Projecting the demand for offshore labor

Peter Marsh writes in the Financial Times about what the global market for service jobs will look like with the rise in offshore outsourcing:

Growth in outsourcing of service jobs from rich countries is likely to be constrained because only one in seven workers in low-wage nations has the skills needed to work for multinationals, according to a McKinsey study published on Thursday. ?Offshore employment [in services] will grow gradually, making no sudden impact on labour markets overall in developed countries,? says the report by the McKinsey Global Institute, a research arm of the strategy consultancy. It says the trend will have ?little effect? on wages in rich countries, scotching the idea that offshoring could help hold down inflation in those nations…. One reason for [the slow pace of offshoring] is multinationals’ attitudes to recruitment, McKinsey says. The consultancy conducted 83 interviews with human resources managers working for multinationals and found that, presented with workers from emerging economies with appropriate academic qualifications, they were likely to reject 87 per cent on other grounds. The main reasons for the low likely take-up were poor language skills, ?the low quality of significant portions of the educational system [in developing nations]? and cultural differences. Diana Farrell, director of the institute, said multinationals often failed to take up offshoring because of initial costs and other hurdles.

Marsh has another story about the MGI report here. One interesting bit:

Even though the supply of young people in low-wage economies with good educational qualifications is likely to increase substantially in the next decade, demand for employing them in their own nations in jobs transferred from rich countries is likely to be muted, the report says. On top of this, many young professionals in the 28 low-wage countries studied by the institute even though they may have university degrees lack the work-related experience and aptitude that foreign companies are looking for. ?A lot of developing countries are churning out new graduates but not giving enough thought to the practical skills they will need if they are to work for multinational companies,? says Diana Farrell, director of the institute. The report indicates that even though many manufacturing jobs have migrated from rich countries to emerging economies over the past 10 years, due to cost-cutting pressure, the service sector is unlikely to see the same trend.

This last point is stressed in the executive summary of the McKinsey report:

At a country level, our observation is that labor markets in developed economies are experiencing and will continue to experience the trend toward offshoring as a slow, evolutionary change. It will have less impact on patterns of employment than the decline in manufacturing employment developed economies have experienced recently. In the United States, for example, the share of manufacturing jobs in overall employment fell by 11 percentage points to 21 percent in the 30 years to 2002. By contrast, the total number of service jobs in the United States that could in theory be filled remotely represents 9 percent of total current employment. The moderate impact and generally slow pace of offshoring will not soften the blow for those individuals in developed countries who do lose their jobs as a result. However, most are college graduates, and therefore likely to be more amenable to retraining than manufacturing workers. And in the United States, growth rates in both wages and jobs in the computer and data processing services sector, where offshoring is prevalent, are higher than in the economy as a whole.

This jibes with data and analysis of the U.S. economy in recent years. In terms of employment, a glance at Bureau of Labor Statistics data shows that manufacturing has suffered far more than services (though in both cases the extent to which offshore outsourcing has been blamed has been much greater than its actual causal effect). Similarly, the figures for which service sector jobs are theoretically likely to be outsourced match up with Ashok Bardham and Cynthia Kroll’s study from 2003. Click here to access McKinsery’s three-part series of reports on the issue. Thanks to George Adair for the link.