The result is that many Americans who thought outsourcing only threatened factory workers and call-center operators are about to learn otherwise. That is a giant development, because information-based services are the heart of the U.S. economy. With 76% of its jobs in services, America’s economy is the most service-intensive of any major country’s. Of course many of those jobs can’t be shipped abroad: Chefs, barbers, utility and NFL linemen, and many others know they can’t be replaced by even the smartest person in Bangalore.
But growing numbers of other service jobs are not safe. Everyone has heard about the insurance-claims processors, accountants, and medical transcriptionists in India and elsewhere who’ve taken away U.S. jobs by doing the same work for much less money. More alarming is that the value of outsourced jobs is steadily rising. Morgan Stanley is hiring Indian bond analysts, fearsome quants who can make or cost a company millions. Texas Instruments is conducting critical parts of its next-generation chip development—extraordinarily complex work on which the company is betting its future—in India. American computer programmers who made $100,000 a year or more are getting fired because Indians and Chinese do the same work for one-fifth the cost or less.
The big question is how far all this will go. A massive new study from the McKinsey Global Institute predicts that some industries could be changed beyond recognition. In packaged software worldwide, 49% of jobs could in theory be outsourced to low-wage countries; in infotech services, 44%. In other industries the potential job shifts are smaller but still so large they’d create major dislocations: Some 25% of worldwide banking jobs could be sent offshore, 19% of insurance jobs, 13% of pharmaceutical jobs.
Looking at occupations rather than industries, some fields will never be the same. McKinsey figures that 52% of engineering jobs are amenable to offshoring, as are 31% of accounting jobs.
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The downward pressure on U.S. wages could be more immediate and severe than you might imagine. It is tempting to suppose that the giant U.S. economy couldn’t have felt much strain yet; the total number of offshored white-collar jobs is probably fewer than a million so far. But it doesn’t take the shifting of many jobs to produce ripple effects through the whole economy.
Why? Most U.S. workers whose jobs are sent overseas will try to find new ones, perhaps in other industries or occupations. So the offshoring of any jobs will produce job seekers who will tend to push wages down even in industries in which outsourcing isn’t happening. Far more significantly, the mere threat of moving jobs offshore is enough to hold wages down—those growing armies of skilled workers around the world are increasing the labor supply in many occupations, and the immutable law of markets is that when supply goes up, prices come down. It has happened in all kinds of other markets—food, clothing, microchips, appliances. Why not in labor?
Some economists believe they see it happening already. They note that something extremely odd occurred in the U.S. economy last year: Average compensation, including pay and benefits, fell. That is a rare event; the last time it happened was 14 years ago. More important, it usually happens in or around recessions or when productivity is going nowhere. But last year wasn’t like that. Productivity rose. The economy grew. The unemployment rate was low and falling. Every indicator pointed to strong wage increases, but just the opposite happened. Now some of the nation’s most eminent economists, including professor Richard B. Freeman of Harvard and Stephen Roach of Morgan Stanley, believe the supply of overseas workers in newly globalizing labor markets is holding U.S. pay down and will do so for years.
