Offshoring: The Next Industrial Revolution?

Alan S. Blinder

From Foreign Affairs, March/April 2006

Summary:  Economists who insist that "offshore outsourcing" is just a routine extension of international trade are overlooking how major a transformation it will likely bring -- and how significant the consequences could be. The governments and societies of the developed world must start preparing, and fast.

Alan S. Blinder is Gordon S. Rentschler Memorial Professor of Economics at Princeton University. He served on the White House Council of Economic Advisers from 1993 to 1994 and as Vice Chairman of the Board of Governors of the Federal Reserve from 1994 to 1996.

Many people blithely assume that the critical labor-market distinction is, and will remain, between highly educated (or highly skilled) people and less-educated (or less-skilled) people -- doctors versus call-center operators, for example. The supposed remedy for the rich countries, accordingly, is more education and a general "upskilling" of the work force. But this view may be mistaken. Other things being equal, education and skills are, of course, good things; education yields higher returns in advanced societies, and more schooling probably makes workers more flexible and more adaptable to change. But the problem with relying on education as the remedy for potential job losses is that "other things" are not remotely close to equal. The critical divide in the future may instead be between those types of work that are easily deliverable through a wire (or via wireless connections) with little or no diminution in quality and those that are not. And this unconventional divide does not correspond well to traditional distinctions between jobs that require high levels of education and jobs that do not.

A few disparate examples will illustrate just how complex -- or, rather, how untraditional -- the new divide is. It is unlikely that the services of either taxi drivers or airline pilots will ever be delivered electronically over long distances. The first is a "bad job" with negligible educational requirements; the second is quite the reverse. On the other hand, typing services (a low-skill job) and security analysis (a high-skill job) are already being delivered electronically from India -- albeit on a small scale so far. Most physicians need not fear that their jobs will be moved offshore, but radiologists are beginning to see this happening already. Police officers will not be replaced by electronic monitoring, but some security guards will be. Janitors and crane operators are probably immune to foreign competition; accountants and computer programmers are not. In short, the dividing line between the jobs that produce services that are suitable for electronic delivery (and are thus threatened by offshoring) and those that do not does not correspond to traditional distinctions between high-end and low-end work.

The fraction of service jobs in the United States and other rich countries that can potentially be moved offshore is certain to rise as technology improves and as countries such as China and India continue to modernize, prosper, and educate their work forces. Eventually, the number of service-sector jobs that will be vulnerable to competition from abroad will likely exceed the total number of manufacturing jobs. Thus, coping with foreign competition, currently a concern for only a minority of workers in rich countries, will become a major concern for many more.

There is currently not even a vocabulary, much less any systematic data, to help society come to grips with the coming labor-market reality. So here is some suggested nomenclature. Services that cannot be delivered electronically, or that are notably inferior when so delivered, have one essential characteristic: personal, face-to-face contact is either imperative or highly desirable. Think of the waiter who serves you dinner, the doctor who gives you your annual physical, or the cop on the beat. Now think of any of those tasks being performed by robots controlled from India -- not quite the same. But such face-to-face human contact is not necessary in the relationship you have with the telephone operator who arranges your conference call or the clerk who takes your airline reservation over the phone. He or she may be in India already.

The first group of tasks can be called personally delivered services, or simply personal services, and the second group impersonally delivered services, or impersonal services. In the brave new world of globalized electronic commerce, impersonal services have more in common with manufactured goods that can be put in boxes than they do with personal services. Thus, many impersonal services are destined to become tradable and therefore vulnerable to offshoring. By contrast, most personal services have attributes that cannot be transmitted through a wire. Some require face-to-face contact (child care), some are inherently "high-touch" (nursing), some involve high levels of personal trust (psychotherapy), and some depend on location-specific attributes (lobbying).

However, the dividing line between personal and impersonal services will move over time. As information technology improves, more and more personal services will become impersonal services. No one knows how far this process will go. Forrester Research caused a media stir a few years ago by estimating that 3.3 million U.S. service-sector jobs will move offshore by 2015, a rate of about 300,000 jobs per year. That figure sounds like a lot until you realize that average gross job losses in the U.S. labor market are more than 500,000 in the average week. In fact, given the ample possibilities for technological change in the next decade, 3.3 million seems low. So do the results of a 2003 Berkeley study and a recent McKinsey study, both of which estimated that 11 percent of U.S. jobs are at risk of being offshored. The Berkeley estimate came from tallying up workers in "occupations where at least some [offshoring] has already taken place or is being planned," which means the researchers considered only the currently visible tip of the offshoring iceberg. The future will reveal much more.

To obtain a ballpark figure of the number of U.S. jobs threatened by offshoring, consider the composition of the U.S. labor market at the end of 2004. There were 14.3 million manufacturing jobs. The vast majority of those workers produced items that could be put in a box, and so virtually all of their jobs were potentially movable offshore. About 7.6 million Americans worked in construction and mining. Even though these people produced goods, not services, their jobs were not in danger of moving offshore. (You can't hammer a nail over the Internet.) Next, there were 22 million local, state, and federal government jobs. Even though many of these jobs provide impersonal services that need not be delivered face to face, hardly any are candidates for offshoring -- for obvious political reasons. Retail trade employed 15.6 million Americans. Most of these jobs require physical presence, although online retailing is increasing its share of the market, making a growing share of retail jobs vulnerable to offshoring as well.

Those are the easy cases. But the classification so far leaves out the majority of private-service jobs -- some 73.6 million at the end of 2004. This extremely heterogeneous group breaks down into educational and health services (17.3 million), professional and business services (16.7 million), leisure and hospitality services (12.3 million), financial services (8.1 million), wholesale trade (5.7 million), transportation (4.3 million), information services (3.2 million), utilities (0.6 million), and "other services" (5.4 million). It is hard to divide such broad job categories into personal and impersonal services, and it is even more difficult to know what possibilities for long-distance electronic delivery the future will bring. Still, it is possible to get a rough sense of which of these jobs may be vulnerable to offshoring.

The health sector is currently about five times as large as the educational sector, and the vast majority of services in the health sector seem destined to be delivered in person for a very long time (if not forever). But there are exceptions, such as radiology. More generally, laboratory tests are already outsourced by most physicians. Why not out of the country rather than just out of town? And with a little imagination, one can envision other medical procedures being performed by doctors who are thousands of miles away. Indeed, some surgery has already been performed by robots controlled by doctors via fiber-optic links.

Educational services are also best delivered face to face, but they are becoming increasingly expensive. Electronic delivery will probably never replace personal contact in K-12 education, which is where the vast majority of the educational jobs are. But college teaching is more vulnerable. As college tuition grows ever more expensive, cheap electronic delivery will start looking more and more sensible, if not imperative.