U.S. Service Job Off-Shoring

Alexandre Pestov
U.S. Service Job Off-Shoring
JUNE 2009
Alexandre Pestov June 2009
TABLE OF CONTENTS
1 Abstract.................................................................................................................................................................................................. 3
2 Introduction .......................................................................................................................................................................................... 4
3 Off-Shoring Issue ................................................................................................................................................................................. 5
3.1 Brief History of Off-Shoring in the U.S. ................................................................................................................................ 8
3.1.1 Manufacturing ..................................................................................................................................................................... 8
3.1.2 Information Technology, BPO and Other Industries ............................................................................................... 9
3.2 Off-shoring Drivers .................................................................................................................................................................... 9
3.3 Why India? ..................................................................................................................................................................................10
3.4 The Issue .....................................................................................................................................................................................11
4 Occupational Trends ........................................................................................................................................................................13
4.1 Off-Shoring by Occupation.....................................................................................................................................................13
4.1.1 Can It be Off-Shored?.....................................................................................................................................................18
4.1.2 Future of Off-Shoring .....................................................................................................................................................19
4.2 Occupational Trends: Conclusion ........................................................................................................................................20
5 Off-shoring by numbers ...................................................................................................................................................................21
5.1 Outsourcing Time Frame ........................................................................................................................................................21
5.1.1 Time Lag in Reported Statistics ...................................................................................................................................21
5.1.2 Viability of Off-Shoring as a Key Driver.....................................................................................................................25
5.1.3 Future of Off-shoring By Numbers .............................................................................................................................25
5.2 Employment Before And During the Recession ...............................................................................................................25
5.2.1 Economic Growth (1989-2007) ...................................................................................................................................25
5.2.2 Recession employment in the U.S. and India ............................................................................................................26
5.2.3 Changes in U.s. employement – declining industries..............................................................................................28
5.2.4 Off-Shoring By Numbers: Future of Off-Shoring.....................................................................................................31
5.3 Off-shoring by numbers: Conclusion ...................................................................................................................................33
6 Other Conciderations ......................................................................................................................................................................34
6.1 Retraining of Highly-Skilled Occupations............................................................................................................................34
6.2 Vulnerable Groups....................................................................................................................................................................35
6.3 Impact on Education.................................................................................................................................................................36
6.4 Other Strategic Issues..............................................................................................................................................................39
6.4.1 Loss of Technological Leadership ................................................................................................................................39
6.4.2 High-Techonology Manufacturing................................................................................................................................40
6.4.3 Terms Of Trade ...............................................................................................................................................................42
6.4.4 Lower Standards of Living .............................................................................................................................................43
7 Conclusion ..........................................................................................................................................................................................45
U.S Service Job Outsourcing Page 1 of 51

8 Acknowledgements ...........................................................................................................................................................................48
9 References ...........................................................................................................................................................................................49
On-Line References.........................................................................................................................................................................51

1 ABSTRACT
This paper attempts to examine various off-shoring trends with respect to the job value and relationship between
the share of employment potentially affected by off-shoring and other economic and structural factors. The paper
relies on a combination of secondary research, publicly available datasets and proprietary surveys to draw
conclusions regarding the key off-shoring trends.
The study‘s results indicate that off-shoring is undergoing both lateral and vertical expansion to the extent that it
has already impacted occupations historically held by the U.S. middle-class and moderately rich population. The
existing trends suggest a substantial move of off-shoring into the occupation groups residing in the upper half of
the income pyramid. The development signals a potential future loss of the high value jobs to off-shoring and
labour redeployment to the occupational groups of lower value. While the study produced no firm evidence of the
off-shoring impact on the service job losses, the statistical association between the off-shorable employment during
the economic expansion of 2003-2007 and the subsequent recession strongly suggest the job losses in the service
areas as a direct result of off-shoring. Furthermore, contrary to commonly accepted view, the study identified a
confirmation of a significant structural change in the perception of the domestic and foreign workforce by the U.S.
companies engaged in off-shoring.
Additionally, by analysing the trends, the paper highlights certain implications for the U.S. economy arising from the
off-shoring impact on education, vulnerable employments groups, balance of trade, competitiveness of the U.S.
economy and other factors directly related to off-shoring.
Please direct all inquiries regarding this paper to alec.pestov@yahoo.com.

2 INTRODUCTION
In the global economy, off-shore outsourcing (or off-shoring) plays an increasingly important role. The term ―off-
shoring‖ describes the relocation of a business process from one country to another. Frequently, ―off-shoring‖ is
used interchangeably with ―outsourcing‖, suggesting that the two are the same. It is a common fallacy, as
outsourcing refers to subcontracting a process to a third-party provider, which can be a domestic company. Off-
shoring doesn‘t necessarily imply work subcontracting, as the business function can still be performed by the same
company. However, unlike outsourcing, off-shoring always involves shifting functions to overseas locations.
Globalization has reached every corner of the world, opening up new opportunities for companies to discover
efficiencies. In some cases, productivity gains are achieved by moving certain operations to other parts of the
world. The benefits that can be realized from function relocations (aka off-shoring) can be quite substantial. It is
not surprising that the ranks of companies practicing off-shoring continue to swell. The notion of moving
operations abroad is not new. Since the late 1970s, governments around the world have torn down trading
barriers by embracing free-market, effectively eliminating over 45,000 different tariffs that had existed before
(―Political History of Offshoring‖, On-Line). In the wake of the market reforms, companies discovered new and
efficient means of acquiring goods and services abroad. The most noticeable changes can be observed in the
manufacturing industry where the largest share of the goods, especially consumer goods, is now produced
overseas. In fact, the U.S. currently imports over $500 billion more than it exports in manufactured goods
(Economic Policy Institute, On-Line). While initially limited to manufacturing, in the last few years off-shoring has
engulfed the service industry. The technological advances over the last two decades allowed for more services to
be provided from the remote locations, which altered the nature of off-shoring: the scope of off-shoring was no
longer limited to manufacturing goods, but could now be extended to the service areas.
Off-shoring always entails job relocation. It is becoming increasingly visible in many areas, most notably in
Information Technology and Telecommunications. Initially, IT job off-shoring was restricted to low-end IT
functions, hardware manufacturing, call centers, back-office processes and other labour-intensive and low-skill
tasks. However, since the late 1990s, the landscape of the IT industry has undergone a dramatic change. Presently,
more and more high-skill jobs are going overseas with multinational corporations like IBM, Intel and Microsoft
setting up large centers abroad.
This paper evaluates job off-shoring in the U.S. and its impact on the U.S. economy, concentrating mainly on the
high value-added occupations. The U.S. is the biggest user of off-shored services in the world and one of the few
countries for which long-time series of relevant and reliable statistical data are available. On the receiving side, the
research frequently refers to India for benchmarking. In recent years, India has become the most attractive
destination for white-collar job off-shoring and the dominant provider of IT and BPO services to foreign
companies. Where appropriate the research draws parallels with the off-shoring trends in general. The scope of
the research is not limited to the analysis of the sheer volumes of job relocated from the U.S. to other countries,
but rather examines a combination of value of jobs outsourced and the effects on the macroeconomic scale.

3 OFF-SHORING ISSUE
The issue of off-shoring has been heavily debated. On one hand, on the macroeconomic scale, off-shoring leads to
realization of numerous benefits, including:
 Improved productivity and competitiveness;

 New revenues and export growth;
 Favourable returns on capital;
 Redeployment of labour;
 Repatriated earnings;
 Increased consumer income and saving rates;
 Concentration on key competencies;
 Job creation.
On the other hand, off-shoring can potentially entail the following negative effects:
 Fall in real wages;

 Lost tax revenues;
 Reduced total value added;
 Deterioration of the balance of trade;
 Regional effects;
 Reduced competitiveness;
 Decline in capacity for innovation;
 Destruction of key competencies;
 Diverted investments;
 Job losses.
The following section elaborates on each point.
Benefits
Improved productivity and competitiveness are first realized at the price point. As cost of inputs falls,
productivity rises. Similarly, declining costs of inputs translate either into higher margins or reduced sale prices,
leading to the increased market share and profitability. The further productivity gains are expected from the
increased investments of the freed up funds into R&D. Greater R&D investments are expected to lead to
improved competitiveness.
New revenues and export growth are expected to be influenced by the off-shoring activities in two ways.
Generally, at the macro-economic level, foreign investment often complements trade and generates additional
exports. Then, the growth in incomes in the destination countries creates additional demand, which could be
satisfied by increased exports from the off-shoring countries (McKinsey Global Institute, 2003).
Favourable returns on capital arise from the improved profitability of the off-shoring firms. By utilizing lower
cost inputs firms can produce more output with smaller capital. In turn, higher return on capital will stimulate
domestic and foreign investments.
Redeployment of labour: by its nature, off-shoring entails job losses or slower job creation in certain areas at
least in a short-term. However, it eventually leads to the redeployment of labour, as workers who lost their jobs
to off-shoring will take up jobs elsewhere. In many cases, new jobs will be attained through investments in

education, additional training and skill upgrades. As such, redeployment of labour will generate additional value for
the economy by adding new jobs in other areas.
Repatriated earnings: many of the off-shoring service providers are incorporated in the same countries as their
clients rather than in destination countries, effectively repatriating their earnings back to the countries of origin.
Increased consumer income and saving rates: the importing of goods and services at a price lower than the
domestically produced products increases consumers‘ incomes in that country (Hatzichronoglou, T., 2006). The
income growth typically results in increased consumption and, to some degree, savings.
Concentration on key competencies: depending on the nature of off-shoring and policies in place,
redeployment of labour may lead to a shift of workforce from low value to high value jobs, allowing countries to
concentrate on their key competencies.
Job creation: many of the positive effects of off-shoring, including income increases, rising exports, redeployment
of labour, demand for education, will lead to job creation in the relocating countries.
Negative Effects
Fall in real wages: the off-shoring country is likely to experience a fall in real wages in the employment
categories directly competing with the lower wages destinations. Depending on the productivity and nature of
relocation, the competition may drive real wages in outsourcing countries significantly below their original levels
and more in line with those of the receiving countries.
Lost tax revenues: off-shoring will have a multi-tier effect on tax revenues. The reduction in tax revenues from
the positions performed from abroad and from the workers collecting unemployment insurance benefits will have
the direct impact. The indirect impact is expected from the relocation of parent companies or head offices of
multinational corporations. As off-shoring gains momentum, more companies will be inclined moving their head
offices off-shore, resulting in a larger part of the profits of the groups concerned to be transferred and taxed in
other countries.
Reduced value added: off-shoring a function or a process to another country will lead to the sourcing country
producing a smaller portion of the final product, whether it is goods or services. When it takes place on a greater
scale, the country will import many of its inputs, creating less value added in the total production chain.
Deterioration of the balance of trade could be observed in situations when a country begins to import much
of its inputs, while adding smaller value to the final product. Additionally, if exported goods and services lie in a
similar range as the off-shored services the country will experience a drop in net exports with the result that the
balance of trade will be impacted.
Regional effects: Despite that off-shoring may have a noticeable positive effect on the economy of a particular
country it may have devastating effects at the regional level within the same nation. The consequences for a region
where off-shored activities played a key role in the local economy can be particularly severe, leading to pockets of
excessively high unemployment with the ensuing social issues such as high crime rates.
Reduced competitiveness and destruction of key competencies: as a direct result of reduced value-added
in the final product and technology sharing, companies and nations may lose their competitive edge on the world
arena. Technology acquisition is a lengthy and costly process. The same stands for the knowhow and other
proprietary functions that give companies their competitive edge. However, the technology must be shared with
off-shore partners for them to carry out operations, and the sharing typically occurs at no or very little cost to the
receiving side. At some point, the function performed by the off-shored company or its technology can be

effortlessly replicated abroad. Having no burden of the initial investment and the benefits of lower cost
productions, the receiving countries will be able to form domestic enterprises designed to directly compete with
foreign off-shored companies.
Decline in capacity for innovation: technological improvements enable tasks to be done from the low-cost
locations to the extent that some industries may eventually lose their attractiveness due to the low employment
projections in the developed countries. It leads to the decline in the interest, participation and investments in the
field, resulting in diminishing capacity for innovation.
Diverted investments: off-shoring is expected to divert investments to the recipient destinations due to the
need for direct investment in infrastructure and human capital in the receiving nations. The effect can be magnified
by the loss of attractiveness of the declining industries in the off-shoring countries.
Job losses – at least initially - is perhaps the most prominent negative effect of off-shoring. Effective off-shoring
cannot be complete without replacing high cost domestic labour with the low cost foreign workforce, implying
that a job must be lost (or not created) on-shore in order for it to be off-shored. The magnitude of the job losses
and the ability of the economy to compensate by creating jobs elsewhere to absorb the displaced workers is the
single biggest concern of off-shoring on the macroeconomic scale.
The accelerating pace of off-shoring and the significance of its impact place it in the middle of heated discussions
amongst academics, economics, think tanks and umpteen interest groups. Countless research papers and opinion
publications cover this subject. The datasets were collected to examine numerous sides that off-shoring has.
However, in a nutshell, the key issues of off-shoring can be described by the three core questions, which are the
center point of this paper:
 Does it cause net job losses in the U.S.?

 Is off-shoring positive or negative for the economy?
 Will jobs and the economy suffer in the long run?

3.1 BRIEF HISTORY OF OFF-SHORING IN THE U.S.
To gain a better understanding of the off-shoring phenomenon and its impact on the U.S. economy, it is important
to review its history in the context of the U.S.
The notion of off-shoring is not new. In pre-Revolutionary War America, the vast majority of the manufactured
goods were produced in England. During that time, England ran a labour surplus and its national policy was devised
around protection of the domestic industries and workforce. To solidify British industrial dominance and protect
domestic industries, the British parliament passed laws prohibiting manufacturing of any goods outside of England,
if they could be produced locally. It is not surprising that virtually all consumer and industrial goods destined for
the Colonies were manufactured in England while from the British Colonies perspective the manufacturing
operations were off-shored to England (Burlingame, R., 1955).
Since then America has undergone major changes, turning the table around by establishing its manufacturing
infrastructure and eventually seizing the title of the world‘s leading manufacturer. From the off-shoring perspective,
America became the place where many manufacturing tasks, especially technology intensive, were off-shored to.
The situation changed again in the late 1970s, where roots of the modern off-shoring can be traced to. Before the
‗70s, American productivity hit a plateau due to the lack of innovation in manufacturing. At the same time other
countries, namely Japan, learned adapted and improved upon the U.S. methods of manufacturing (Dr. Dean F.
Poeth, On-Line). The progress of the manufacturing processes allowed these countries to advance their
productivity and begin making products at a lower cost than that of the U.S. In the late ‘70s and early ‗80s the U.S.
had to face the loss of its competitive edge in many areas. To counter the stiff competition the American
companies began to seek ways to reduce costs of inputs, shifting their manufacturing facilities to lower waged
countries. Initially, off-shoring was limited to neighbouring Canada and Mexico, and later it expanded to South-East
Asia, including Malaysia, Vietnam, Indonesia, Taiwan and eventually China.
The off-shoring process came in waves and went through several distinct phases, affecting different areas and
industries. The following section reviews the brief history of the major off-shoring trends.
3.1.1 MANUFACTURING
In modern history, off-shoring of the manufacturing operations has perhaps the longest and most studied record.
Initially, it started in the late 1970s with the relocation of operations to Canada and Mexico. The North American
Free Trade Agreement (NAFTA) further stimulated the shift of production facilities from the U.S. to both
countries. Canada ranked relatively high on the productivity index and overall production quality due to the
educated and skilled workforce that closely resembles that of the U.S. The favourable value of the Canadian dollar
offered undeniable advantage to the off-shored operations, despite the higher Canadian tax rates. Mexico played an
important role in off-shoring due to the wage arbitrage that existed between itself and the U.S. Off-shoring
companies later shifted their focus to Asia, as the Asian countries started aggressively competing on cost through
very low wages, loose workers' rights laws, relaxed environmental regulations, enormous economies of scale (in
the case of China) and the currency advantage. After its accession to the World Trade Organization (WTO) in
2001, China‘s off-shoring role expanded even further and it became the biggest and the most prominent
destination for moving manufacturing operations overseas. Initially, there was some reluctance to move high value-
added production of leading-edge products to China and other countries due to the lax enforcement of intellectual
property laws. However, with some regulatory changes and competitive pressure, many companies revised their
policies, eventually allowing technologically advanced products to be manufactured outside of the U.S.

3.1.2 INFORMATION TECHNOLOGY, BPO AND OTHER INDUSTRIES
Originally seen in the context of production and manufacturing only, in the 1990s off-shoring rapidly advanced to
the service sector. Until recently, services were largely viewed as something that requires face-to-face
communication and location of the vendor within a certain proximity of its client. Many changes have taken place
since then. The technical progress in telecommunications and high-tech made the trade of services possible. The
beginning of the service off-shoring can be largely attributed to the Y2K syndrome and growing tech bubble of the
late 1990s. Numerous high-scale Y2K projects and mushrooming high-tech start-ups exhausted the U.S. talent
pool, forcing U.S. companies to seek human capital elsewhere. While searching for talent abroad, many companies
discovered new and efficient ways to perform labour intensive tasks from off-shore locations. Ultimately, the trend
evolved into what is now referred to as BPO or Business Process Outsourcing. BPO is the contracting of a specific
business task, such as call center, payroll or accounting, to a third-party service provider. In addition to BPO,
which always involves a third-party provider, the U.S. companies heavily invested and eventually developed
necessary capabilities to perform the same tasks internally, but from the off-shore locations.
Despite the focus on the IT and BPO off-shoring, a few other sectors are listed as heavily off-shored. Amongst
them are the financial services, legal and R&D. The breakdown of the off-shored occupations in each industry will
be provided in a later section of this document.
3.2 OFF-SHORING DRIVERS
What is the driving force behind off-shoring? The frequently cited perspective published by the McKinsey Global
Institute in 2003 (McKinsey Global Institute, 2003) states:
―Off-shoring will allow the U.S. to  Reduced costs - Savings from reduced costs means more savings,
capture economic value through which can be passed to consumers or to investors to reinvest.
multiple channels:  New revenues – Off-shoring creates demand in destination
countries for U.S. products, especially for high tech items.
 Repatriated earnings - Several providers serving the U.S. market are
incorporated in America, which means they repatriate their earnings
back into the U.S.
 Redeployed labour - U.S. workers who lose their jobs to off-shoring
will take up other jobs, which will in turn generate additional value
for the economy.‖
Reduced cost can be named as a single most important off-shoring factor. Both the critics and proponents of off-
shoring agree on the fact that most companies first consider off-shoring because they are looking to lower costs.
Cost reduction was identified as the predominant driver of off-shoring in the 2004 and 2005 surveys by Duke and
Archstone Consulting. Another study – Capco, 2003 - concluded that 92 percent of companies surveyed cited
saving cost as their key reason for off-shoring (Gupta, Suresh and Lilach Nachum, 2003). To a great degree, the
cost savings are expected to be realized from the labour arbitrage – a disparity in wages between comparable
occupations in different countries.
Access to qualified personnel is listed as a major driver, which plays an increasingly important role in the decision
to off-shore. The 2006 study by Duke and Booz Allen argues that companies now leverage off-shoring strategically
to create competitive advantage, listing the increased access to qualified personnel as a key factor. As a result, its
influence over the decision to off-shore increased substantially in the past two years - by approximately 75
percent.

Scarcity and availability of qualified personnel at home was said to be another key driver of off-shoring. Another
study by Booz Allen Hamilton - The Globalization of White-Collar Work; The Facts and Fallout of Next-
Generation Offshoring – concludes that U.S. companies look elsewhere because they cannot get qualified workers
at home. The study refers to the National Science Foundation and Duke University analysis that determines the
number of U.S. residents graduating with Master‘s and Ph.D. degrees in engineering has steadily eroded over the
past years, while the demand for science and engineering graduates has been growing over the same period.
Exhibit 1 demonstrates the growing gap in domestic U.S. qualified labour supply and demand
Exhibit 1: Supply Gap of U.S. Engineering Graduates and Demand
Supply Gap of U.S. Engineering Graduates

120,000
Number of U.S. Graduates vs. Denmand
100,000
80,000
60,000
40,000
20,000
Number of US Master's in Engineering Graduates

Projected Demand for U.S. Master's in Engineering Graduates
Source: National Science Foundation, Duke University analysis, Booz, Allen, Hamilton
3.3 WHY INDIA?
The major recipients of off-shored jobs are India, China, Philippines, Ireland, Canada, Mexico, Pakistan and Russia.
Yet, this paper frequently references India as a proxy of white-collar job off-shoring. Amongst the key reasons is
the lack of quantitative information and the poor quality of the data available from multiple sources for the other
countries. India‘s IT and BPO sectors, on the other hand, are covered by numerous studies that compiled and
tracked reliable data, which can be used for trend tracing. Another factor complicating the trend analysis from
multiple countries is comparability of the data, which may leave significant gaps in the aggregate data sets, skewing
the final results. More importantly, India‘s domination of the high-skilled off-shoring landscape allows the country‘s
industries to be used for measuring the scale of white-collar off-shoring in general.
India‘s unique standing amongst other off-shoring hubs has given the nation an edge in the global high-tech and
BPO marketplaces. The key factor is India‘s large pool of low-waged English speaking workforce in the scientific,

mathematics and other technical fields. In a 2005 study, McKinsey & Company estimated that nearly a quarter of
India's computer engineers had the language proficiency, cultural fit and practical skills to work at multinational
companies. However, India awards more than twice the number of engineering degrees as the U.S., which creates
a formidable talent pool that cannot be overlooked or easily dismissed. It is not surprising that many of the well-
known American companies, including Dell, Sun Microsystems, LG, Ford, GE and Oracle, have already setup
operations in India, tapping into the local talent.
The research conducted by Booz Allen Hamilton confirms that India firmly maintains its spot as the preferred
location for off-shoring high-skilled tasks (see Exhibit 2). Another study by A.T. Kearney compiles the Global
Services Location Index (GSLI), which puts India ahead of other off-shoring locations. The study concludes that
Inida‘s strength is not just its financial attractiveness, but primarily its people and skills availability scores.
Exhibit 2: Off-Shoring Location Chosen by Business Function
Off-Shoring Location Chosen by Business Function

60
50
40
30
Percent
20
10
0
Back Office Contact Centers IT Procurement Product Development
-10
India Philippines Latin America China Eastern Europe

Other Asia Western Europe Canada Mexico Other
Source: Booz Allen Hamilton/Duke University Offshoring Research Network 2006 Survey
3.4 THE ISSUE
For a long time off-shoring affected traditionally low-end manufacturing industry. However, in recent times
relocation has gone up the value chain and also involved sectors that are technologically more intensive, such as
electronics and even aerospace. What began as a shift of labour-intensive and low-skilled tasks abroad now
encompasses financial and legal services, engineering, product design and R&D. Understandably, the trend has
become one of the major issues of concern to policy makers and public opinion.

As previously mentioned, the issue of off-shoring reviewed in this study can be narrowed down to the following
factors:
 Quantity of jobs lost

 Quality of jobs lost
 Trending and forecasting
This paper reviews the off-shoring trends and points out frequently omitted factors that can contribute to shaping
opinions and policies regarding off-shoring.

4 OCCUPATIONAL TRENDS
Most debates about off-shoring tend to be clustered around the exploration of the number of jobs ―lost‖. In itself,
such an approach can be somewhat misleading. Due to the complexity of relocation practices, the numbers alone
will do a poor job explaining the off-shoring phenomenon and forecasting its future trends. In many instances,
analysis of simply how many jobs were created or lost in a particular industry or a state would not show the jobs
created in other areas of the economy. There is an additional dimension of complexity to off-shoring. Off-shoring
does not always mean outsourcing, and certain functions may stay within the same company, while being
performed from abroad. Such statistics is not tracked or published officially, and the number of jobs created off-
shore to compensate for shortage of qualified labour domestically versus the number of jobs merely moved
overseas cannot be clearly defined.
Initially, off-shoring was limited to manufacturing of low-value goods. Then the scope shifted to more
technologically intensive production and eventually expanded to services. As was the case with manufacturing, the
service off-shoring started with highly-codified, transactional work such as call center functions as well as laborious
and routine software tasks, including testing and basic development. The following section takes a thorough look
on the evolution of the off-shored occupation, future trends and potential impact on the employment in the U.S.
4.1 OFF-SHORING BY OCCUPATION
Exhibit 3 shows the seven individual income levels in the U.S. as of 2008. The grid is similar to the models
presented by Dennis Gilbert (2002) and William Thompson & Joseph Hickey (2005) with the exception that it
employs seven levels to allow for more granular mapping of occupations to kincome.
Exhibit 3: Personal Income Distribution in the U.S. (2008)
Level Class Annual Percentage of Examples

Individual the U.S.
Income Labour Force
$250,000 Professional athletes, top-level executives, high-rung
Level 1 Rich 1.2%
and above politicians, celebrities, successful business owners
Moderately $150,000 to Top salaried professionals, business consultants, top
Level 2 1.9%
rich $249,999 management, doctors and dentists
Affluent $100,000 to Established professionals, independent consultants, top
Level 3 4.2%
middle class $149,999 and middle management
Upper middle $75,000 to
Level 4 4.6% Professionals, middle management
class $99,999
$50,000 to Professionals and semi-professionals with above average
Level 5 Middle class 13.5%
$74,999 standard of living
Lower middle $25,000 to
Level 6 31.5% Semi-professionals, craftsmen and blue collar workers
class $49,999
Working and Under Entry jobs, service, low-rung clerical and low-paid blue
Level 7 43.1%
lower class $25,000 collar workers
Source: United States Department of Labour - Bureau of Labour Statistics, Alexandre Pestov 2009
Exhibit 4 helps to visualize the income distribution in the U.S. The numbers on the far left represent individual
income with corresponding percentage of the overall U.S. labour force earning in the given income bracket. The
pyramid represents the full spectrum of income distribution in the U.S. and it is divided into seven levels.

Exhibit 4: Personal Income Distribution in the U.S. (2008)
Amongst the key arguments frequently presented in support of off-shoring is the notion that the off-shoring results
in redeployment of labour, likely from low-value to high-value jobs. The basic premise behind the concept is
workers who lost their jobs to off-shoring will take up other jobs, likely in high-value areas. This view generally
arises from the historical evolution of the workforce. In the past, as U.S. companies off-shored low skilled
manufacturing or services operations, the high-value industries flourished through the injection of retrained and
redeployed human capital. The following section reviews the path that off-shoring takes with respect to the value
of positions off-shored.
The U.S. became accustomed to the disappearance of manufacturing jobs (income levels 6 and 7) to the lower wage
countries. Since the 1970s, the U.S. has been off-shoring manufacturing operations to Mexico and Canada. With
the ratification of the North American Free Trade Agreement (NAFTA) in 1994, the flow of the manufacturing
jobs sent to both countries increased. Around the same time, favourable economic climate resulted from the
policies of ―Four Asian Tigers‖ and Chinese reforms stimulated an immense move of low skill and mainstream
manufacturing jobs to these destinations.
The surge of foreign investments and ensuing rapid expansion of high-precision manufacturing methods bolstered
domestic capabilities of Asian countries and allowed for advanced products to be manufactured in the region.
Initially, Taiwan and Malaysia emerged as the major manufacturing hubs, with South Korea and China joining them
shortly after. Eventually, the major portion of the computer components and electronics was produced outside of
the U.S. The advancement of Asia‘s manufacturing capacity to produce high value-added products had the greatest
impact on the income level 6. Unlike the previous wave of off-shoring that targeted levels 6 and 7, the new wave of

off-shoring affected high-precision manufacturing, as Asian manufacturers began competing with what traditionally
was the forte of the U.S., Japanese and Western European producers.
Throughout its history, off-shoring was always associated with shifting manufacturing abroad. In the 1990s, many
companies began discovering new efficiencies in off-shoring service jobs. Until the 1990s, it was unimaginable for
such work to be done outside of the U.S. However, a tsunami of technological advancements quickly changed the
landscape of tradable services. The Internet, enormous investments in telecom infrastructure and deregulations in
the U.S. permitted companies to move call centers, document scanning operations and other back-office labour
intensive tasks overseas. An employee was no longer required to be physically present at a local office to do the
job, as the same tasks could be performed remotely at a lower cost. The expansion of the off-shoring scope from
manufacturing to the service industry started to impact the occupations residing at the income levels 5 and 6.
The scope of service off-shoring was originally limited to the repetitive and low value-added occupations such as
call centers and technical support. Later, the Indian and Eastern European high-tech sectors proved their worth by
training and supplying top-notch testers, programmers and engineers. What started as a shift of laborious low
value jobs turned into a transfer of high end positions abroad. Kris Gopalakrishnan, COO of Infosys Technologies
Limited, describes it using his extensive first-hand knowledge of the subject:
1. 1970s to early 1990s: There was a shortage of skills and cost was the prime driver for outsourcing to
India. Companies focused on expanding their skill sets during this period.
2. 1994 to 1998: This was the most crucial time for IT outsourcing in India. The post liberalization reforms
helped already existing companies speed up expansion. New companies also got support in the form of
incentives from the government. The important tasks outsourced to India during this period were
medium and large application projects on legacy migration and enterprise wide IT and problems related to
Y2K syndrome. Companies focused on acquiring diverse skills and execution capabilities, along with
achieving client delight trough productive and quality delivery of projects.
3. 1999 to 2001: While projects related to Y2K syndrome were outsourced on a large scale to India,
companies started acquiring additional competence especially in enterprise resource planning and
customer relationship management during this stage. The industry gave importance to a variety of
business aspects such as achieve excellence in quality of output delivered, making investments in R&D,
ensuring business continuity and financial stability, gaining world-class project management capabilities,
expanding services to IT consulting by gaining domain skills and developing infrastructure for further
growth.
4. 2001 to present: The industry now caters to large application development and maintenance needs of
corporate across the world. Indian companies chalk out IT strategies for large corporations, and focus on
providing end-to-end solutions. Indian companies are now in the process of aggressively gaining expertise
for carrying out high end work such as R&D, architecture and business integration.
According to Kris (and his perspective coincides accurately with the points of view of other off-shoring gurus)
2001 to present saw a major structural shift in off-shored operations. After 2001, off-shored companies were no
longer involved in providing highly scripted services, but started successfully offering world-class solution involving
greater levels of technical judgment. From data entry centers, Indian IT and BPO progressed to testing,
development and advanced support roles solving high-complexity issues and serving the largest multinationals.
Spectacular achievements of the Indian high-tech industry let off-shoring companies move costly high skill jobs
away from the U.S., achieving higher marginal savings per each position off-shored. The ongoing off-shoring began
impacting occupations residing in income levels 4 and 5.

According to the Commission on Professionals in Science and Technology, growth in occupations for scientists and
engineers has come to an end after a period of constant growth spanning over 50 years. From 1950 until 2000,
occupations in the sciences and engineering grew three times faster than the U.S. civilian labour force. "This long
trend of strong U.S. demand for scientific and technical specialists ended after 2001 and had not resumed by 2006,"
say the commission in a new study. "As a result, the science, technology, engineering and mathematical (STEM)
share of total employment has been shrinking." (Manufacturing & Technology News, 2007). Growing imports of
the research and development were named amongst other possible root-causes. In recent years, many Indian high-
tech companies have evolved, reaching the highest SEI CMMI® maturity levels and surpassing their U.S.
counterparts. In many cases, Indian service providers‘ capabilities outgrew those of their clients, giving more
reasons for the U.S. companies to off-shore. This and other noticeable achievements of the Indian IT and BPO
industries induced the U.S. high-tech corporations to setup R&D centers in India to tap into a large pool of fresh
talent. AMD, Google, NVIDIA, Dell, Microsoft, Oracle and countless others opened large world-class research
facilities in high-tech clusters scattered across India. It must be noted that typical occupations employed in R&D
centers correspond to the income levels 3 and 4 in the U.S.
Initially, off-shoring was limited to repetitive and transactional work. However, later it reached to legal and financial
services, bio-tech and aerospace research. According to the 2006 Duke/Booz Allen Offshoring Research Network
Survey, companies off-shore ―high-end work that has traditionally been considered ―core‖ to the business,
including chip design, financial and legal research, clinical trials management, and book editing.‖ Now, occupations
belonging to the income levels 3 and 4 are actively transferred abroad. India has emerged as a key center for
carrying out R&D. According to the 2004 survey conducted by the Economist Intelligence Unit, India is the third
most favourable country for R&D investments, trailing only the U.S. and China. Not surprising that many
multinational corporations have already setup their research centers in India, either directly or through
partnership with other companies. The scope of R&D is clearly reflected in investments made in India‘s R&D
capabilities, which experienced 45 percent growth from 2002 and is expected to continue to grow at a 40 percent
annual rate until 2010.
As tasks performed from off-shore locations climb up the value chain, Indian companies have begun requiring more
sophisticated management. In response, many of the off-shoring companies and service providers directed their
funds to advance management capabilities of their Indian partners. Not surprising that a survey conducted by
McKinsey in 2007 found that management potential of multinational companies in India were second only to the
equivalent companies operating in the U.S. Having an ever-increasing pool of highly trained managers available at
their disposal, many of the U.S. companies started transferring the managerial jobs off-shore as well. The income
levels range corresponding to the high-value managerial jobs is 2 to 4.
Off-shoring is no longer about moving jobs abroad. Increasingly, it‘s about locating and sourcing talent from every
part of the globe. What began with low skill, repetitive tasks off-shoring has now moved to engineering, R&D,
product design and financial services, fundamentally redefining the organizational structures and management
practices of major multinational corporations. Exhibit 5 visualizes the path that off-shoring takes, progressing from
the low skill jobs through occupations historically held by the U.S. middle class to high value-added professions
involved in R&D and management.

Exhibit 5: Off-Shoring Progression up the Occupational Value Ladder
Exhibit 6 lists the major occupation groups as defined by the U.S. Bureau of Labour Statistics, sorted by the mean
annual income in descending order. The dataset is compiled by the U.S. Bureau of Labour Statistics for 2008. Once
referenced back to the U.S. income distribution spectrum defined above, eight occupation groups will fall into the
middle class bucket and above (levels 1 to 5), while ten will map to the low middle class. The balance will be in the
working and lower class category.
Exhibit 6: Occupational Groups Susceptible to Off-Shoring
Occupational Group Occupation Employment Median Mean Mean

Code Hourly Hourly Annual
Management 11-0000 6,152,650 $42.15 $48.23 $100,310
Legal 23-0000 1,003,270 $34.49 $44.36 $92,270
Computer and Mathematical Science 15-0000 3,308,260 $34.26 $35.82 $74,500
Architecture and Engineering 17-0000 2,521,630 $32.09 $34.34 $71,430
Healthcare Practitioner and Technical 29-0000 7,076,800 $27.20 $32.64 $67,890
Business and Financial Operations 13-0000 6,135,520 $27.89 $31.12 $64,720
Life, Physical, and Social Science 19-0000 1,296,840 $27.51 $30.90 $64,280
Arts, Design, Entertainment, Sports, and Media 27-0000 1,804,940 $19.99 $24.36 $50,670
Education, Training, and Library 25-0000 8,451,250 $21.26 $23.30 $48,460
Construction and Extraction 47-0000 6,548,760 $18.24 $20.36 $42,350
Community and Social Services 21-0000 1,861,750 $18.38 $20.09 $41,790

Installation, Maintenance, and Repair 49-0000 5,374,850 $18.60 $19.82 $41,230

Protective Service 33-0000 3,128,960 $16.65 $19.33 $40,200
Sales and Related 41-0000 14,336,430 $11.69 $17.35 $36,080
Production 51-0000 9,919,120 $13.99 $15.54 $32,320
Office and Administrative Support 43-0000 23,231,750 $14.32 $15.49 $32,220
Transportation and Material Moving 53-0000 9,508,750 $13.14 $15.12 $31,450
Healthcare Support 31-0000 3,779,280 $11.80 $12.66 $26,340
Building and Grounds Cleaning and Maintenance 37-0000 4,429,870 $10.52 $11.72 $24,370
Personal Care and Service 39-0000 3,437,520 $9.82 $11.59 $24,120
Farming, Fishing, and Forestry 45-0000 438,490 $9.34 $11.32 $23,560
Food Preparation and Serving Related 35-0000 11,438,550 $8.59 $9.72 $20,220
Source: U.S. Bureau of Labour Statistics, 2008; Desirée van Welsum and Xavier Reif, 2005
The highlighted occupational groups are considered susceptible to off-shoring by the 2005 OECD report (van
Welsum, D. and Reif, X., 2005b) and (Moncarz, R., Wolf, M., and Wright, B., 2008). The findings presented in the
OECD report closely coincide with the trend observed earlier – an upward move up the value ladder. The notable
observation from this mapping is the location of the off-shoreable occupations: most of them reside in the upper
end of the income spectrum.
4.1.1 CAN IT BE OFF-SHORED?
The immediate question to ask is what percentage of each occupational group can realistically be off-shored? For
instance, the legal occupational group was highlighted by the OECD report, but can lawyers attend court hearings
while residing in India, China, Russia or Ireland, even if they possessed the required qualifications? In a study
released in 2004, Forrester Research noted that less than 7 percent of jobs in the categories covered by the study,
which include "management," "computer" and "legal," are actually sent off-shore. The observation does reflect the
realities as they could be observed in 2004. However, since then the landscape of off-shoring has changed
dramatically.
The study by Moncarz, R., Wolf, M., and Wright, B., of the Occupational Outlook Studies Branch (Office of
Employment and Unemployment Statistics, Bureau of Labour Statistics) published in 2008 identifies 160 out of 515
service providing occupations that are susceptible to off-shoring. The mapping of their study results to the
occupational groups listed in Exhibit 6 is presented in Exhibit 7. The last column shows the percentage of the
occupations in each group that can be off-shored. The highlighted groups are comprised of occupations at least
40% of which can be off-shored. Please note that the original study by Wolf and Wright is confined to the service
occupations only, excluding manufacturing groups that are marked as ―N/A‖ in the table below.
Exhibit 7: Percentage of Occupational Groups Susceptible to Off-Shoring
Occupational Group Occupation Mean Annual Number of Off-Shorable Percentage

Code Occupations Occupations Off-Shorable
Management 11-0000 $100,310 31 14 45
Legal 23-0000 $92,270 8 4 50
Computer and Mathematical Science 15-0000 $74,500 14 14 100
Architecture and Engineering 17-0000 $71,430 32 26 81
Healthcare Practitioner and Technical 29-0000 $67,890 41 4 10

Business and Financial Operations 13-0000 $64,720 27 21 78

Life, Physical, and Social Science 19-0000 $64,280 38 23 61
Arts, Design, Entertainment, Sports, and Media 27-0000 $50,670 36 12 33
Education, Training, and Library 25-0000 $48,460 22 1 5
Construction and Extraction 47-0000 $42,350 N/A N/A N/A
Community and Social Services 21-0000 $41,790 13 0 0
Installation, Maintenance, and Repair 49-0000 $41,230 49 2 4
Protective Service 33-0000 $40,200 19 1 5
Sales and Related 41-0000 $36,080 20 10 50
Production 51-0000 $32,320 N/A N/A N/A
Office and Administrative Support 43-0000 $32,220 52 27 52
Transportation and Material Moving 53-0000 $31,450 44 0 0
Healthcare Support 31-0000 $26,340 14 1 7
Building and Grounds Cleaning and Maintenance 37-0000 $24,370 8 0 0
Personal Care and Service 39-0000 $24,120 31 0 0
Farming, Fishing, and Forestry 45-0000 $23,560 N/A N/A N/A
Food Preparation and Serving Related 35-0000 $20,220 16 0 0
Source: U.S. Bureau of Labour Statistics, 2008; Michael G. Wolf and Benjamin Wright, 2008
As a group, these 160 off-shorable occupations accounted for about 30 million jobs in 2007, more than one-fifth of
the total employment in the U.S. (Moncarz, R., Wolf, M., and Wright, B., 2008). The study also finds that these
occupations grew at an average annual rate of 1.5 percent from 2001 to 2007, which was faster than the 1.3-
percent rate for all service-providing occupations. The fast growth may suggest that the need for off-shoring may
be a direct result of the qualified labour shortage due to the inability of the U.S. economy to train and provide
sufficient volumes of workers, which is the conclusion reached by many other off-shoring studies, including Booz
Allen Hamilton in 2006. However, this trend can be interpreted differently if mapped to the timeline of the U.S.
economic expansion that will be discussed later in the ―Off-shoring by numbers‖ section of this document.
4.1.2 FUTURE OF OFF-SHORING
To look into the future value of off-shorable occupations, let‘s refer to the stages of development presented by
Kris Gopalakrishnan of Infosys again:
―2001 to present: The industry now caters to large application development and maintenance needs of
corporate across the world. Indian companies chalk out IT strategies for large corporations, and focus on
providing end-to-end solutions. Indian companies are now in the process of aggressively gaining expertise
for carrying out high end work such as R&D, architecture and business integration.―
On a different occasion Kris stated: "We are at the very early stages of the IT industry. Only 25 per cent of the full
leverage of IT is understood and used. The impact of IT will be significant in the next 25-30 years. There is still
money to be made and wealth to be created in IT." India is well positioned to benefit from the growth. The
number of computer science graduates exceed that of the U.S. Presently, India is the second largest software
exporter in the world, only behind the U.S. In three years India is expected to surpass the U.S. and become the
largest IT country.

According to research firm Evalueserve, the Knowledge Process Outsourcing (KPO) market is growing faster than
the low end services market. The Evalueserve‘s study estimates that between 2010 and 2014 the high-end off-
shoring market will continue expanding at a cumulative annual growth rate of 46 percent, while the low-end task
off-shoring will grow ―just‖ at 26 percent annually. What it means for U.S. off-shoring is that more high-end
services will be produced outside of the country. The Indian talent pool is constantly expanding along with the
investments pouring into the country‘s tech sector. The country‘s R&D sector is absorbing technology, equipment
and talent either through direct investments or foreign companies moving R&D centers to India. India is proving
itself as a major R&D hub and it is expected to turn into a major player directly competing with the U.S., European
and Japanese research capabilities. R&D tends to entail highly educated and high value added workforce, meaning
that in the nearest future off-shoring is expected to solidify its position taking over higher volumes of jobs
belonging to the high-end income levels: levels 2 to 4. Exhibit 8 lists functions that are currently being off-shored to
India. The results suggest that in many fields off-shoring is no longer limited to the highly coded repetitive tasks,
but rather impacts high-value roles that involve technical judgement, creativity and independent thinking.
Exhibit 8: High End Tasks Outsourced to India
Industry Transaction Processing Design and Analysis R&D
IT Y Y Y
Pharmaceutical / Biotechnology Y Y Y
Chemicals - Y Y
Education Y Y -
Engineering - Y Y
Financial Services Y Y -
Source: The Boston Consulting Group
With respect to the highest income levels, occupations mapped to the income levels 1 and 2 are unlikely to see any
significant impact from off-shoring. Due to their specifics many of the occupations that fall into Level 1 and 2
categories, for instance celebrities or pro athletes, simply cannot be off-shored. Other tasks such as top-level
executive positions potentially could be transferred and performed from off-shore. However, it is unlikely to
happen for a variety of reasons, including the improbability of the top decision makers to give up their jobs to
lower cost foreign professionals, taxation consideration, proximity to the end clients, headquarters location, and
overall prestige.
4.2 OCCUPATIONAL TRENDS: CONCLUSION
The sustained growth trajectory of the off-shored task value suggests that companies are placing greater emphasis
on sourcing talent from India and other off-shore locations. The emergence of India as a central hub for R&D
supported by a steady investments inflow shows that Indian capabilities for carrying out complex tasks are
expected to increase further in the future. Off-shoring is no longer limited to the low-end manufacturing or service
tasks, but rather impacts what was traditionally viewed as high-value occupations. In fact, the majority of the
currently off-shorable roles are concentrated at the upper end of the value spectrum. Already, many U.S.
companies off-shore their core functions, including financial management and research, product design, R&D, and
even some decision making. The unprecedented structural shift in the value of the off-shored occupations is
expected to fundamentally redefine the business models and employment landscape in the U.S. in the immediate
future.

5 OFF-SHORING BY NUMBERS
Presently, precise tracking of U.S. off-shoring numbers is not feasible. Unlike the U.S. employment statistics, for
instance, off-shoring numbers are not captured by the U.S. Census Bureau. Additionally, no independent
organization tracks precise off-shoring data on a continuous basis. Individual research papers and statistics
compiled for the purposes of these studies can be obtained from isolated and scattered sources, including OECD
and World Bank publications. However, comprehensive and reliable multi-year datasets are not available. As a
result, most studies rely on assorted combinations of publically available information, assumptions and proprietary
surveys, which are often restricted in scope and in size of sampled data. The limited and randomly selected
samples are assumed to represent the ―bigger picture‖. This paper is not an exception. For the purposes of this
research, multiple data sources were analyzed and certain assumptions were made to fill the gaps left by the
missing information. The assumptions made in this research are clearly identified for each section.
Aside from the availability of reliable datasets, interpretations of thereof can present a formidable challenge. For
example, a job created off-shore by an U.S. company can be interpreted as a job lost from the U.S. or a job that
compliments another position in the U.S., leading to an expansion of the global labour force. Depending on the
perspective taken by a particular researcher, there can be myriads of interpretations that would lead to different
conclusions even though the underlying statistical data is the same. The following section captures empirical
observations on the white-collar job off-shoring and draws conclusions to explain the results.
5.1 OUTSOURCING TIME FRAME
Many off-shoring studies tend to focus on the datasets available at the time of writing. The conventional backward-
looking approach to pattern recognition can bear misleading results for it doesn‘t account for many specific factors
that must be considered. The following section introduces several components that should be factored in building
off-shoring estimates.
5.1.1 TIME LAG IN REPORTED STATISTICS
Off-shoring is a process, not an event. It doesn‘t happen overnight. Depending on the complexity of the functions
being off-shored, typical transition may involve the following phases:
 Vendor selection (if off-shoring also involves outsourcing)

 Infrastructure setup
 Training
 Operations ―shadowing‖
 Full transition of responsibilities
Each of five phases consists of several sub-phases, which can be viewed as individual phases of a project, depending
on the objective of the classification. For the purposes of this paper, the focus is on the training and shadow
operations phases. CIO.com – an on-line source of information on various dimensions of IT operations –
estimates that the transition portion involving training and shadowing operations by the off-shore partner can take
anywhere from three months to a full year (CIO.com, On-Line). In some cases, domestic staff may stay behind for
up to two years to ensure smooth changeover and uninterrupted operations. This delayed transition – the time
between the beginning of the off-shoring project and full transition of responsibilities abroad – causes a ―time lag‖.
The time lag in the context of off-shoring will be observable once an off-shoring partner has dispatched its
personnel to perform the knowledge transfer. Typically, at this point the off-shoring provider will start recording
revenues streaming from the new account support. As previously mentioned, at this point, the on-shore staff will

continue to function in their roles while transferring their responsibilities to the new teams. As mentioned before,
the time lag between the off-shoring transfer is fully complete and on-shore staff is redeployed may be anywhere
from three months to two years long.
Exhibit 9 visualizes the growth of the Indian IT-BPO industry between 2000 and 2009. To eliminate effects of the
inflation distortion an inflation-adjusted, or real, export growth rate was added to the chart (in 2000 U.S. dollars).
Exhibit 9: Indian IT-BPO Industry 2009
Indian IT-BPO Industry Revenues

50
45
40
35
Billions of U.S. Dollars
30
25
20
15
10
Domestic Exports Exports (in 2000 dollars)
Source: World Bank 2008; Indian IT-BPO Industry 2009 - NASSCOM Analysis
The U.S. Census Bureau does not track off-shoring statistics. However, using Indian IT-BPO sector growth as a
proxy for white-collar job relocation, it is possible to visualize the effects of the time lag on the domestic U.S.
emplacement in the off-shored areas. Exhibit 10 illustrates the time lag effect, which will manifest itself as follows.
In year 2000, the Indian IT-BPO industry generates $5 Billion U.S. in revenues, employing X number of workers.
As the U.S. companies begin signing contracts to move their operations abroad, the employment in the industry
immediately begins to grow to cope with the new volumes of work. However, the on-shore workforce does not
experience redeployment proportional to the off-shore labour force gains due to the before mentioned time lag.
As time goes by, the Indian industry continues to expand, and the domestic U.S. employment starts to feel the
effect of off-shoring, however still lagging behind in terms of on-shore losses vs. off-shore gains. Let‘s say in 2009
the off-shoring reached its full potential and the growth stops. At this point, the labour force in India stops
expanding for it has fully completed the employee procurement to service its contracts. However, the knowledge
transfer with on-shore workers still continues for another three months to two year. During this timeframe, off-
shore industry size stabilizes (working under the assumption that the growth has stopped in 2009). However, on-
shore labour force continues shedding jobs or redeploying its employees until 2011.

Exhibit 10: Time Lag Effect
Workforce Percentage Off-Shore and On-Shore

100%
90%
80%
70%
60%
Percent
50%
40%
30%
20%
10%
0%
Off-Shore Employment On-Shore Workforce Reduction
Source: Alexandre Pestov 2009; Indian IT-BPO Industry 2009 - NASSCOM Analysis
Reverting back to Exhibit 9, it can be seen that off-shoring of IT and BPO work to India accelerated from 2005
onwards. The industry growth slowed in 2008 and 2009, which can be attributed to a large degree to the global
financial crisis. Nonetheless, the industry continues to grow albeit at a slower pace. Factoring the ―time lag‖ effect,
it can be said that the true impact of the off-shoring increase will be felt by the domestic U.S. IT and BPO
industries starting in 2006 accelerating through 2011 onwards.
The time lag phenomenon makes revenues reported by the Indian service providers a leading indicator for the off-
shoring numbers in the U.S. If an off-shored position was reflected in the employment numbers of the sector and
industry the revenues posted by the off-shore service provider will precede the statistics reported by the U.S.
Census Bureau by about 12-24 months.
The time lag in the officially reported statistics effectively diminishes the significance of many off-shoring studies
done in the past. Conducted during or before the explosive growth of 2005-2008, most of the studies rely on
statistical information available at the time of writing, which is likely to be 12-24 month old. Factoring the off-
shoring ―time lag‖ discussed earlier, the U.S. employment statistics used in these studies would be 18 to 36 months
behind. In this case, the studies contacted in 2005 will be using employment statistics from 2002, at which point
off-shoring was a small fraction of what it was in 2008. It is not surprising that many of the studies did not find any
correlation between the off-shoring phenomenon and employment in the U.S. For instance, a study released by
Global Insight, a private consulting firm, concluded that off-shore relocation has had a positive impact on job
creation within the U.S. The report found that off-shoring resulted in lower inflation, increased productivity, and
was linked with lower interest rates in the U.S. As a result of its research, Global Insight estimated that off-shoring,
in fact, created 90,000 new jobs in the U.S. in 2003. However, factoring statistical delay and the ―time lag‖, off-

shoring represented less than 15% of 2007 volumes in real terms and the number of jobs lost due to off-shoring
will be statistically insignificant and easily masked by developments in other areas.
In 2004, Forrester Research, a consulting company, conducted a widely cited study that concluded off-shoring
numbers will grow to 830,000 by 2005 and to 3.4 million by 2015. Since 2004 the white-collar off-shoring process
dramatically accelerated, suggesting that the numbers estimated by Forrester Research would be below actuals.
Forrester Research did note that although these numbers appear large, they may be misleading. The researchers
determined that 58 percent of the 139 North American IT firms they interviewed do not use off-shore labour and
do not plan to use it in the future. Once again, the accelerating pace of white-collar job off-shoring strongly
suggests that many of the companies might have changed their point of view. A similar trend could be seen in
manufacturing in the 1990s, where many companies were initially reluctant to move operations to China and other
Asian countries, but eventually changed their policies in order to stay competitive.
Exhibit 11: Off-Shoring Implementations That Did Not Lead to Job Losses by Function
Off-Shoring Implementation
120%
100%
80%
Percent
60%
40%
20%
0%
Source: Duke University/Booz Allen Hamilton Offshoring Research Network 2006 Survey
The 2006 study by Duke and Booz Allen Hamilton (Exhibit 11) analyzed the impact of off-shoring at the specific
functional level. The research concluded ―the more sophisticated or higher-skilled the function, the lower the
impact of offshoring on ―home country‖ employment. In fact, no domestic jobs were lost in three out of every
four offshoring implementations involving R&D, sales and marketing, product design, or engineering.‖ It can be
argued that the statistics delay and the ―time lag‖ played a key role in influencing the study results. Again, referring
to the Commission on Professionals in Science and Technology, "the science, technology, engineering and
mathematical (STEM) share of total employment has been shrinking." (Manufacturing & Technology News, 2007).
This conclusion, however, does not necessarily contradict the view presented by Duke and Booz Allen Hamilton. If
the ―time lag‖ and dataset age are factored in the Booz Allen Hamilton estimations, it can be seen that at the time
of the study off-shoring indeed did not have any observable impact on the job losses in the U.S. In conjunction with

the economic growth, which is covered in a later section of this document, the negative impact of job off-shoring
measured by many studies is expected to be negligible.
5.1.2 VIABILITY OF OFF-SHORING AS A KEY DRI VER
It has been determined that off-shoring becomes viable only if the off-shore to on-shore personnel ratio is
maintained above a certain level. Some companies target 60/40 ratio, others 70/30. Hank Zupnick, the CIO of GE
Real Estate, states "It‘s got to be 80 percent or 85 percent working offshore or the numbers just don‘t work."
The financial necessity to maintain the off-shore/on-shore ratio above profitability levels becomes an important
driver influencing a company‘s direction. Companies using off-shoring services are more compelled to implement
strategies geared towards sending more work overseas simply to meet their profitability point and recoup the
initial investment, at least partially. However, an immediate switch from on-shore to off-shore is not possible. Many
companies re-evaluate their original off-shoring plans, as the initial projections are not confirmed by the off-shoring
realities. To make ―the numbers work‖ companies are expected to continually seek for internal positions and
functions that can be safely off-shored, which will lead to greater off-shoring within a single organization than was
originally planned. As a result, off-shoring is expected to be stretched over a longer time.
Factoring these specifics into calculations, it is expected that off-shoring will continue to expand for some time in
the future, even in the highly improbable event that net-new off-shoring ceased today.
5.1.3 FUTURE OF OFF-SHORING BY NUMBERS
The most frequently cited estimate by Forrester Research predicts that 3.4 million U.S. jobs will be off-shored by
2015. The estimate was built on the figures and trends observed at the time of research. Since then, off-shoring has
exceeded most of the analytical forecasts, safely putting the number in excess of the 3.4 million off-shored jobs
originally estimated by the study. Referring back to Kris Gopalakrishnan‘s assessment of the off-shoring trends, it
should be expected that off-shoring numbers can surpass the original estimates even further, as Indian‘s R&D
sector gains capabilities and U.S. companies begin off-shoring additional functions.
5.2 EMPLOYMENT BEFORE AND DURING THE RECESSION
5.2.1 ECONOMIC GROWTH (1989-2007)
Exhibit 12 shows the growth of the U.S. GDP between 1989 and 2007. Despite the two recessions, the economy
continued to expand. Particularly strong growth can be observed between 2003 and 2007. Unemployment aligns
closely with the economic cycles, peaking during the recession and subsiding in the economic expansion phases.
The unemployment rates during 1997-2001 and 2005-2007 periods dipped below 5%, suggesting that the economy
ran red-hot. It is expected that both periods presented a challenge of locating qualified labour domestically in the
U.S. In both cases, the economy generated enormous demand for the skilled trades: high-tech and telecom in
1997-2001 and professionals in general in 2005-2007. Observably, it is warranted that during these expansion
times U.S. companies turned to the alternative labour market seeking to fill vacant positions.
Exhibit 12: U.S. GDP and Unemployment

U.S. GDP and Unemployment

16,000,000,000,000 8
14,000,000,000,000 7
Constant U.S. Dollars
12,000,000,000,000 6
10,000,000,000,000 5
Percent
8,000,000,000,000 4
6,000,000,000,000 3
4,000,000,000,000 2
2,000,000,000,000 1
0 0
GDP (current US$) Unemployment
Source: United States Department of Labor - Bureau of Labor Statistics, 2008
5.2.2 RECESSION EMPLOYMENT IN THE U.S. AND INDIA
The previous section presented the relationship between the U.S. economic cycles and unemployment rates
between 1989 and 2007. The data sets suggest that to cope with the growing demand for qualified labour and
short supply of the same in the U.S. companies would look elsewhere to fulfil their immediate employment needs.
Exhibit 13 shows the growth of the U.S. GDP and corresponding unemployment rates between 1989 and 2009
(2009 data is taken at the time of writing of this paper – June 2009).
Exhibit 13: U.S. GDP and Unemployment 1989 to 2009
U.S. GDP and Unemployment

16,000,000,000,000 10
9
Constant U.S. Dollars
14,000,000,000,000
8
12,000,000,000,000
7
10,000,000,000,000
Percent
6
8,000,000,000,000 5
6,000,000,000,000 4
3
4,000,000,000,000
2
2,000,000,000,000 1
0 0
GDP (current US$) Unemployment
Source: United States Department of Labor - Bureau of Labor Statistics, 2009
The unemployment rates in 2009 confirm the severity of the ongoing rescission, as it surpasses the unemployment
experienced 1991-1993 and 2002-2003. By the end of 2009 the unemployment rates in the U.S. are expected to

reach double-digits, approaching and probably exceeding the 10.8% joblessness seen in November and December
of 1982, which was the time of the highest unemployment rate since the Great Depression.
Exhibit 14 displays the total employment rate in the Indian IT-BPO sector comparatively to the U.S. unemployment
rate. As determined earlier, the Indian IT-BPO sector can be used as a sound proxy for white-collar off-shoring
numbers. The chart shows a consistent increase in the Indian off-shoring-centered employment and a sharp rise in
the U.S. unemployment. The significance of this observation is in the path that both the Indian and American
employment trends take. Despite the economic slump, spending cuts and mass layoffs in the U.S., the employment
in the export-oriented service sector in India continues to grow, albeit at a slower pace. It is assumed that the
overall U.S. unemployment numbers are reflective of employment changes across the industries. It is possible that
employment in a particular field, such as high-tech, may not have gone through exactly the same changes as the
overall employment in the U.S. With no reliable industry employment data available at the time of writing, the
percentage change in total U.S. unemployment was used as being representative of the change in a particular
industry.
Exhibit 14: U.S. Unemployment and Professionals Employed in the Indian IT-BPO sector (2000 to 2009)
Indian IT-BPO Employment and U.S. Unemployment

2,000,000 0
1,800,000 1
1,600,000 2
1,400,000 3
1,200,000 4
Workers
Percent
1,000,000 5
800,000 6
600,000 7
400,000 8
200,000 9
0 10
IT, BPO and Services Exports U.S. Unemployment
Source: NASSCOM 2009; United States Department of Labor - Bureau of Labor Statistics, 2009
The observed phenomenon may have several plausible explanations. Firstly, the recession impacted revenues,
motivating companies to look for cost saving opportunities. Workforce reduction is known to be an effective and
quick cost reduction measure. Naturally, cutting higher waged domestic workforce meets the cost cutback goals
better than a similar headcount reduction overseas due to the wage differences. Assuming that the remaining
employees can maintain the same level of service, this measure will meet the cost reduction objective faster and
with less impact on the company‘s operations than off-shore layoffs would.
Secondly, off-shoring investment considerations would be at play. Off-shoring is a decision that requires a
substantial upfront investment in infrastructure, training and knowledge transfer, structural changes to the
workforce, adaptation of the business processes and user education. In some cases, investments can be in excess
of hundreds of millions of dollars, especially when a company off-shores an entire R&D complex complete with

high-tech equipment and labs. To ensure viability of the off-shoring initiative and to recoup initial investments the
companies are compelled to continue running operations off-shore, while reducing domestic workforce to cope
with downturns.
Thirdly, the cost-effective off-shoring of services entails a move of a sizable portion of certain business functions,
such as development, call center operations or payroll processing, to the off-shore facilities. The remaining on-
shore workforce usually retains most of the historical knowledge, helps drive improvements and implements
corporate strategy. However, in terms of the hands-on involvement in daily tasks, in most instances, the on-shore
staff would not have sufficient capacity or skills to replace the off-shore workforce. Most companies attempt to
staff off-shore operations with just enough resources to support operations with very little overhead. It implies
that downsizing of the off-shore workforce would inevitably lead to the forced reverse off-shoring, as some of the
task will have be taken back on-shore or moved to another vendor. In either situation, additional investment in
personnel procurements and training will be required to accommodate the layoffs of the existing off-shore
workers.
Exhibit 15: Professionals Employed in the Indian IT-BPO Sector (2000 to 2009)
2002 2003 2004 2005 2006 2007 2008 2009
IT Exp. & Services Exports 170,000 205,000 296,000 390,000 513,000 690,000 860,000 946,809
BPO Exports 106,000 180,000 216,000 316,000 415,000 553,000 700,000 789,806
Domestic Market 246,250 285,000 318,000 352,000 365,000 378,000 450,000 500,000
Total 522,250 670,000 830,000 1,058,000 1,293,000, 1,621,000 2,010,000 2,236,614
Source: NASSCOM 2009;
Exhibit 15 shows the number of professionals employed in the Indian IT-BPO sector. Since the beginning of the
financial crisis of 2007, the Indian IT-BPO sector has added nearly half a million jobs to service foreign accounts.
Over the same period, the U.S. lost in excess of six million jobs, many of which were in the IT and BPO industries.
It represents a major structural shift in U.S. companies‘ perception of their workforce. Until recently, the off-shore
employees and contractors were largely seen as a supplementary force created to compliment the core on-shore
team. The off-shore workforce was structured and developed on the premise of taking over repetitive low-value
tasks, while the domestic personnel was responsible for maintaining company‘s operations. However, the
expansion of off-shore capabilities has resulted in many business functions being performed strictly from off-shore
locations with no or very few on-shore staff available to support operations if the off-shore workforce was not
available. Consequently, it had a profound effect on the workforce structure. In a 180-degree reversal of roles, the
on-shore employees became complimentary to the off-shore personnel, and workforce reduction decisions are
now more likely to affect on-shore staff (nice-to-have positions) than off-shore employees (necessary roles).
The off-shoring trends observed in the U.S. are somewhat contrary to the practices implemented in other leading
developed countries. Unlike the U.S. where off-shoring continues to grow during the financial crisis, UK has seen
jobs coming back into the country (Nick Heath, On-Line) and Japan, despite the rising domestic unemployment,
still maintains its practice of keeping the Japanese workforce at the expense of jobs being eliminated abroad.
5.2.3 CHANGES IN U.S. EMPLOYEMENT – DECLINING INDUSTRIES
According to the statistics presented by the U.S. Census Bureau, most of the 14 distinct industries showed
employment gains between 2000 and 2007. 3 of them, however, showed declines in employment numbers.
The chart below illustrates percentage change in employment for each industry with the year 2000 used as a base
year.

Exhibit 16: U.S Employment Gains by Industry (2000 to 2007)
U.S. Employment Gains by Industry

160%
150%
140%
130%
Percent
120%
110%
100%
90%
80%
Agriculture and related industries Mining Construction
Manufacturing Wholesale trade Retail trade
Transportation and utilities Information Financial activities
Professional and business services Education and health services Leisure and hospitality
Other services Public administration
Source: U.S. Census Bureau, 2008
Two of the three declining industries - Manufacturing and Information - have been previously identified by several
studies as the most susceptible to off-shoring, and to date both have been impacted by off-shoring the most. The
manufacturing industry has been moving operations out of the U.S. since the 1970s, and the observed pattern is a
logical continuation of the known trend. The information industry, of which IT and many of the BPO functions are
an integral part, started off-shoring fairly recently. Despite the ongoing shift to technologically-intensive operations
in most areas, IT showed overall employment decline between 2000 and 2007.
Exhibit 17 illustrates the correlation between goods imports and U.S. Manufacturing employment.

Exhibit 17: Imports from China and U.S. Manufacturing Employment (1997 to 2006)
Imports from China and U.S. Manufacturing Employment

300,000 25,000
250,000
20,000
Thousands U.S. Workers

Millions of U.S. Dollars
200,000
15,000
150,000
10,000
100,000
5,000
50,000
0 0
Imports Employment
Employment in other industries identified by the various off-shoring studies has increased between 2000 and 2007.
However, with the release of the confirmed employment data for the 2008-2009 period, this picture is expected
to change dramatically. For instance, many of the scientists, mathematicians and IT professionals were drawn to the
financial industry, which went through a phase of extraordinary growth between 2003 and 2007, to work on the
computerized investment and forecasting models. The massive 2008 and 2009 layoffs in the financial sector - in
2008, it was reported that Wall Street alone let go over 110,000 employees - are likely to reveal higher
unemployment amongst this group. It must be noted, that the industry employment estimates suggest that two out
of five jobs created between 2002 and 2007 came from the housing industry. The housing bubble burst and the
ensuing financial crisis are expected to permanently eliminate a solid portion of the jobs created during the times
of the inflating bubble. The biggest percentage of these jobs can be mapped to the incomes levels 2-5 - the
rich/middle class income levels - on the income distribution pyramid presented earlier.
Exhibit 18 shows comparative employment in the manufacturing and information industries. It was noted earlier,
both industries are among the most off-shored industries in the U.S. Despite the economic growth of 2003-2007,
both heavily off-shored industries show a substantial employment decline. While the trend is not surprising for
manufacturing – after all, the manufacturing industry has been a target of off-shoring since the 1970s and the
dwindling employment numbers have become a norm – it is unexpected to observe a similar trend in the
Information industry. The observation suggests that in spite of the expanding economy and shortage of skilled
workers, both industries reduced their numbers domestically. As the demand for manufactured goods and
information services did not decrease in the same time frame, the slack was picked up by the facilities and service
centers located abroad.

Exhibit 18: Employment Losses in the Manufacturing and Information Industries (2000-2007)
U.S. Employment in Manufacturing and Information Industries

25,000 4,200
4,000
20,000

3,800
15,000
3,600
10,000
3,400
5,000
3,200
0 3,000
Manufacturing Information
The 2008 The Hackett Group survey concluded that large companies are accelerating their use of off-shore
outsourcing, and as many as a quarter of IT jobs at Global 1,000 firms may be moved offshore by 2010. According
to the research, these companies will move about 350,000 corporate jobs off-shore between 2008 and 2010. Over
50 percent of the jobs will be in IT, with the balance in finance, human resources and procurement. The company‘s
conclusion confirms the accelerating pace of high-value white-collar job off-shoring. According to Michel Janssen,
Hackett's Chief Research Officer, the white-collar off-shoring trend "is a confirmation of a mega-trend, similar to
what happened in the manufacturing sector several decades ago. And while 25% of the IT jobs may head overseas
in the next two years, over the longer term that figure could hit 60%. In some organizations, it could reach 80%.‖
5.2.4 OFF-SHORING BY NUMBERS: FUTURE OF OFF-SHORING
Forrester Research estimated that by 2015, 3.4 million service industry jobs and up to $136 billion in wages will
move overseas to countries including India, Russia, China and the Philippines from the U.S. The Hackett Group
projects 25 percent of IT jobs in large companies will head overseas, with the off-shoring reaching eventually as
high as 60 to 80 percent. A Deloitte Research survey reports that the world's 100 largest financial-services
companies expect to transfer about $356 billion of their operations and two million jobs offshore over the next
five years.
The Hackett Group identifies off-shoring rate as ―accelerating‖. Christopher Gentle, a director at Deloitte
Research, states that ―Off-shoring is gaining momentum at a rapid pace". Exhibit 19 illustrates the projected off-
shoring employment in the Indian IT-BPO industry. The industry growth is projected to continue at the slower

pace until the global economy begins its recovery, which is expected to take place in 2010. Once the recovery
starts, off-shoring is expected to accelerate once again until it the off-shoring market reaches a saturation point at
which the off-shoring pace would begin to slow down.
Exhibit 19: Projected Indian IT-BPO Sector Employment (2000 to 2015)
Projected Indian IT-BPO Sector Employment

3,000,000
2,500,000
2,000,000
Workers
1,500,000
1,000,000
500,000
IT, BPO and Services Employment Projected IT, BPO and Services Employment
Source: Alexandre Pestov 2009; NASSCOM 2009;
Exhibit 20 shows the sector-wise break-down of revenues in the Indian IT, BPO and R&D industries. Despite the
ongoing global recession, most of the sectors show enormous growth over the last five years. While the revenues
of the domestic-oriented services increased at a comparable pace as the export-oriented sectors, the Indian
domestic consumption of services still lags substantially behind the exports, indicating that India‘s IT-BPO sector
remain an export-oriented industry. From the off-shoring perspective, it indicates that in the last five years off-
shoring has tripled in its magnitude and the trend is expected to continue for some time. The trend suggests a
interesting observation about the lower-value added part of off-shoring. Over the same period, hardware
manufacturing actually decreased, suggesting that the Indian industries gear towards higher-value added tasks to
the extent that R&D revenues eclipsed those of the hardware industry.
Exhibit 20: Indian IT, BPO and R&D - Sector-wise Revenue Break-up (2005 to 2009)
Sector 2005 2006 2007 2008 2009E
IT Services-Exports 10 13.3 17.8 23.1 26.9
IT Services-Domestic (India) 3.5 4.5 5.5 7.9 8.3
BPO-Exports 4.6 6.3 8.4 10.9 12.8
BPO-Domestic (India) 0.6 0.9 1.1 1.6 1.9
Engineering Services and R&D, Software Products-Exports 3.1 4 4.9 6.4 7.3

Engineering Services and R&D, Software Products-Domestic

0.7 1.3 1.6 2.2 2.3
(India)
Software and Services Revenues-Export 17.7 23.6 31.1 40.4 47
Software and Services Revenues-Domestic (India) 4.8 6.7 8.2 11.6 12.6
Hardware-Exports 0.5 0.6 0.5 0.5 0.3
Hardware-Domestic (India) 5.1 6.5 8 11.5 11.8
Source: Alexandre Pestov 2009; NASSCOM 2009; Notes: E: Estimates
5.3 OFF-SHORING BY NUMBERS: CONCLUSION
The ―Off-shoring by Numbers‖ section leads to several conclusions. Firstly, the observations suggest that the pace
of off-shoring has accelerated in recent years, resulting in a greater redeployment of labour. The ―time lag‖ effect
and economic growth of 2003-2007 concealed the job losses due to off-shoring and allowed for these jobs to be
spawned in other areas. The economic crisis of 2007 eliminated many of these newly created jobs. The ongoing
recession revealed that off-shoring indeed has greater impact on the employment than previously thought. The
Federal Reserve Bank did a study of the job losses during the 2001 recession. The findings of the study concluded
that 89 percent of the jobs were lost for structural reasons, meaning these jobs are not expected to recover. The
boom of 2003-2007 resulted in two out of five newly created jobs to be linked to the housing industry. With the
housing collapse in the U.S., these jobs are not expected to come back. Therefore, the redeployment of labour due
to off-shoring was funnelled to industries that are now undergoing structural changes due to the ongoing
recession. As a result, in the long run the initial redeployment of labour will translate into significant job losses that
are not yet reflected in statistics.
Secondly, despite the economic growth of 2003-2007 the heavily off-shored industries still recorded employment
losses. While adequate statistical data has not yet been compiled for the 2008-2009 periods, it is expected that the
job losses in industries identified as susceptible to off-shoring have accelerated during the recession. The
observation leads to a conclusion that in spite of the previously developed conclusions that off-shoring does not
lead to job losses, it, in fact, has a substantial impact on the domestic industries in terms of employment.
Another notable observation is the structural change in the U.S. companies‘ view on their workforce. It has been
determined that the U.S. companies‘ perception of the roles of off-shore and on-shore employees has undergone a
significant change. The off-shore workforce is now viewed as an integral part of their operations, while many on-
shore roles are received as ―nice-to-have‖. As a result, during the dire times U.S. companies favour keeping foreign
workers instead of domestic employees, which is reflected in the employment numbers in the U.S. industries vs.
the Indian IT-BPO sectors during the recession.
Lastly, the pace of off-shoring is accelerating. This is reflected in the expanding capabilities of the off-shore centers
and service providers that can offer a broader range of services, expanding both laterally and vertically in the
service areas. Combined with the recession, greater levels of off-shoring are expected to be reflected in the
employment levels of the off-shoring industries in the nearest future.

6 OTHER CONCIDERATIONS
6.1 RETRAINING OF HIGHLY-SKILLED OCCUPATIONS
In many instances off-shoring implies permanent job relocation abroad. While an argument can be made that off-
shoring does not necessarily encompasses job losses in the U.S., it certainly results in labour redeployment, as
highlighted by numerous studies. In itself, the labour redeployment is expected to benefit the economy from the
movement of skills and experience to other, preferably high value-added, areas. In some cases, there will be
exceptions to this general notion. Ron Blackwell, Director of Corporate Affairs of the AFL-CIO, participating in an
―Off-Shoring Roundtable‖ facilitated by McKinsey & Company exemplifies the exception with great clarity:
―Three weeks ago I met a young engineer at Boeing, in Wichita, Kansas. She was a Ph.D., aerospace
engineer, third generation Boeing employee. Her father was a machinist and he saw manufacturing just
coming up from under him. He didn't want his family to follow him into this business. So he sent his
daughter to get an advanced degree in aerospace engineering. Now that company is threatening to move
the work of these engineers offshore unless they get the right settlement at the bargaining table.
This anecdote is undercutting one of the other comforting narratives, which is that somehow, if you work
with your hands, of course you could lose your job, but, if you get an education, you'll keep your job.
Well, many people did go get an education and they're especially bitter about this trend for that reason.
When we did a large survey of a number of issues, in the (American electoral) swing states, we asked:
"Which of the following two statements do you agree with? One, business should find the cheapest place
to do its work to remain competitive and a strong company. Two, American businesses have a moral
responsibility to hire Americans." Sixty-six percent of the people said, companies have a moral
responsibility to hire Americans. There's a moral and a political dimension to this, which is immediate, and
could do harm, as Jeff warned. The palliatives that are currently before people are not going to work.
Leaders can say, ‗Don't worry, we're going to train you.' But what is an aerospace engineer going to be
trained to do? To become a doctor? A lawyer? A Wall Street plutocrat? It's not just an adjustment
problem for workers that are left behind. It's a question of, how are we going to make an environment
where people can make a living in the advanced countries, even as the developing countries move forward
and build world-class companies?‖
Ron brings up an important question: how do you retrain those who reached the pinnacle in a particular high-value
occupation? In the case described by Ron, the aerospace engineer has likely spent nearly a decade training for her
future job. During that time, she has been out of the labour pool, likely accumulating personal debt or receiving
support from others in order to complete her education. The efforts will be in vain if the job does not materialize
or if full benefits of the job will not be extracted as the employment will be cut short. From the social perspective,
her training becomes a liability for society, since it used resources, i.e. through savings, debt or financial support,
but is not expected to provide any tangible benefits due to the abruptly unanticipated lack of demand.
In the case of natural evolutions of industries, the workforce demand can be forecasted with a certain degree of
accuracy for years ahead. Conversely, off-shoring can reshape industries from the labour perspective in a very
short time. On its own, an industry can take decades to go from growth, and maturity to a state of decline and
potential new entrants will recognize the trend sooner to avoid entering the declining field. It is not the case with
off-shoring. Off-shoring may take three months to two years to complete. It will not impact the entire industry
within the same short timeframe. However, by the time a prospect completes his education, the industry may have
already significantly changed, and domestic job opportunities would no longer exist in it.

The free market argument is valid here as well. If the economy cared about horse carriage makers the
advancement of automobiles would have been impeded by resources being directed to the ―wrong‖ field. The key
difference with off-shoring, however, is that the industry continues to exist and flourish. Cases similar to the one
described by Ron will deter prospects from pursuing careers in certain industries. Eventually, these industries will
find themselves unable to staff all required positions with domestic workers and will be forced to seek and rely on
the overseas workforce. It has already become evident in some areas. The 2006 research from Duke and Booz
Allen Hamilton identifies the correlation between the dwindling pool of scientists and engineers and the off-shoring
driven by the shortage of qualified domestic labour. The survey states the companies‘ need to gain access to
qualified personnel as a key consideration in the decision to off-shore high value-added work.
Perhaps, an education investment made in the U.S. and subsequent employment of the U.S. worker is not as
efficient as using services of someone trained in India or China at a fraction of the cost. The cost/benefit ratio is
likely to favour the latter arrangement. When done individually, a career choice in the off-shored industry will be a
burden on the individual due to the time and resources investment that will never be recouped. However, the
accelerating pace of off-shoring is likely to inflate the numbers of those who found themselves trained for positions
that no longer exist in the U.S. As a result, the situation will weigh down on the U.S. economy.
The case of the aerospace engineer may have a high visibility. However, in terms sheer numbers, the highly-
educated workforce (Ph.D and Master‘s level) represents a smaller fraction of the workforce than the more
commonly found Bachelor‘s degree and below. For those who attained a Bachelor‘s degree or professional
certification in the field that is being actively off-shored the blow will not be as significant as for someone who has
invested in Master‘s or Doctorate degrees. The shorter time frame required for completing either a Bachelor‘s
degree or professional certification will allow for a quicker rerouting and retraining of the professionals who find
themselves out of work. However, given the larger number of those who take Bachelor‘s degree or professional
certification, the investment of the four-five years will be observable on the macroeconomic scale.
6.2 VULNERABLE GROUPS
The financial crisis of 2007 exposed the vulnerability of the U.S. social programmes. It was announced in May 2009
that the ongoing financial crisis has put both Medicare and Social Security on the fast track to bankruptcy. While
many economists forecasted more than a decade ago that both programs were expected to eventually run out of
funds, the financial crisis had a profound effect on the programs and both will be running out sooner than
expected. The funds‘ trustees estimated that the Medicare hospital trust fund will be insolvent by 2017, two years
earlier than projected last year, and the Social Security trust fund will be bankrupt by 2037, four years earlier than
last year's report had predicted. Government officials, led by Timothy Geithner, stated the reports emphasized the
need for a healthcare reform.
Amongst the most probable solutions for the Social Security insolvency is a retirement age hike. In 2005 then-
Federal Reserve Chairman Alan Greenspan issued a call to deal with the looming Social Security insolvency. In his
warning to Congress, Greenspan stated that beneficiaries may have to accept lower benefits and workers may
have to work longer. Shortly after Greenspan‘s address, Sen. Chuck Hagel of Nebraska proposed to raise the
retirement age from 67 to 68.
For the retirement age increase to be effective, the workers must be able to remain the in the workforce. Off-
shoring results in labour redeployment. It was mentioned earlier that off-shoring takes an increasingly upward path
on the job value chain, reaching occupations that require special training and experience. In situations when the
off-shoring processes impact occupations traditionally held by mature workers it may possess a considerable risk
to the social programmes and the economy in whole. Retraining of workers over a certain age is a difficult task.
The time and resources required for retraining may not be recouped by the post-retraining employment. Another

concern is the competitiveness of the retrained mature workers and willingness of companies to hire these
workers. With just a few years left until their retirement, mature workers may not be as attractive job prospects
as the younger generation from the employer perspective. Mature workers carry a wealth of experience
accumulated over the decades of their careers. However, in a new environment this experience may not be fully
advantageous or applicable. On the down side, mature workers would be expected to retire in a fairly short time
and may not have the same stamina for carrying out exhausting assignments requiring long hours. These and many
other considerations will likely daunt those who might otherwise re-train to continue their workforce
participation. Re-training discouragement will lead to premature retirement or acceptance of a lower value job. In
either case, the situation will burden the economy through the additional strains on the social programmes or
migration of workers to substantially lower value job categories.
New workforce entrants comprise another highly vulnerable group that might be impacted by off-shoring.
Typically, any new career begins with an entry-type job. Coincidentally, in many industries, entry jobs are now
considered the cornerstone of off-shoring. The low entry barriers, no or little experience requirements, highly
coded and repetitive nature of the jobs allow young professionals to acquire necessary knowledge about the
company‘s business and the industry. The same credentials allow these jobs to be off-shored with minimal impact
to productivity. Companies strive to off-shore or outsource laborious support tasks. From the history of off-
shoring, these jobs were the first to transition overseas. Companies engaged in off-shoring gained necessary
expertise to effectively identify, transfer and then perform these activities from the off-shore locations at a fraction
of the on-shore cost. As a result, many of the entry-level positions are now considered as ―must off-shore‖ for
their low value within the company and savings opportunities. This trend presents a formidable challenge for new
workforce entrants in the future. The first stepping stone in their careers is in the process of being transferred off-
shore and it is unlikely to come back, as the pace of off-shoring accelerates. Lack of opportunities for fresh college
graduates and new entrants in a blue-collar workforce will create a void that with time will expand further up the
job value chain. The low prospects of getting a job will deter potential employees from pursuing studies and then a
career in a certain field. Eventually, the thinning of the existing workforce due to retirements and other factors will
become prominent. Beyond a certain point, the lack of qualified domestic replacements for the workers leaving the
industry will impede industry growth. In order to stay competitive, industries are likely to seek qualified personnel
overseas, which would lead to additional off-shoring of the tasks that were initially intended to be kept on-shore.
6.3 IMPACT ON EDUCATION
The before mentioned research from Duke and Booz Allen Hamilton confirms the correlation between the
steadily declining pool of science and engineering talent in the advanced economies. Respondents to the survey
cited the need to ―gain access to qualified personnel‖ as a key factor for product development and engineering
work. The study concluded that U.S. companies are now sending work off-shore, rather than importing foreign
workers. The key driver of this is not merely the cost of talent, but the availability of talent as well.
Exhibit 21, Exhibit 22 and Exhibit 23 display the historical numbers of Bachelor, Master‘s and Doctorate Degrees
earned by field between 1970 and 2006. The charts are limited to the occupations/fields identified earlier as
susceptible to off-shoring.

Exhibit 21: Bachelor's Degrees Earned by Field (1970 to 2006)
U.S.: Bachelor Degrees Earned by Field

180%
160%
140%
120%
Percent
100%
80%
60%
40%
20%
0%
Architecture and related services Biological and biomedical sciences
Business Communications technologies
Computer and information sciences Engineering
Engineering technologies Mathematics and statistics
Physical sciences and science technologies Precision production
Source: U.S. Census Bureau 2009, Alexandre Pestov 2009
Exhibit 22: Master's Degrees Earned by Field (1970 to 2006)
U.S.: Master's Degrees Earned by Field

250%
200%
Percent
150%
100%
50%
0%
Business Communications technologies
Computer and information sciences Engineering
Engineering technologies Mathematics and statistics
Physical sciences and science technologies Precision production

Exhibit 23: Doctorate's Degrees Earned by Field (1970 to 2006)
U.S.: Doctorate Degrees Earned by Field

140% 700%
120% 600%
100% 500%
Percent
Percent
80% 400%
60% 300%
40% 200%
20% 100%
0% 0%
Business Computer and information sciences
Engineering Engineering technologies
Mathematics and statistics Physical sciences and science technologies
Communications technologies
The chart displaying Bachelor Degrees earned shows the declining interest in physical science and science
technologies, engineering, engineering technologies, mathematics and statistics. The chart shows interest in the
computer science field, which directly correlates to the periods of IT boom in the mid-1980s and late 1990s. While
interest in precision production demonstrates solid growth, which is contrary to the off-shoring trend, its numbers
are negligible comparing to other fields.
Very similar trends can be observed in the levels of Master‘s Degree attainment. The interest in physical science
and science technologies, biological and biomedical sciences, engineering, engineering technologies, mathematics
and statistics remains stagnant over the last 15 years. And while precision production shows a significant leap
forward in 1995, 1998 and 2004, the number of students working towards the degree in this field is considerably
lower than that of other study areas.
The Doctorate‘s degree attainment follows along the same lines as Master‘s and Bachelors. The attainment of
doctorate degrees in communication technologies was given a separate y-axis due to the high volatility of the
numbers of degrees earned over the last three and a half decades. A notable observation should be made about
the degree attainment levels between 1994 and 2002. During these year, the number of doctorate degrees earned
in most fields steadily declined.
Highly visible job off-shoring deters prospective students from pursuing a career in a particular field. For instance,
engineering and computer science are closely tied to the manufacturing and IT-BPO jobs. Both fields are seen as an
epicentre of job relocation abroad. Daunted by the prospects of joining a field that is likely to be off-shored in the
nearest future, students opt out from study certain disciplines in favour of pursuing education in other fields that
are seen as more ―stable‖ in the long run. Eventually, it will cause, or may have caused already, a shortage of
qualified workers in many areas. This type of shortage forms a vicious circle, where off-shoring discourages
students from majoring in a particular field, which leads to the shortage of qualified labour in some fields, which in
turn fuels off-shoring. Regardless of this phenomenon‘s root-cause, the future flow into the field is expected to fall

further due to the general discouragement of the prospects. Exhibit 24 illustrates the results of a student survey
conducted to measure the sensitivity to off-shoring when choosing a major amongst computer science and
engineering students.
Exhibit 24: Importance of Off-Shoring in Career Choices
Importance of Off-Shoring in Career Choices

70%
60%
50%
Percent
40%
30%
20%
10%
0%
Important Unimportant
Source: Alexandre Pestov 2009;
6.4 OTHER STRATEGIC ISSUES
6.4.1 LOSS OF TECHNOLOGICAL LEADERSHIP
The R&D off-shoring can have much greater effects on the U.S. economy than a mere loss of jobs. R&D drives
technological innovation and competitiveness in enterprises. Therefore, R&D relocation may have undesired
consequences for the U.S. technological potential. The concerns about technological leadership have been raised
on many levels of the private and public sectors. The U.S. branch of the IEEE has taken a formal position on the
subject, which strongly opposes unregulated off-shoring. In a formal position paper, the organization states that off-
shoring causes unemployment among U.S. engineers, and poses a very serious, long-term challenge to the U.S.'s
leadership in technology and innovation (IEEE-USA, 2004).
In terms of the potential job losses, off-shoring of R&D centers is likely to represent a very small percentage of the
total employment involved in relocation. Unlike many other off-shored functions, such as call centers and data
entry, research laboratories do not require a large workforce to operate. Instead, the reduction or stagnation of
R&D centers in the U.S. in favour of developing laboratories abroad, will impact the U.S.‘s ability to attract new
talent.
The number of graduates with Bachelor, Master of Doctorate‘s degrees who enter R&D field in the U.S.‘s has been
stagnant or decreasing since the 1970s. The interest in R&D amongst the prospective students has been declining.
To some degree it is warranted by the increased attractiveness of other fields, namely finance and art. However,
off-shoring and possibility of attaining position in a particular industry plays a key role in areas of study choices.
Regardless of the underlying reasons, the decrease in U.S. graduates will broaden the labour supply and demand
gap that was mentioned earlier. Historically, U.S. companies imported skilled workers to fill the positions, which
led to the talent accumulation in the U.S. Presently, the situation has changed, and the companies no longer import
talent, but rather off-shore R&D operations abroad. Sourcing R&D, product design and other creative tasks from
overseas would lead to the technology, knowledge, and knowhow accrual in foreign countries. Despite that many

of the patents produced abroad would belong to U.S. companies, knowledge, hence the technological potential,
will no longer stay in the U.S., but will be ―off-shored‖ to other countries. Combined with the declining numbers of
domestically produced scientist and engineers, the U.S. is expected to witness a substantial decline in its
technological capabilities and possible loss of the leadership in many areas.
Exhibit 25 shows the U.S. receipts and payments of royalties and fees for intellectual property between 1986 and
2005 in billions of U.S. dollars.
Exhibit 25: U.S. Receipts and Payments of Royalties and Fees for Intellectual Property (1986 to 2005)
U.S. Receipts and Payments of Royalties and Fees for IP

70
60
Billions U.S. Dollars
50
40
30
20
10
0
Receipts Payments Balance
Source: Science and Engineering Indicators 2008
To date, the U.S. has strongly maintained its leadership in creating patentable discoveries. As R&D centers are
transferred off-shore, foreign scientists and engineers gain access to the latest technology, which they can use to
advance their research and skills. Technology sharing and workforce engagement in R&D will allow for the
recipient nations to spawn companies of their own. By leveraging knowledge and experience attained while
working for foreign corporations, these new enterprises are expected to eventually compete with their U.S.
counterparts in the nearest future.
Presently, the U.S. retains its significant lead over other countries, remaining an R&D and innovation powerhouse.
However, its position is slipping. According to the 2009 study by the Economist Intelligence Unit, the U.S.‘s
innovation performance is forecast to decline slightly compared with the average in the previous five years.
Between 1996 and 2006, the growth in patent filings by U.S. residents has slowed, while other countries continue
to catch up. The Economist Intelligence Unit study states:
―The US National Science Board recently expressed concern about weakening trends in several areas of
US science and technology. Fewer articles have been published in scientific and technical journals (from
34.2% of the world‘s scientific articles in 1995 to 28.9% in 2005); inflation-adjusted government support
for academic R&D fell in 2006 for the first time in a quarter of a century. According to the Board, ―the
confluence of these indicators raises important questions about implications for the future of US
competitiveness in international markets and for the future existence of highly skilled jobs at home.‖
6.4.2 HIGH-TECHONOLOGY MANUFACTURING

Presently, the U.S. is no longer a leader of high-technology manufacturing, being surpassed by other nations (see
Exhibit 26). Manufacturing has a longer history of off-shoring than services do. However, factoring the accelerating
pace of high-value service off-shoring, a similar trend will be expected to develop in the service area in the future.
Exhibit 26: High-Tech Manufacturing Share of Total Manufacturing, by Region/Country (1985 to 2005)
High-Tech Manufacturing Share by Region/Country

30
25
20
Percent
15
10
World U.S. EU Asia China Japan
SOURCE: Global Insight, Inc., World Industry Service database; Science and Engineering Indicators 2008
Exhibit 27 shows the U.S. trade balance in high-technology goods between 2000 and 2006. As it can be seen on the
chart, since 2001 the U.S. has exported less high-technology products than it imported. In 2005, the U.S. share of
total OECD high-technology exports dropped, accounting for 15.6 percent, compared with 18.4 percent in 1996.
Exhibit 27: U.S. Trade Balance in High-Technology Goods (2000 to 2006)
U.S. Trade Balance in High-Technology Goods

40
30
Billions of U.S. Dollars
20
10
0
-10
-20
-30
-40
-50
U.S. trade balance in high-technology goods
SOURCE: U.S. Census Bureau, Foreign Trade Division 2009;

Exhibit 28 shows a U.S. trade balance for individual high-technology manufacturing industries in 2005. The chart
reflects the view that the areas impacted by off-shoring the most – high-technology manufacturing, communication
equipment and office machinery/computers – show the biggest deficit. At the same time, the areas that were
retained by the U.S. companies for on-shore production demonstrate trade surplus.
Exhibit 28: U.S. Trade Balance for Individual High-Technology Manufacturing Industries (2005)
U.S. High-Tech Trade Balance

40
20
0
Billions U.S. Dollars
-20
-40
-60
-80
-100
-120
-140
-160
All high-technology Communications Office Pharmaceuticals Scientific instruments Aerospace
industries equipment machinery/computers
Trade surplus/deficit
SOURCE: Science and Engineering Indicators 2008;
6.4.3 TERMS OF TRADE
Exhibit 29: U.S. Goods and Services Exports and Imports (1960 to 2006)
U.S. Goods and Services Exports and Imports

18
16
14
12
Percent
10
8
6
4
2
0
Exports of goods and services (% of GDP) Imports of goods and services (% of GDP)
SOURCE: Workdbank Statistics 2008;

Excessive manufacturing off-shoring and the ensuing need for additional exports impacted the U.S. terms of trade.
Off-shoring always involves obtaining inputs manufactured off-shore, which leaves the U.S. contributing an
increasingly smaller portion to the final product. Exhibit 29 shows the goods and services exports vs. imports
between 1960 and 2006.
In percentage terms, U.S. imports have been exceeding its exports since 1976. From 1990 onwards, the terms of
trade worsened and the export/import gap began to grow. As a result, the U.S. entered a three decade period of
balance of payments deficits, which continues to grow today. Exhibit 30 shows the balance of payment in the U.S.
between 1960 and 2008. A notable observation is while the balance of goods has been steadily declining in the
negative territory since mid-1970s, the balance of service trade has been going up since 1985. However, with the
increasing pace of off-shoring of services, the balance of service trade will likely to worsen in the future.
Exhibit 30: U.S. Trade in Goods and Services - Balance of Payments (1960 to 2008)
U.S. Balance of Payments

200,000
0
Millions of U.S. Dollars
-200,000
-400,000
-600,000
-800,000
-1,000,000
Total Goods BOP Services
SOURCE: U.S. Census Bureau, Foreign Trade Division 2009;
6.4.4 LOWER STANDARDS OF LIVING
The search for cheaper inputs is the core of off-shoring. A survey by Capco estimated that cost savings is a key
driver for the 92 percent of companies engaged in off-shoring. Combined with the rapid expansion of off-shoring
practices, it possesses a serious impediment for maintaining living standards amongst the U.S. middle class and low
income families.
At the early stages of off-shoring the practice is limited to certain fields and functions. The magnitude of it is also
insignificant in comparison to the domestically produced goods and services. The companies that engage in off-
shoring early realize notable productivity gains, as the cost of inputs falls while the price of output and demand for
companies‘ products remains steady. The increasing profit margins enable companies to reinvent their market
strategies, competing on price or investing more in R&D. The ensuing expansion and likely market share gains
would stimulate the expansion and hiring by the company.
The expansion of off-shoring would eventually even up the field, as more companies will start participating in
relocating certain functions abroad. The off-shoring will become a necessity for maintaining productivity levels,

rather than a new strategic opportunity for advancement. At this point, off-shoring will no longer fuel job creation
through the continuous expansion of the companies, but will result in labour redeployment. During this phase of
off-shoring workers will be forced out of the field due to the competition from the lower-waged off-shore labour
force.
In the next phase, off-shoring spreads out from manufacturing to service areas, following a similar path as
manufacturing originally did. As more and more goods and services are offered from off-shore locations, more and
more substitutes to the domestic products will come into existence. At this point, more companies will find
themselves unable to compete with the off-shore firms due to the significant price arbitrage.
To cope with the increased competition at the company and individual levels, companies and workers will be
required to make concessions in order to stay in business. From the company‘s perspective, it will be in the form
of lower margins due to the depressed output prices. From the worker‘s perspective, a lower wage will be
accepted for the same job in order to remain employed. Both factors will result in lower standards of living in the
countries that off-shore.
The common argument is off-shoring will not result in lower standards of living due to the continuous
technological advancements and labour redeployment to other high-value fields. This argument stands if two
conditions are met: the technological advancements emerge and stay domestically; and the economy must be able
to absorb labour redeployment by creating equal or higher value jobs in other areas. However, off-shoring impacts
most of the high-value industries, and the economy is unlikely to provide sufficient employment in other
occupations offering similar or better income. Also, if technological advancements are immediately applied at the
overseas facilities, the domestic companies will not benefit from the technological edge.
Data from around the world signals that off-shoring is not a minor phenomenon impacting isolated industries. The
article by Gottfredson reports that 51% of large firms in Europe, Asia, and North America use off-shore services
across a broad range of industries, including manufacturing and services. According to the Cutter survey, 54% of
responding companies outsourced IT functions to off-shore companies between 2000 and 2004. Since 2004 off-
shoring of services experienced exponential growth, indicating that more industries are likely to be affected by it
and the reach of off-shoring will widen.
The earlier sections of this paper illustrated that off-shoring has now reached all income levels below ―rich‖. This
means additional wage pressure for the middle class and lower income workers. Since no equal pressure is
expected to be applied to the highest income levels, the wage inequality between rich and middle class/low income
will rise. Due to the dominant number of the ―below rich‖ population in the U.S., the standards of living are
expected to drop as off-shoring picks up steam. Former Council of Economic Advisers Matthew Slaughter and co-
author Kenneth F. Scheve state in the July/August 2007 issue of ―Foreign Affairs‖ magazine:
―Globalization has brought huge overall benefits, but earnings for most U.S. workers -- even those with
college degrees -- have been falling recently; inequality is greater now than at any other time in the last 70
years.‖
The ―Financial Times‖ confirms the observation in ―Globalisation needs more than PR to be sold to its losers‖:
―Globalisation has many virtues. Chief among them, it has contributed to an unprecedented accumulation
of human wealth over the past decades and has helped lift a record number of poor out of poverty.
Yet globalisation has also created losers, particularly among the middle and lower classes in rich
countries...‖

7 CONCLUSION
The growth of services and material off-shoring is reflected in the statistical data reported by major off-shoring and
receiving nations (van Welsum, D., and Reif, X., 2005b). The enormous growth rate echoes the continuous trend
of globalization and integration of world economies. In the observed patterns, it is the impact of off-shoring that is
of most interest. Off-shoring is expected to lead to productivity growth, increased employment in higher value-
added occupations and other major positive changes to the U.S. labour market. However, closer examination
suggests that this is not necessarily the case, and the off-shoring results may significantly deviate from forecasts
produced by theoretical models.
Off-shoring is moving up the value chain, expanding further into the territory historically held by the upper middle
class in the U.S. Contrary to the widely accepted view that off-shoring forces domestic labour to shift to high-value
jobs, the trend suggests that off-shoring indiscriminately impacts a wide range of occupations in the manufacturing
and service industries, ranging from low value manufacturing to high-end R&D positions. Again, contrary to the
common view, the new wave of off-shoring targets the highest-value occupations, as low-wage manufacturing job
off-shoring is now the norm. Workers displaced from the R&D and high-tech sectors are forced to abandon the
lucrative industries, and the migration is reflected in the industries‘ employment numbers. The data suggests that
the room for vertical and lateral movement is restricted for those who are displaced from the highest-value
occupations. It is possible that the substantially reduced job pool would prevent displaced workers from attaining
employment at equal or better pay level, forcing an exodus from the high-value jobs to the occupations of lower
value.
The accelerating nature of off-shoring, especially in the high-value fields, should be an area of concern. The ―time
lag‖ effect and the economic boom of 2003-2007 had concealed job losses in many occupations. Studies of the past
may have potentially reached erroneous conclusions due to the double effect of ―time lag‖ and economic boom.
Both distortions, combined with the substantially lesser degree of white-collar job off-shoring in the past, are
expected to lead researchers to the flawed results. Once the timeline is extended further to capture the recession
period, resulting in the elimination of the bubble-era jobs, the losses in the off-shored industries begin to surface.
Since the peak employment period, the U.S. economy has shed nearly 6.5 million jobs, many of which were in the
off-shorable occupations. To cope with the rising unemployment the administration proposed a stimulus package
that under the optimistic scenario would create up to 3 million jobs. However, the package is not expected to
bring the employment numbers back to their original levels and create new jobs on top of it. It merely projects to
add 3 million jobs to some unspecified number. An assumption can made that the difference between the jobs lost
and the number of jobs added as projected by the administration will contribute to the U.S. unemployment for
some extended time. The 3 million jobs forecasted by the administrations would be created in the areas related to
infrastructure, such as freeway and road repairs. The largest portion of jobs will be in income levels 6 and 7. The
plan does not include a significant job creation in income levels 2, 3, 4 and 5. It should be expected that the
number of high-value jobs in the U.S. would not recover for some time, which would have a significant impact on
the standards of living in the U.S.
The structural change in a perception of the domestic and foreign workforces is another area of concern. As many
U.S. companies no longer consider their domestic employees to be the ―core‖ of certain operations, employment
volatility is expected to rise in these fields. Companies are expected to hire domestic workers to supplement their
foreign workforce during economic expansion, and lay them off when times are dire. The situation appears to be
applicable to most off-shored occupations, including the highest-value professionals.
According to the Commission on Professionals in Science and Technology, the growth in occupations for scientists
and engineers has come to an end after a period of constant growth spanning over 50 years. Growing imports of

research and development were named amongst the possible root-causes. R&D drives technological innovation
and competitiveness in enterprises. Therefore, R&D relocation may have negative consequences for the U.S.‘s
technological potential. It has been identified that off-shoring causes unemployment among U.S. engineers, and
poses a very serious, long-term challenge to the U.S.'s leadership in technology and innovation.
In the future, the off-shoring phenomenon is expected to accelerate even further. Unlike the manufacturing off-
shoring of the 1970, excessive off-shoring of services is anticipated to impact the standards of living in the U.S., as
the economy will not be able to supply adequate amounts of jobs in other high-value areas. Off-shoring enables the
substitution of expensive, hence inefficient, internally produced goods with less expensive, thus more efficient,
inputs from abroad. Presently, the better productivity of the off-shore parties is driven predominantly by the input
costs, as the actual productivity per worker still lags behind that of the U.S. Once the productivity per worker in
developing countries converged with that of the U.S., foreign companies will surpass U.S. firms in terms of their
overall productivity. The scale of off-shoring suggests that the loss of competitive edge will not be limited to a
particular company or industry, but may impact the entire U.S. economy. Assuming that foreign workers do not
demand salary raises proportional to their productivity gains, the U.S. will be forced to relinquish its wages, and
therefore its standards of living, in order to remain competitive.
The white-collar job off-shoring is expected to follow a different route than the manufacturing job outsourcing did.
Unlike the manufacturing sectors, service job off-shoring has no immediately visible effect, no strikes, no
centralized lobbying by unions (and no unions, for that matter), but also no visible sense of pride associated with
the final product. Off-shoring of manufacturing jobs could not be done on a small scale, as it is not feasible to
stretch manufacturing job off-shoring over time: a factory is either operational in the U.S. or elsewhere as a single
unit. These large job moves are immediately felt in the community, as the loss of hundreds of jobs at once has a
greater effect than the same layoff taking place over a longer time. The duration over which the process develops
controls the resentment and reaction of the community. In the service industry, jobs can be off-shored gradually,
stretching the process over a longer period. As a result, resentment and organized protests are less likely to
develop in the case of white-collar job off-shoring. What‘s worth mentioning is the sense of pride surrounding the
final product and its affect on sales. The modern history of the Detroit‘s ―Big 3‖ revealed that Americans buy
American products, even if they are somewhat inferior to the foreign offerings. A substandard car can be sold
purely on the sense of patriotism. The car represents a tangible item that is built in the U.S. It is not the same for
the services. Inputs that lead to the final product and the final product itself are not as important in service areas. It
is not easy to place a ―Made in USA‖ label on back-office operations or create a NASCAR-type cult following to
support microchip industry. The willingness of consumers to buy products influenced by the place of origin will
vary from manufacturing to services, and services off-shoring is more likely to meet consumer indifference. As a
result, consumer preferences are less likely to be the key determinant that would pressure service providers to
maintain a certain level of domestic employment.
Lastly, the excessive off-shoring of certain occupations deters prospective students from entering these fields of
studies. As a result, the U.S. may enter a vicious cycle, where shortage of qualified labour domestically will force
companies to seek workers abroad, which will result in less interest in the field due to the increased off-shoring. In
turn, it will lead to a greater shortage of qualified labour domestically and even greater off-shoring. If continued for
some time, the vicious cycle may cause a complete relocation of some industries off-shore, eliminating or greatly
reducing the U.S.‘s presence in these fields. When done in strategically important areas, most notably engineering
and aerospace, the vicious circle may significantly cripple the U.S. ability to compete on the world stage.
Presently the U.S. Census Bureau does not track off-shoring statistics. Simultaneously, the government does not
have a clearly articulated off-shoring policy. At some point, sooner or later, the federal government will be
compelled to develop and adopt a formal policy with respect to off-shoring. The resentment that off-shoring
creates (especially during the recession times), and the lack of reliable statistical information and clear

government‘s policy are likely to lead to the intensified lobbying for protectionism. Protectionist policies with
respect to off-shoring may be harmful for the U.S. economy. Instead, it is highly recommended that the federal
government establishes mechanisms for tracking off-shoring and conducting further in-depth studies of the
phenomenon before taking any action.
The extent of white-collar job off-shoring, and the degree to which it is related to other economic and structural
developments are vaguely understood. It is important to establish continuous monitoring of the off-shoring trends
to evaluate job recovery during and beyond the ongoing recession. Accurate recording of the off-shoring path
during the post-recession economic upturn is necessary for developing a deeper understanding of the overall off-
shoring trend and its behaviour with relation to economic cycles. It is probable that the most severe economic
downturn since the Great Depression skewed the employment numbers in the U.S., and jobs the in off-shored
industries are positioned for recovery. It is also possible that the recession unearthed a permanent structural
change that has transpired in the recent years, and these jobs are not coming back.
The looming Medicare and Social Security bankruptcies necessitate a further study of the age distribution in the
occupations identified as susceptible to off-shoring in the U.S. Action by the federal government to resolve the
upcoming fund crisis is imminent. Amongst the likeliest solution that would be included in a comprehensive set of
measures is the before mentioned retirement age hike, which requires appropriate pre-work for setting up and
maintaining an environment in which the workers would be motivated to remain in the workforce. However,
without a comprehensive review of the situation, any policy would be a ―hit or miss‖ approach. Similar
development is necessary for scanning the hospitality of labour environment to new the workforce entrants,
ensuring that the economy has sufficient capacity to satisfy their demand.
The ability of the U.S. economy to supply jobs of equal or greater value as those residing in the off-shorable
occupation groups should be carefully evaluated. The assessment results must be taken as a key determinant for
developing the federal off-shoring policy. It is possible that the U.S. economy would not have sufficient capabilities
for adding adequate numbers of comparable value jobs, which would lead to the inevitable decline in living
standards in the U.S. The suggested scrutiny of off-shoring by the federal government will aid developing greater
understanding of the off-shoring trends, and, as a direct result, more efficient federal strategy.
The calls for protectionist policies are inevitable in light of the historically high unemployment. However, it must
be noted that over the last 40 years, material off-shoring was linked to multifactor productivity (MFP) growth. And
while service off-shoring wasn‘t found to be related to MFP, it does provide tangible benefits to the U.S. At the
same time, multiple studies, including that of van Welsum and Reif (2005a), suggested that nearly 20 percent of
total employment could potentially be affected by off-shoring. Globalization will continue. Therefore, the U.S. has
to find a way to continue with its integration with the global economy while retaining its competitive edge. To
achieve these strategic goals, the government‘s policies should be geared towards providing companies with
incentives to keep high-value jobs on-shore. However, the lack of centralized monitoring of the situation and
nonexistent federal policy will be a major impediment. It is vital for the federal government to establish a formal
position on off-shoring, taking clearly articulated steps to develop a balanced policy that will serve the national
interests.

8 ACKNOWLEDGEMENTS
I am grateful to Andrew Mertens from Hewitt Associates for his help in preparing this paper.
I am also grateful to Professor Dave Barrows of the Schulich School of Business for his advice and inspirational
views on macroeconomics and the supply side.

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Economic Policy. 22, 4: 499–512.
Schultze, C. L. (2004) ‗Offshoring, import competition and the jobless recovery‘, The Brookings Institution, Policy
Brief No. 136, August, 2004.
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March 3.
Trefler, D., (1995) ‗The Case of Missing Trade and Other Mysteries,‘ American Economic Review, 85:5, 1029-1046.
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ON-LINE REFERENCES
CIO.com
http://www.cio.com/article/29654/The_Hidden_Costs_of_Offshore_Outsourcing?page=2
Dr. Dean F. Poeth, ―A brief history of offshoring and its relationship to manufacturing productivity‖
http://poeth.com/history.pdf
Economic Policy Institute. "Offshoring." Issue Guide. June 2004

http://www.saveyourfactory.com/articles/epi_issue_guide_on_offshoring.pdf
Nick Heath, " Recession bringing offshored work back to UK‖, 2009
http://services.silicon.com/itoutsourcing/0,3800004871,39424656,00.htm
Political History of Offshoring

http://cse.stanford.edu/class/cs201/projects-03-04/offshoring/history.html

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Alexandre Pestov

U.S. Service Job Off-Shoring

U.S Service Job Outsourcing Page 1 of 51

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Please direct all inquiries regarding this paper to alec.pestov@yahoo.com.

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 Improved productivity and competitiveness;

 Fall in real wages;

The following section elaborates on each point.

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 Does it cause net job losses in the U.S.?

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3.1 BRIEF HISTORY OF OFF-SHORING IN THE U.S.

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3.1.2 INFORMATION TECHNOLOGY, BPO AND OTHER INDUSTRIES

3.2 OFF-SHORING DRIVERS

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Exhibit 1: Supply Gap of U.S. Engineering Graduates and Demand

Supply Gap of U.S. Engineering Graduates

Number of US Master's in Engineering Graduates

3.3 WHY INDIA?

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Exhibit 2: Off-Shoring Location Chosen by Business Function

Off-Shoring Location Chosen by Business Function

India Philippines Latin America China Eastern Europe

3.4 THE ISSUE

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 Quantity of jobs lost

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4.1 OFF-SHORING BY OCCUPATION

Exhibit 3: Personal Income Distribution in the U.S. (2008)

Level Class Annual Percentage of Examples

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Exhibit 4: Personal Income Distribution in the U.S. (2008)

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Exhibit 5: Off-Shoring Progression up the Occupational Value Ladder

Exhibit 6: Occupational Groups Susceptible to Off-Shoring

Occupational Group Occupation Employment Median Mean Mean

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Installation, Maintenance, and Repair 49-0000 5,374,850 $18.60 $19.82 $41,230

4.1.1 CAN IT BE OFF-SHORED?

Exhibit 7: Percentage of Occupational Groups Susceptible to Off-Shoring

Occupational Group Occupation Mean Annual Number of Off-Shorable Percentage

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Business and Financial Operations 13-0000 $64,720 27 21 78

4.1.2 FUTURE OF OFF-SHORING

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Exhibit 8: High End Tasks Outsourced to India

Industry Transaction Processing Design and Analysis R&D

Source: The Boston Consulting Group

4.2 OCCUPATIONAL TRENDS: CONCLUSION

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5.1 OUTSOURCING TIME FRAME

5.1.1 TIME LAG IN REPORTED STATISTICS

 Vendor selection (if off-shoring also involves outsourcing)

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Exhibit 9: Indian IT-BPO Industry 2009

Indian IT-BPO Industry Revenues

Domestic Exports Exports (in 2000 dollars)

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