, that’s California. The rest of the country is losing jobs, right?–ed. Not according to this Business Week story from earlier this month]:

Foreign investment for setting up U.S. subsidiaries and plants doubled, to $82 billion, between 2002 and 2003, according to the Commerce Dept. That means 400,000 new jobs, most of them tech-related, figures the Organization for International Investment, a trade association based in Washington, D.C. Over the same period, outsourcing has taken away about 300,000 U.S. jobs, according to tech consultancy Forrester Research. So, on a net basis, foreign outfits have actually added some 100,000 U.S. jobs. There’s plenty of incentive to keep the trend going. For starters, foreign companies often find that having a U.S. base can be a big help when selling to the lucrative U.S. market. That’s one reason Fremont (Calif.)-based Infosys Consulting, a subsidiary of Indian outsourcer Infosys, plans to hire about 500 consultants — most of them Americans — over the next two years, says Basab Pradham, senior vice-president and head of worldwide sales…. As U.S. companies begin to outsource such mission-critical functions as human resources and finance, they still want to be able to coordinate and oversee such work more closely. “What we’re beginning to witness is a change in the [offshoring] business model,” says Wipro’s [corporate vice-president of human resources Pratik] Kumar. “A lot of outsourcing companies used to be completely offshore. But as they’ve begun to handle more complex work, they find that they need to have more local expertise deployed.”

UPDATE: Ashish Hanwadikar has more links on this.