1 - MIT



Offshoring and U.S. Public Policy:

Issues and Actions

Elana A. Cohen

Submitted: May 3rd, 2004

Introduction

Outsourcing has become a major political issue. The media regularly highlight many different voices expressing wide-ranging views on this hotly debated topic. Each of these voices and the groups they represent are hoping to impact public policy in a manner that will have broad reaching implications for many generations to come. Incumbent members of state and national legislative bodies are now adding their voices to what is becoming a political “hot button” for candidates currently running for office.

This national debate is beginning to impact policy decisions with long term implications for our nation. Before examining some of these decisions, it is critical to understand the current political climate that is framing the hotly charged national debate. This paper will first address key issues that are being raised by various constituencies along with those data, where available, that these groups are using to support their positions. The paper will then turn to an examination of current policy decisions.

Issues Framing National Debate

Job Loss

Increasingly the national debate tends to focus on jobs lost through offshoring. Currently Forrester (a Boston based research firm) estimates the U.S. has offshored approximately 400,000 jobs. The group projects the number of U.S. jobs offshored will grow to 3.3 million jobs by 2015, equating roughly $136 billion in wages.

The February Economist article entitled, “The great hollowing-out myth” disputes the claim that the loss of U.S. jobs is structural in nature. The article claims that in the absence of an obvious jobs recovery, the myth arose that the American economy was suffering from structural rather than cyclical changes. Three distinguished economists, William Baumol, Alan Blinder and Edward Wolff in their recent text Downsizing in America: Reality, Causes and Consequences debunk this structural theory and further illustrate that the loss of U.S. jobs is in fact more cyclical in nature. The authors refer to this phenomenon as job churning, an event where margins

are always higher for the creation of new jobs in comparison to the jobs destroyed. The graphic below highlights this U.S. job churning phenomenon.

[pic]

Figure 1: U.S. Labor Statistics[1]

The U.S. Bureau of Labor Statistics estimates that 25-30 million jobs are being destroyed and created each year. Assuming the Forrester data are accurate, offshoring accounts for 1% of the jobs being destroyed in a given year.[2] Today 138.6M Americans are working, which is at nearly a record high both as a proportion of the population and in absolute terms. (It should

be noted that between 1980 and 2002 the percentage increase of employed Americans, 37.4%, was greater than the U.S. population growth, 23.9%.)

The Economist article presents one major flaw in its fundamental argument, characterized by the fact that in order to fully prove “the beauty of churning” theory one needs data on current worker wage rates after periods of economic recovery. While in the past the margins have always been higher for the new jobs created, it is unclear whether this theory holds true in today’s marketplace.

Further, until very recent times, the media have concentrated largely on the job losses in the manufacturing sector. These losses, however, are not a recent phenomenon; rather the manufacturing sector has been in decline since the late sixties. It should be noted that manufacturing provides employment for 12% of the U.S. population. (Agricultural accounts for 3%). Regrettably one can only examine gross trends for the remaining 85% of the U.S. population employed in the service sector. The government doesn’t collect detailed statistics on this segment.

Types of Jobs Affected

The McKinsey Global Institute (MGI) reports that organizations today are offshoring increasingly complex job transactions. The graphic below illustrates the nature of the jobs currently being offshored.

Figure 2: Current trend in offshore job functions[3]

These jobs range from basic data entry to engineering and design.

The infamous Business Week article titled, “Is Your Job Next?” summarized the issue well:

“The next round of globalization is sending upscale jobs offshore. They include basic research, chip design, engineering – even financial analysis. Can America lose these jobs and still prosper? Who wins? Who loses?”[4]

The jobs that are currently being offshored are no longer the low paying blue-collar jobs. The ramifications of white-collar jobs on the economic and technological strength of the U.S. present some extremely complex issues ranging from educational reform to national security.

For those jobs left behind, some rather disturbing trends are also being noted. The development of offshoring is now being linked to the expansion of contingent work in the United States. The term contingent work refers to contractors, temporary and part-time workers and leased employees. In an effort to minimize fixed costs of employment and increase flexibility, firms are increasingly replacing permanent workers with contingent employees. Companies are retaining a core set of capabilities and hiring less-skilled lower-wage non-core employees to perform work required during demand fluctuations. The non-core workers are hired on contract directly or through a subcontractor. A recently published white paper entitled, “Outsource This?” described the strong correlation between outsourcing and contract work:

“A CNN report on outsourcing notes that it is ‘the logical extension of the process that began with contract manufacturing and continued into corporate services’ in which work is ‘spun off into contracts rather than tied to employees.’ Once a person’s labor can be reduced to a contract, ‘it matters little whether the contract is filled in India or Indiana; the only relevant issue is cost.’ As soon as a job becomes routine enough to describe in a spec sheet, it becomes vulnerable to outsourcing. And without a ‘social contract’ binding employer and employee, long-term jobs are an illusion.”[5]

Among examples used to illustrate the hazards of firm contingent work are those occurring in situations where companies hire back the employees they have laid off, only under a temporary work contract. The American Staffing Association determined that 30% of employers rehired employees who had been downsized under temporary contracts.[6]

In 2003, U.S. staffing firms hired approximately 10.7 million temporary and contract employees (1 million more than in 2002). [7] U.S. staffing firms employed nearly 2.5 million temporary and contract workers, an estimated 2% of the U.S. workforce. In 1999, former Labor Secretary Robert Reich, calculated that the number of self-employed contract workers accounted for 20% of the total labor force. In 1999, the American Staffing Association approximated revenues in the staffing industry at $3 billion. This was a dramatic increase relative to the 1991 figures of $335 million. [8]

Economic Impact

The McKinsey Global Institute (MGI) determined in their research, that offshoring will allow the U.S. to capture economic value through a variety of channels including: (a) net cost reduction, (b) export of goods and (c) repatriated earnings.

(a) Net cost reduction: Reduction in cost is the primary reason why most firms elect to offshore; businesses capture 58 cents for every dollar spent offshore.

(b) Export of goods: Offshore service providers purchase an additional 5 cents for every dollar spent offshore worth of goods and services.

(c) Repatriated earnings: Companies that repatriate their earnings in the U.S. generate an additional 4 cents for every dollar offshored.

In addition, for every dollar of U.S. labor cost offshored, $1.45-$1.47 is created globally (the U.S. captures $1.12-$1.14).

MGI also factors in redeployed labor, making the assumption that the economy will capture an additional 45-47 cents per dollar from the new jobs generated. This assumption appears overly optimistic given a current market where many workers in the I.T. and engineering fields are struggling to find work. The Bureau of Labor Statistics illustrate that 31% of the individuals whose jobs were displaced by trade during the period 1979-1999 were unable to find reemployment. Further the statistics reports show that 55% of displaced workers were working at approximately a 15% wage reduction, while 25% were working at a 30% wage reduction.

The McKinsey Global Institute (MGI) assesses the impact that offshoring will have on U.S. employment is minimal in overall magnitude. The firm concludes that the current fear around job losses, exaggerates the likely impact of offshoring. In addition, MGI states that approximately 70% of the U.S. economy is comprised of services (e.g. retail, hotels, restaurants, etc.). These services must be based locally and can’t be offshored. This argument doesn’t help to alleviate any of the current public policy issues that have arisen in recent months. Are we creating a cultural environment where the vast majority of the next generation will work at local Wal-Marts? The statistics show that Wal-Mart has, in fact, grown by 4,700% between 1980 and 2002.[9]

For every dollar offshored, the U.S. indeed captures $1.12 - $1.14 in value. However, when the U.S. “captures value” the reference is with regard to the U.S. businesses and consumers. The critical variable here is that not all consumers are workers. Therefore, while the wealthier become wealthier, according to the government could lose an estimated $13.4 billion in tax revenue over the five years from high-value jobs moving offshore. This figure translates into $7.5 billion in lost Social Security and Medicare, $4.4 billion in federal revenue and $1.5 billion in state and local government taxes. Hence the middle-class Americans will be the group most widely impacted. (While the war in Iraq is currently costing approximately $4 billion per month, these numbers should not be underestimated.)[10] At present the U.S. has the greatest gap of income distribution of any developed country, with the top 1% earning 17% of the gross national income (this level was last seen in the 1920s).[11]

Impact on Technological Innovation

“A nation’s ability to innovate is at the core of its economic and technological strength. Location matters when it comes to the innovation process because it generates enormous local spillover benefits and feeds on itself. An obvious example is Silicon Valley.”[12]

As firms continue to offshore manufacturing and related functions, the technological ramifications have yet to be fully determined. The most obvious consequence of offshoring in the past was that technological improvements in manufacturing processes were discovered and perfected at the location where they were produced. Today more and more firms are relocating the entire firm innovation process: content development, design, engineering and testing near their manufacturing facilities.

The offshoring of these high-tech jobs is made possible by the concurrent transfer of intellectual property (IP). The IP transfer represents valuable knowledge consisting of corporate property. Companies distinguish themselves by this proprietary IP. The IP often consists of the technology (i.e. documentation, prior versions, quality control processes) and the business methods (i.e. marketing strategy, supply chain strategy). There are many components of IP including patents, copyrights and trade secrets.

Geo Wiederhold, Professor at Stanford University, writes that the indirect effects and ramifications of IP transfer are difficult to predict. Currently much of the U.S. based IP transfer is unrecognized; subsequently firms pay no taxes on the resulting profit. As a result there is an imbalance in regards to income location versus IP location. Current trends illustrate excessive cash accumulation outside of the U.S. (i.e. when a firm’s foreign profits are large) which in turn encourages further investments outside of the U.S. Subsequently the numbers of U.S. based high-tech jobs continue to rapidly decelerate.

Impact on Human Resources

In a discussion of offshoring during a recent television interview, Michael Porter, Harvard Business School Professor, expressed that his greatest concern about offshoring was its impact on our national human resources.[13] The subsequent discussion centered on the difficult issues faced by educational system in this country, primarily the K-12 system in preparing our future work force. In addition to such problems as our math and science education, however, the concerns are even more broad-based.

The American Engineering Association (AEA) firmly believes that better education will not protect American high-tech jobs. The association states that, “…..College-educated Americans are competing against college-educated foreigners who earn 1/10 to 1/4 what they do. And for the half of all Americans who won't go to college, it's even worse.”[14]

As more and more scientific and engineering jobs are shifted to lower cost offshore locations, the downward pressure on U.S. job opportunities, wages and working conditions will become increasingly apparent. As a result of these trends America’s young people will be less likely to pursue careers in science and engineering. The Computer Research Association conducted a study (which will be published in May) indicating that the enrollment of undergraduate students in computer technology and engineering has dramatically decreased by 19%. Many educators speculate that the dramatic drop in enrollment is a result of student concern regarding the growing trend of sending software industry work overseas. Ironically, while Microsoft continues to offshore software jobs, Bill Gates embarked on a tour of major university campuses in February of 2004 to encourage students to continue their studies in computer science and engineering.[15]

Redeployed Labor Force

Concerns regarding the United States’ future in technology are often assuaged by blind faith in the ‘next big thing.’ The next big thing will provide displaced workers with the opportunity for a new career and increased wages. Robert Reich, the former secretary of labor under the Clinton administration, believes that worldwide innovation will generate high-tech jobs. He is quoted as stating, “There’s no limit to the human mind. And there’s no limit to the human needs that can be satisfied.”[16] Ronil Hira, associate professor at the Rochester Institute of Technology expressed his concern for this viewpoint, “The argument is that something better will always come along, but that’s blind faith to me. It not clear to me what’s next.”[17]

Hira, also chairman of the career and work force policy panel at the U.S. branch of IEEE counters those who strongly support the need for retraining initiatives when he states, “I don’t think this is the answer….some of the people who are being displaced are some of the best and brightest.” [18] Secretary-treasurer of the AFL-CIO (a federation of labor unions representing more than 13 million U.S. workers) shares Hira’s pessimism about retraining:

"Everyone talks about retraining, but the problem is that these days, if you're out of work, there's not a job in the area you're trained in and not a job in the area you're retrained in. Everybody used to think services were exempt or high-tech jobs, but the new economy is being outsourced. Retraining is not the magic solution because there isn't an industry that is safe from the trend anymore that provides the solid jobs needed by the American middle class."[19]

Catherine Mann, senior fellow at the Institute for International Economics, points out other key issues that must be considered in the cost of retraining workers. She points out that the costs of adjustment must be considered. Not only is there the problem of helping people locate new jobs, but she feels there must be human capital investment tax credits to give firms the incentive to train. She also mentions the need for providing workers with “wage-adjustment assistance.” Further she stresses the importance of portable health coverage for workers.

In discussions of health coverage and its importance to the worker, other groups such as the American Electronics Association (AeA) point out that issues relating to health care and health care reform could have major implications for state and federal competitiveness. AeA notes that at both the state and federal levels, litigation and regulatory costs have risen dramatically. The group state, “The future of health care and the health care debate will now have to incorporate the reality that health care costs for U.S. companies could greatly undermine their international competitiveness.”20

Security Implications

Professor Ronil Hira, associate professor at Rochester Institute of Technology and IEEE representative, states, “It’s interesting that the defense department hasn’t been paying more attention here.” In the past the military has protected technologies viewed in the national interest, such as encryption software and chip manufacturing. However, assuming that the current trend continues there will be no software industry at all in the United States. The majority of firms will have offshored a large percentage of their software work. Programmers will no longer have the opportunity to advance their technology skills and learn from senior level experts (i.e. all of the jobs for senior level experts will be offshored). Subsequently the U.S. government will have a difficult time finding someone to integrate and test the software that has been written. The following quote summarizes the current security concerns that have been recently raised:

“Do you think it wise if, in the future, our software for banking, air traffic control, power stations, bridges, water systems, boat traffic, etc. is written offshore? Who will check it? We will have lost our industry."[20]

In addition, the offshoring of information technology and engineering outside of the United States will reduce opportunities for domestic innovations in areas such as data communications and data security applications. National security will be subject to increasing risk as responsibility for proprietary and mission critical military is offshored.

Richard Hunter, an analyst at Gartner Inc., downplays the implications of offshoring on the welfare of national security. Hunter states that the Pentagon would still have the ability to procure technology developed offshore. In addition he believes that through the use of a global supply chain, the U.S. would rely on several nations for information technology. Hunter states, “It’s not like oil. Technology by definition doesn’t have borders.” Hunter trivializes the complexity that offshoring of technology pertinent to national security presents. Lt. Col. Ken McClellan, a Pentagon press officer, states that the military is currently examining the issue. Further the National Security Agency will have to study the implications of partners using offshore outsourcing and the security tests that offshore workers will have to pass.[21]

Public Policy Actions

The public debate surrounding outsourcing is now making its way into the chambers of state and federal legislative bodies where some of the issues dominating this debate are now influencing decision-making. At the state level, at least 36 states have introduced more than 100 Bills to curb or ban offshore outsourcing.[22] For example, Arizona Governor Jane Napolitano has mandated that all future state contracts will require all work to be performed in the United States. This decision came after recent awareness that an estimated 19,000 telephone inquiries from Arizona’s state welfare and food stamp recipients were being routed to call centers in Mexico and India by a tax-payer funded private firm. The legislative action was being mandated under security and privacy concerns.[23]

Currently there are numerous federal legislation activities addressing offshoring; some of these recent federal legislation activities are assessed in this section. In addition, the appendix provides an up to date listing of the current federal legislative activity. The majority of the bills can be grouped according the following categories: (a) Immigration, (b) “Buy-American” Provisions, (c) Labor Law and (d) Procurement.

Other initiatives that merit close attention are also included in this section. These include taxation issues and education and worker retraining.

Immigration

Legislation has been introduced by several members from Connecticut to greatly limit the use of both the H-1B and L-1 visa. Subsequently, a Florida representative has introduced legislation to limit the use of the L-1 visa. This was triggered after Siemens was utilizing L-1 visa holders to move jobs to India.[24] The L-1 intra-company transferee visa permits executives, managers and employees with specialized skills to transfer to a U.S. office, subsidiary, or affiliated company to perform temporary services. Initially, L-1 visas are granted for one to three years; extensions are then made available in two-year increments, with a total stay not to exceed seven years.[25] The H-1B is a nonimmigrant classification used by an alien who will be employed temporarily in a specialty occupation for a maximum period of six years at a time. In 2004, the number of aliens issued a visa was limited to 65,000.[26]

The rising xenophobic attitudes that have arisen are reason for apprehension. The following excerpt provides insight into this recent trend:

“The rising public anger about outsourcing, combined with persistent unemployment, residual fear from 9-11, and concern about immigration forms a volatile mix that is ripe for demagogic activity by anti-foreign, anti-immigrant politicians and interests. For example, a former software developer who lost his job in 2002 is running for Congress in Florida on an anti-outsourcing agenda. “This is hitting medical transcribers, financial analysts, radiologists, everyone,” he says. His slogan? “If you work at a desk, beware – the foreigners are coming after your job.”[27]

The attitude reflected in the above quote has to be countered by providing the U.S. public with the appropriate facts and statistics to counter this growing xenophobic trend. Similar fear was prevalent during the late eighties when Americans feared that Japan would control the global technology sector.

Originally Congress passed the Immigration Act of 1990 to address the critical U.S. shortages of engineers, scientists and other highly skilled professionals. The authorized enactment increased the admission of foreign nationals seeking permanent residential status in the U.S. To address the high levels of unemployment among U.S. high tech professionals, in 2003 the U.S. government reduced the number of allotted H-1B visas from 195,000 to 65,000.

Many advocates against this legislative measure argue that rather than protecting U.S. jobs the reduction in visas only further stimulated firms to more rapidly offshore work. In addition, in an effort to create and maintain jobs in the U.S., the AeA association (AeA is the nation's largest high tech trade association, representing more than 3,000 companies) advocates giving a green card to all foreign nationals holding a Masters and Ph.D. The association states that given approximately 50% of the U.S. Doctoral and Master’s degrees in the sciences, math and engineering are earned by foreign nationals, the U.S. needs to provide incentives for these students to remain in the U.S.

The American Engineering Association (AEA) holds the firm belief that H1-B programs should be abolished in order to provide American technology workers with jobs and appropriate wages. The following quote summarizes the group’s beliefs:

“We are sending a message to our young people not to take technical careers, where they will be forced to compete against cheap foreigners, and making ourselves dependent on people with no intrinsic loyalty to us.  The entire H1-B program should be abolished, and the few authentic geniuses out there should be brought in under other, existing programs."[28]

The Institute of Electrical and Electronics Engineers (IEEE), unlike the AEA association, has proposed several reforms to the current H-1B Visa legislation. The group advocates the following policy recommendations[29]:

❑ Limit authorized stay in the U.S. to a single 3-year, non-renewable term.

There have been growing complaints from labor representatives about this issue, pointing out that as temporary workers have returned home, they use their knowledge and connections in the U.S. market to competitively bid for outsourced work.

❑ Reform to facilitate the permanent admission of foreign professionals with highly specialized knowledge and skills.

Provide green cards for foreign professionals to reside in the U.S., utilizing their brain power to bolster innovation and increase the number of newly created jobs.

❑ Mandate that all H-1B workers are paid a prevailing wage equivalent to the median salary of similarly qualified U.S. workers.

❑ Improve the H-1B program administration and statistical reports to include the numbers of visa applications received/issued, demographic information, etc.

Included with the complaints about immigrants are charges that displaced American engineers and IT workers are being forced to train their L-1 visa replacements as a condition of their severance package. While these issues have brought groups to Washington, D.C. to lobby their federal representatives for policy change, there is great need for more comprehensive data to support their claims about the widespread nature of these practices and the magnitude of their impact on the American workforce.

“Buy American” Provisions

Current law requires that product purchased by the Defense Department contain 50% U.S. content. Duncan Hunter (R-CA), has attached legislative language to this bill requiring products purchased by the defense department contain 65% U.S. content.

Opponents of these measures, including AeA, respond to these provisions with the following statement, “If U.S. federal, state, or local governments promulgate protectionist measures to deal with offshore outsourcing or other issues, no industry will be more vulnerable to the likely retaliation than high tech.” Opponents argue that foreign retaliation puts at risk $171 billion in U.S. high-tech exports. Estimates from the Department of Commerce illustrate that 5,000 people are employed for each $1 billion exported, totaling 855,000 employees. In 2002, U.S. direct investment abroad in high-tech manufacturing totaled $69 billion, while foreign direct high-tech investment in the U.S. totaled $54 billion.[30]

The American Engineering Association (AEA) counters the foreign retaliation theory proposed by AeA. The group debunks the theory that, ‘the money that goes abroad in offshoring gets recycled back to the U.S. and underscores the current half-trillion-dollar deficit between U.S. exports and U.S. imports. In addition, the AEA report claims that foreigners don't have to ‘recycle’ their dollars into buying job-creating exports from the U.S.[31]

Labor Law

Senator Tom Daschle (D-SD) has introduced legislation to expand the Worker Adjustment and Retraining Notification (WARN) Act. The bill requires companies that offshore 15 or more jobs to offer at least three months notice of their intentions to offshore. In addition, the bill requires the firms to notify the Department of Labor in order to facilitate a statistically sound report regarding the offshoring of jobs. Given the lack of available data to support a majority of the proposed policies concerning offshoring, this bill is novel in its requirement for data collection. The proposed legislation not only acknowledges but also offers one source for gathering much needed data. Given the dearth of available data on which decision making can be based at this time, much more effort should be dedicated to studying possible vehicles that would be most expedient for gathering critical and comprehensive data.

Procurement

Senator Dodd (D-CT) has introduced a bill to prohibit federal contracts from being performed offshore. Representative Jim Walsh (R-NY) introduced the American Manufacturing Retention Act; this bill would require federal contractors to have at least 50% of their workforce in the U.S. In addition Senator Maxine Waters (D-NY), has introduced legislation that would prohibit companies that have offshored jobs during the past five years from receiving Federal funding (i.e. grants, contracts, loans).

Senator Daschle has also proposed a bill entitled Call Center’s Consumer Rights to Know Act. The bill requires employees at a call center who either initiate or receive telephone calls to disclose their physical location.

Taxation Issues

The nation’s system of taxation is also coming under increasing scrutiny. John Kerry, Democratic Presidential candidate, is addressing taxation issues in his campaign. Among his proposals are to change the tax structure on income earned outside the country. This change is thought to have major impact on large corporations heavily involved in offshoring. In addition, Kerry proposes tax incentives for keeping business offices in the U.S. Beyond the Kerry proposals, other taxation proposals are also under

consideration. These include:

Intellectual Property Export Tax

Fifteen years ago corporate taxes comprised 35% of the total federal tax, whereas today corporate taxes comprise approximately 17%. Geo Wiederhold in his presentation, “Outsourcing and IP” hypothesizes that the decrease in corporate taxes results from the decrease in uncaptured IP. Subsequently, individuals, employees and Subchapter S corporations pay an increasingly higher share of taxes. Wiederhold suggests that if the value of IP exports could be captured, then corporations should pay taxes on the value of these exports. This in turn may serve to slow the offshoring of project critical technology. He further suggests that the net income from these export taxes could serve to offset some of the national costs incurred.[32]

R&D Tax Credit

Several associations have lobbied for an R&D tax credit to encourage and promote R&D investment activities in the United States. Integrated circuits, the Internet, personal computers, and jet aircraft are just some of the many examples of past technology advancements that were stimulated by federal R&D. In order for the U.S. to remain technologically competitive the U.S. must continue to invest in R&D.[33] In addition, the American Electronics Association (AeA) suggests increasing federal R&D spending in the physical sciences, since recently funding has been disproportionably allocated to the life sciences.[34] While government investment in the physical sciences was $5 billion, Intel Chief Executive Craig Barrett complained about federal agriculture subsidies that he said were worth tens of billions of dollars. He stated, “I can’t understand why we continue to pour resources into the industries of the 19th century.”[35]

Education and Worker Retraining

Many labor specialists say that the 2-year community colleges in the U.S. should do much of the job of worker training, and that these institutions are also an important educational resource for retraining people for a new job. President George W. Bush, in his State of the Union address proposed a $250 million dollar initiative for community colleges but by cutting federal financing for other occupational education and job training programs at community colleges by roughly the same amount, the White House’s budget effectively undercuts Bush’s promises.

President Bush also proposed “personal re-employment accounts” last year that would provide unemployed workers with approximately $3000 dollars to spend on training, education or counseling. The bill, with an estimated cost of $3.6 billion never reached a floor vote. Wage insurance is another idea advocated by some labor specialists as a means to provide incentives for unemployed workers to more rapidly find new jobs. Advocates for wage insurance believe that the most effective kind of retraining is on-the-job education. Most proposals would pay half of the difference between the old job and the lower paying new one. At the current levels of unemployment, the wage insurance program would cost an estimated $5 billion a year.[36]

Some economists dismiss retraining as a solution to raising the income of the dislocated worker or the working or jobless poor. For example, University of Chicago economist James Heckman firmly believes that training programs for more mature displaced workers, as well as remediation programs for young adults with severe educational disadvantages have negligible effect. Heckman states that investing in early childhood education and K-12 schools makes sense since “…young persons have a longer horizon over which to recoup the fruits of investment.”[37]

Federal Reserve Chairman Alan Greenspan told Congress in March, “…that better education, not trade barriers, is key to preparing U.S. workers for global competition.” A critical question should however be posed as to whether better education will more effectively prepare U.S. workers? In January, 2004 according to the most recent Labor Department data, there were more unemployed workers 25 or older with college degrees than there were unemployed workers without high school diplomas.[38]

Many groups, associations and government entities are working to improve and reform the country’s K-12 educational system. One of these groups, the Computer System Policy Project (an information technology industry advocacy organization comprised exclusively of CEOs), is outspoken in their belief that the future of American competitiveness is very much reliant on the improvement in education and training of American workers. The group’s white paper entitled, “Choose to Compete” states, “It is imperative for business people and policymakers to work together to make Americans understand a rigorous education in core academics and 21st century skills is the key requirement for tomorrow’s jobs.”[39]

In addition, the group realizes that it’s impossible for the U.S. to retain intellectual and business leadership without improvement in math and science K-12 education. Businesses must not only assist with math and science education funding, but also support and collaborate at the federal and state level to assist in curriculum development and part-time teaching in the K-12 classrooms.

Currently another group, Learning for the 21st Century Partnership whose founding members include Microsoft, Dell, Time Warner, Cisco and the National Education Association are working together to bring information and technology literacy into the classroom. The Partnership hopes to serve as a catalyst for change in the educational community.[40]

At the same time, state governments across the nation are grappling with educational reform efforts. As the result of a major rewriting of the federal K-12 law, schools across the nation are struggling to meet requirements of the No Child Left Behind Act passed in 2002 that mandates them to make annual yearly progress reports for all students Grades 3-8 or face major sanctions. Schools whose students show no improvement are required by this Act to take remedial action. Since the passage of the Act, there has been a huge outcry from the educational community since schools across the nation are in danger of failing to meet acceptable standards for passing the required tests. Some critics complain of insufficient funding to support the reform activities necessary while other critics view it as a federal intrusion into state rights.[41]

Some private foundations such as the Gates Foundation have attempted to support reform efforts. With its small schools initiative, the Gates Foundation has already dedicated over $373 million to supporting reform efforts across the country.[42] It is still far too early to gauge the impact of reform efforts on our nation’s schools. It is already apparent, however, that educational reform is an extremely complex process that will require long-term commitment and major financial investment in order to increase the probability of achieving its goals.

Untapped Labor Source: U.S. Prisons

“State governments and entrepreneurs are teaming up to ‘exploit’ prisoners, after all no one can undersell a worker who makes 41cents an hour without additional compensation.”[43]

An Arizona state official recently stated, "In select industries where

America has lost jobs overseas, like shoes and textiles, you could bring these jobs back." Currently, states are spending approximately $25 billion a year on corrections. Approximately 1.1 million Americans are in prison today (in 1980 the number was 316,000); 3 out of every 100 American adults are in prison or on parole or probation.

The American Service Friends Committee in Arizona has advocated against prison privatization, arguing that companies are not currently subject to the same laws as government regulated prisons, and therefore are immune to the normal checks and balances that protect prisoners from abuse. An excerpt from their public statement reads:

“There is an inherent threat to democracy when an institution with so much power over the lives of so many individuals is immune to any public accountability. In addition, the social marginalization of inmates--the fact that most are poor and people of color--makes them ‘throw-away people’ in the eyes of many citizens. This lack of concern serves to invite abuse and neglect with little threat of consequences for the corporations. Our experience with criminal justice work has taught us that abuses are less likely to occur in an environment in which there is a high degree of public involvement.”[44]

The labor movement from its inception in the late 1800s protested the use of convict labor to drive down U.S. wage levels; in fact, by the late 1890s public opposition compelled many states to abolish the practice of prison labor for profit. The Justice System Improvement Act of 1979 was the first in a series of laws to loosen these regulations and allow prisons to put people to work inside the prison confines. Future actions to affect policy on this subject will merit monitoring as prisoners remain a population of interest in offshoring labor discussions.

Environmental and Labor Protections

Politicians and public interest groups may appear to have dedicated more time to protecting the rights of U.S. prisoners, rather than assessing the factory labor conditions of foreigners hired by U.S. corporations abroad. This situation is gradually changing as stories continue to surface about labor conditions abroad. This paper would, therefore, be incomplete if it failed to at least mention the groups and members of Congress in this country who are trying to draw attention to global concerns regarding offshoring. One of the many documents on this subject, a white paper entitled, “Outsource This?” broaches the environmental concerns in stating, “Our current industrial system is rapidly destroying the earth’s air, water, land and biosphere. The reconstruction of the system of production and consumption on an environmentally sustainable basis is both a necessity for human survival…”[45] and for the survival of earth itself.

Many of the nations to which work is currently being off-shored use lower environmental and labor standards as part of their cost competitive strategy. In looking at policy activity around this important area, it is important to note that several associations and members of Congress have recommended that all future trade agreements have labor and environmental protections.

Conclusion

The issues surrounding offshoring are both complex and multi-faceted. It is only through an attempt to gather more comprehensive data regarding each of these issues that a range of comprehensive public policies can be developed to adequately address each of the many different facets of this highly complex phenomenon.

Unfortunately much of the comprehensive data that will be required to study offshoring issues have yet to be carefully gathered. For example, reliable statistical information about the current magnitude of global outsourcing and its effect on national and international labor markets is lacking. One important policy recommendation that is needed at this time is to pool the resources of those parties expressing great interest in outsourcing and its impact. These include educators, employers, government agencies, labor unions and professional societies. By pooling sources of statistical information from a wide variety of sources, it will then become possible to compile a comprehensive data set that represents the contributions of many broad-ranging perspectives. Only then can more definitive conclusions be drawn on which to base informed policy decisions.

Appendix

Current Offshore Legislation[46]

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References

“AeA Position Paper on Federal Offshore Outsourcing Legislation,” American Electronics Association, March, 2004,

Bill and Melinda Gates Foundation, Gates , .

Brecher, J. and Costello, T., “Outsource This? American Workers, the Jobs Deficit and the Fair Globalization Solution,” North American Alliance for Fair Employment, April 2004.

Brown, B. and Post, D., “On the Horizon: Outsourcing Deserves Policy Discussion,” InformationWeek, November 17, 2003,

Cappelli, Peter, The New Deal At Work, Harvard Business School Press: Boston, MA, 1999.

Carr, Lisa, “Staffing Industry Hailed as Genuine Article,” Staffing Today, .

Charlie Rose Show, PBS, April 30, 2004

“Choose to Compete,” Computer Systems Policy Project, 2004, .

“Creating and Economic Environment for Technological Competitiveness,” IEEE-USA, February 12, 1998,

Dignan, Larry, “Depleting the U.S. Tax Base,” eWeek, September 5th, 2003, .

Dignan, Larry, “National Security: Off the Radar,” eWeek, September 5, 2003, .

Dignan, Larry, “The Next Big Thing: Blind Faith in U.S. Innovation,” eWeek, September 5, 2003,

Dobbs, Michael, “More States are Fighting ‘No Child Left Behind Law’,” Washington Post, February 19, 2004, .

Fletcher, Ian “20 Defenses of Offshoring and Why They Are Wrong,” American Engineering Association, .

Gangloff, Mark, “As more U.S. companies move jobs overseas, debate rages on answers to a divisive issue,” , March 1, 2004, .

Globalization and Economic Development: Trade and Sustainable Development, CFED, Vol. 3, No. 8, September 2002, .

Graham, Jed, “Fed Chairman: Education Key to Outsourcing,” Investor’s Business Daily, March 12, 2004.

Hira, Ronil, “Global Outsourcing of Engineering Jobs: Recent Trends and Possible Implications,” IEEE, June 2003, .

“IEEE-USA Position Statement on the H-1B Visa,” IEEE-USA, February, 2003, .

“Is Your Job Next?” Business Week, February 3, 2003.

Kammon, Jon, “Governor Halts State’s Offshoring,” The Arizona Republic, April 15, 2004.

“L-1 Intracompany Transferee Visa,” American Immigration Network, .

Locke, Robert, “Why H1-B Visa’s are Bad for America,” , January, 24, 2001,



Lohr, Steve, “U.S. politicians target disappearing jobs,” International Herald Tribute, February 24, 2004, .

“Made in the USA….by Convicts,” .

Maranjian, Selena, “Offshore Outsourcing Soundoff,” The Motley Fool, March 18, 2004,

“Offshore Outsourcing and Related Legislation: Current Federal Action,” National Conference of State Legislatures, March 18, 2004, .

“Offshore Outsourcing in an Increasingly Competitive and Rapidly Changing World,” American Electronics Association, March 2004,

.

“Offshoring: Is it a Win-Win Game?” McKinsey Global Institute, August 2003.

“Outsourcing Bills may Affect US Trade,” , April 21, 2003.

“Outsourcing making US students shun computer sciences?” , March 28, 2004, .

“Privatization of Prisons,” American Service Service Committee: Arizona Program Area, .

Roundtable on Outsourcing, The Wall Street Journal Online, .

“Staffing Shines In 2003,” Staffing Today, March 1, 2004, .

“Tech Chiefs Defend Overseas Jobs,” Wired, January 7, 2004, .

“The great hollowing-out myth,” The Economist, February 19, 2004.

The 21st Century Learning Initiative, .

“USCIS Announces New H1-B Procedures – Reaches Cap,” U.S. Citizenship and Immigration Services, February 17, 2004, .

Wiederhold, Geo, Lecture Notes: “Outsourcing and IP,” April 24, 2004.

-----------------------

[1] “The great hollowing-out myth,” The Economist, February 19, 2004.

[2] “Offshore Outsourcing in an Increasingly Competitive and Rapidly Changing World,” American Electronics Association, March 2004,

[3] “Offshoring: Is it a Win-Win Game?” McKinsey Global Institute, August 2003.

[4] “Is Your Job Next?” Business Week, February 3, 2003.

[5] Brecher, J. and Costello, T., “Outsource This? American workers, the Jobs Deficit and the Fair Globalization Solution,” North American Alliance for Fair Employment, April 2004.

[6] Cappelli, Peter, The New Deal At Work, Harvard Business School Press: Boston, MA, 1999.

[7] “Staffing Shines In 2003,” Staffing Today, March 1, 2004, .

[8] Carr, Lisa, “Staffing Industry Hailed as Genuine Article,” Staffing Today,

[9] “Offshoring: Is it a Win-Win Game?” McKinsey Global Institute, August 2003.

[10] Dignan, Larry, “Depleting the U.S. Tax Base,” eWeek, September 5th, 2003,

[11] Brecher, J. and Costello, T., “Outsource This? American Workers, the Jobs Deficit and the Fair Globalization Solution,” North American Alliance for Fair Employment, April 2004.

[12] Hira, Ronil, “Global Outsourcing of Engineering Jobs: Recent Trends and Possible Implications,” IEEE, June 2003, .

[13] Charlie Rose Show, PBS, April 30, 2004

[14] Fletcher, Ian, “20 Defenses of Offshoring and Why They are wrong,” American Engineering Association, .

[15] “Outsourcing making US students shun computer sciences?” , March 28, 2004,

[16] Brown, B. and Post, D., “On the Horizon: Outsourcing Deserves Policy Discussion,” InformationWeek, November 17, 2003,

[17] Dignan, Larry, “The Next Big Thing: Blind Faith in U.S. Innovation,” eWeek, September 5, 2003,

[18] Graham, Jed, “Fed Chairman: Education Key to Outsourcing,” Investor’s Business Daily, March 12, 2004.

[19] “Roundtable on Outsourcing,” The Wall Street Journal Online,

[20] “AeA Position Paper on Federal Offshore Outsourcing Legislation,” American Electronics Association, March, 2004,

[21] Maranjian, Selena, “Offshore Outsourcing Soundoff,” The Motley Fool, March 18, 2004,

[22] Dignan, Larry, “National Security: Off the Radar,” eWeek, September 5, 2003,

[23] “Outsourcing Bills may Affect US Trade,” , April 21, 2003.

[24] Kammon, Jon, “Governor Halts State’s Offshoring,” The Arizona Republic, April 15, 2004.

[25] “AeA Position Paper on Federal Offshore Outsourcing Legislation,” American Electronics Association, March, 2004,

[26] “L-1 Intracompany Transferee Visa,” American Immigration Network, .

[27] “USCIS Announces New H1-B Procedures – Reaches Cap,” U.S. Citizenship and Immigration Services,

February 17, 2004, .

[28] Brecher, J. and Costello, T., “Outsource This? American workers, the Jobs Deficit and the Fair Globalization Solution,” North American Alliance for Fair Employment, April 2004.

[29] Locke, Robert, “Why H1-B Visa’s are Bad for America,” , January, 24, 2001,



[30] “IEEE-USA Position Statement on the H-1B Visa,” IEEE-USA, February, 2003,

[31] “AeA Position Paper on Federal Offshore Outsourcing Legislation,” American Electronics Association, March, 2004,

[32]Fletcher, Ian “20 Defenses of Offshoring and Why They Are Wrong,” American Engineering Association.

[33] Wiederhold, Geo, Lecture Notes: “Outsourcing and IP,” April 24, 2004.

[34] “Creating and Economic Environment for Technological Competitiveness,” IEEE-USA, February 12, 1998,

[35] “AeA Position Paper on Federal Offshore Outsourcing Legislation,” American Electronics Association, March, 2004,

[36] “Tech Chiefs Defend Overseas Jobs,” , January 7, 2004,

[37] Lohr, Steve, “U.S. politicians target disappearing jobs,” International Herald Tribute, February 24, 2004, .

[38] Globalization and Economic Development: Trade and Sustainable Development, CFED, Vol. 3, No. 8, September 2002, .

[39] Gangloff, Mark, “As more U.S. companies move jobs overseas, debate rages on answers to a divisive issue,” , March 1, 2004,

[40] “Choose to Compete,” Computer Systems Policy Project, 2004,

[41] The 21st Century Learning Initiative,

[42] Dobbs, Michael, “More States are Fighting ‘No Child Left Behind Law’,” Washington Post, February 19, 2004, .

[43] Bill and Melinda Gates Foundation, Gates , .

[44] “Made in the USA….by Convicts,” .

[45] “Privatization of Prisons,” American Service Service Committee: Arizona Program Area,

[46] Brecher, J. and Costello, T., “Outsource This? American Workers, the Jobs Deficit and the Fair Globalization Solution,” North American Alliance for Fair Employment, April 2004.

[47] “Offshore Outsourcing and Related Legislation: Current Federal Action,” National Conference of State Legislatures, March 18, 2004, .

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