The trend to ship jobs of the service sector to a country with cheap labor is clearly formed in developed countries. Politicians see this as a threat to economic growth and development prospects, economists – as possibilities for increasing wealth and the signal of the need to invest more in education. According to some analysts, the fight against outsourcing smacks of protectionism, which could reduce the competitiveness of the U.S. economy (Partridge, 2011). In addition, such measures pave the way for the U.S. accusations that preach the principles of free trade and open markets in the policy of double standards.
Many believe in erupted exaggerated passion. According to market research firm IDC, over the past year, the number of professional programmers in the United States increased after several years of decline, reaching 2.35 million, which is four times more than the number of programmers in India and seven times – the number of their Chinese counterparts. Also, the quality of IT-services in developing countries does not always correspond to the needs of American companies. In the past, the American investment company Lehman Brothers Holdings Inc. signed outsourcing contracts with Indian companies Wipro Ltd. and Tata Consultancy Services, moving to India 20% of its operations in the field of IT (Drucker & Solomon, 2004). However, the U.S. company was dissatisfied with the quality of service and reduced the announced collaboration with Wipro and Tata.
In general, the pace of job growth, output abroad, below the rate of employment growth in the United States. According to Ms. Farrell of the McKinsey Global Institute, over the last twenty years, the United States lost 2 million jobs due to outsourcing, whereas in the last ten years it created 35 million jobs (2006). This year IBM plans to withdraw 3 thousand jobs abroad, but to increase its workforce in the U.S. by 4.5 million people (Trumbore, 2013). Outsourcing – is not the only one, not even the main, cause of the stagnation in the U.S. labor market. More detrimental to the labor market, as some experts believe, is high unemployment insurance (Hartung, 2013).
Subject of jobs withdrawal abroad is becoming more and more popular. The politicians talk about it from the stands, journalists write the editorials in national and local media, and Americans themselves think more about this problem. Democratic presidential candidate, John Kerry, said that if he wins the elections, he will cancel the tax incentives for U.S. companies that transfer jobs overseas. At the same time, Harvard professor, Gregory Mankiw, the chief economic adviser to President George W. Bush, at a special hearing in Congress said that the transfer of jobs to other countries in fact – in the interests of the United States: "If the goods or services can be produced more cheaply abroad, it aggregate welfare of the U.S. economy will grow only. Since this will lead to lower prices for consumers" (Griswold, 2012). Not only Democrats, but also Republicans reacted negatively to the statement of Mankiw. Speaker of the U.S. House of Representatives, Dennis Hastert, said that such liberal views hurt the U.S. economy (Drezner, 2004). A few Republican congressmen even demanded the resignation of Mankiw. The reasons for the politicization of the issue are simple: the U.S. economy is growing fast, though jobs are created extremely slowly. In 2003, U.S. GDP increased by 3.2%. At the same time, unemployment was at the level of 5.8% a year ago; it went down to 5.6% by February 2004. The current growth, after stagnating in 2001, received the title in the U.S. jobless recovery – restore growth without jobs.
The number of jobs in the country is growing slowly because of increasing international competition. But whereas it was mainly about jobs in the industry – for decades U.S. companies are moving their production facilities to lower-cost countries (from Mexico to China), and now has become the main outsourcing – the transfer of jobs in the service sector employs 74.5% of Americans and 80% of GDP. Americans perceive the transfer of manufacturing jobs with difficulty, but they still allow it, as the share of industry in GDP falls from the forties. The expert, regional director of the North American research Center Economist Intelligence Unit, Gerald Walsh, states that the outflow of the same jobs in key sectors of the service industry is perceived as much more painful since it is the most dynamic part of the economy, which employs the vast majority of Americans.
Indeed, more and more jobs, in the previously untouched by the globalization services, migrate from the U.S. to other countries – India, the Philippines, Eastern Europe, Russia, Malaysia, and Brazil. The leader, however, is India, where there are tens of millions of high-class English-speaking professionals willing to work for 8-12 thousand dollars a year. Salaries in India are 10-15% of the cost of a similar job in the U.S. or in Europe, which makes the country highly attractive for U.S. companies, concerned about cost reduction. By outsourcing, which is expanding in India by 50% per year, a high-tech sector of the Indian economy is growing rapidly – by 30% a year – and now stands at $ 3 billion. According to consulting firm Datamonitor, the volume of the global market of offshore outsourcing in the information technology sector increased by 80% last year.
The trend towards the transfer of jobs in the service sector is not limited to high-tech sector. Thanks to the development of communications – laying high-speed fiber-optic cables – outsourcing covered almost every sphere of services. In the same, India's IT accounts for only a quarter of the total outsourcing market (India managed to capture almost half of the global outsourcing market – of the total turnover of 25 billion in 2003, India accounted for 12 billion dollars). In countries with cheaper but skilled labor force, the transferred work includes not only software development, but also the processing of financial documentation, research and development in the industry, the development of architectural projects, call centers, insurance companies, banks and even the analysis of fluoroscopy. U.S. investment banks have experienced hard times because of the stagnation of 2001-2002, and moved about 100 thousand jobs to India – mostly in back – office processing of financial documents. Another problematic sector of the economy – airline – is also trying to reduce costs by outsourcing. In February 2004, the U.S. Delta airline announced the opening of a call center for booking tickets in India, where 1,200 people work.
Government organizations more and more resort to outsourcing. Last year, the growth market of IT-outsourcing was largely fueled by increases in the number of state orders. The largest contract that was signed in 2003 with the U.K. tax office Cap Gemini Ernst & Young worth $ 5.1 billion (the main part of the contract was then transferred for execution in India).
The outflow of U.S. jobs to other countries has led many analysts to express concerns about the future of high-tech sectors of the American economy. U.S. leaders in this sector, mainly due to the production of software, are American industries with a turnover of 200 billion dollars a year. It has traditionally been used by both the American and foreign labor, but jobs were created in the United States – in the Silicon Valley of California, in the branches of such companies as Microsoft and IBM, and all over the country in technological departments of industry giants and financial institutions.
Competition with cheap foreign programmers and engineers not only leads to a decrease in the number of jobs in developed countries, but also to a decrease in salaries of those who manage to keep a job. For example, in the United States over the past two years, salaries for programmers declined by about 15%, and the number of jobs decreased by 12%. Research firm Forrester predicts an additional 18% of the programmers’ jobs that can migrate abroad. Salaries of U.S. programmers could fall by another 10% (currently it is at the level of 50-80 thousand dollars per year).
Review of Literature
Unemployment in the United States is relatively high for two reasons. The first reason is the outsourcing. This word means that U.S. companies transferred their production to countries with cheaper labor, such as China, India, Mexico, etc. The absolute champion of outsourcing is, of course, China. Now imagine that the company brings its production to China, where workers can be paid 5 times less. It is clear that corporate profits will rise sharply. It is also clear that the corporation, having a similar plant in the U.S., will close it, and the workers will be fired. Look at this picture released by the Congressional Research Service (Jackson, 2013, p. 9). image1.jpg
These are employment index graphs. The red dotted line represents the index of employment in companies in the U.S., and the blue line represents the employment index in foreign branches of the same companies. Please note that the sharp divergence of the two lines began after 2002, which roughly coincides with the time of a sharp increase in profits of U.S. companies. It is not a coincidence since in December 2001 the WTO adopted China, and then a massive transfer of manufacturing from the U.S. to China began. This is the first reason. The second reason is a scientific and technical progress. Imagine a company that employs 1,000 people. Then invent a robot that does the same job faster, better and cheaper, because the robot does not need to be paid. The owners of these companies lay off 1,000 people. The company's profits are increasing, but unemployment increases, as well. Similar processes occur in the U.S. in recent years. Moreover, in recent years, in the United States there is a process called "revival of production" that takes place. This process means that the United States creates new industries and transfers many productions from China and other countries with cheap labor back to the U.S. This happens because many of the processes are getting automated, and, therefore, they do not need a lot of workers. That is the reason that the company that was once transferred to production in these countries has disappeared. Renowned economist and Nobel laureate, Paul Krugman, in his column in the New York Times, wrote: there is no doubt about that some high technology industries are reducing the number of all or almost all working professions. For example, one of the reasons why some high-tech industries moved to the United States in recent years is that the most valuable parts of a computer motherboard are mostly done by robots now, so cheap Asian labor force is no longer a reason for their production abroad.
Thus, a low-skilled labor force in the U.S. is gaining less demand. To see this, let us turn to statistics from the United States Department of Labor, which shows that the lowest level of unemployment is linked to people with the highest education (Bachelor's degree and higher). For example, in December 2012, it was only 3.9% while among workers with the lowest education unemployment was 11.7%, among workers with a high school degree – 8.0%, and the average unemployment rate in the country was 7.8%. So it turns out that corporate profits are growing with an expanding production while the number of jobs does not increase, or its increases are not significant. That is why the U.S. has developed a service sector and small and medium enterprises; as only this sector can compensate for the loss of manufacturing jobs. It is called "a post-industrial economy."
The systematic review that was chosen is the direction of the research methodology, which is based on consideration of an object as a complete set of elements in a set of relationships and connections between them that is a consideration of an object as a system. Speaking about a systematic approach, we can talk about some method to our actions, such that covers any kind of activity and identifies patterns and relationships to their more effective use.
The basic concepts of a systematic approach are system, element, composition, structure, functions, functioning and purpose. We expand them to fully understand the systematic approach. System is an object functioning of which is necessary and sufficient to achieve the purpose of confronting them, provided in certain environments as a set of constituent elements in the appropriate relations with each other. Element is the internal source unit, the functional part of the system, the structure of which is not considered, and taken into account only for the properties needed for the construction and operation of the system. Composition is a complete (necessary and sufficient) set of elements of the system, taken out of its structure, i.e., a set of elements. Structure is the relationship between the elements of the system that are necessary and sufficient to ensure that the system has reached its goal. Function is the way to achieve goals that is based on appropriate properties of the system. Functioning is the process of the implementation of appropriate properties of the system while ensuring the achievement of its objectives. Purpose is what the system should achieve on the basis of its performance. The target can be a particular state of the system or a product of its operation. Target value is mentioned as a system factor. We emphasize it again: the object is a system with respect to its purpose. The purpose of demanding and achieving certain functions determines the composition and structure of the system. The focus of a system’s approach is the study of the elements, the structure of the object and the placing of the elements in it.
Versatility of such methodology type is explained due to the fact that the option of classifying stages of systematic analysis is based on a principle of unity in the sequence of system analysis for any purpose and in any facility. It takes into account the different types of a system’s research and provides full integration with the logical design of a system’s theory. All of these allow us to consider the proposed methodology as a base.
Methods of solutions of complex and highly complex researches are often insufficiently formalized. This is due to the fact that the outlet direction of the majority logic unites, and more defined intuition steps of an observer at any stage may go back. In solving specific observations,, the individual steps can be skipped. Using a particular technique, different researchers may come to different solutions to the same problem and may not find the only solution.
Either technique has applicability limits beyond which it stops working. There are no universal algorithms that work to solve any researches. Therefore, the proof of the effectiveness of the use of a particular method is to establish the boundary that clearly separates the area of ??systematic analysis, where it can produce the desired result. Finally, the chosen method’s results largely depend on the ability to use it. Therefore, during this chapter, I have examined the methodology to overcome the complexity, and planned the resources that I needed.
Competition with cheap foreign programmers and engineers not only leads to a decrease in the number of jobs in developed countries, but also to reduced salaries of those who manage to keep a job. For example, in the United States, over the past two years, salaries for programmers declined by about 15% (and the number of jobs has decreased by 12%). Research firm Forrester predicts that by 2010, an additional 18% of the programming jobs can migrate abroad. Salaries of U.S. programmers could fall by another 10% (currently it is at the level of 50-80 thousand dollars per year). As a result, for two years in the U.S., the number of applicants to receive technical specialty in IT related sector had 30% reduction. In the countries where jobs are getting more and more established due to the outsourcing, the opposite is true. In India, universities increase the production of programmers by 10% per year. Similarly, the situation will develop in other sectors. According to consulting firm AT Kearney, in the next five years, the U.S. financial sector (banks, investment funds, insurance companies and pension funds) will transfer abroad about 500 thousand jobs.
Most economists do not believe that outsourcing is a threat to the U.S. and other developed economies. In their opinion, such statements – is a policy of meaningless gossips. "Jobs in the United States, abbreviated due to outsourcing abroad is quite a small number of the total number of jobs that a huge amount – about two million a year – and are declining in the U.S. economy," – says Gerald Walsh of EIU. The process of creating and eliminating jobs redistributes resources, both financial and human, to where they will be most effective. The U.S. economy is growing primarily due to increased productivity, particularly in the service sector. In the past year, productivity grew by 4.2% and in 2002 – by 4.9%. Globalization has a very large effect on labor productivity in the service sector, and the “productivity boom“ of the late nineties has been associated with the massive introduction of information technology in all sectors of the service industry – in banks, shops, hospitals and so on. Therefore, an increase in labor productivity in the high-tech sector leads to a multiplier effect in other industries, accelerating growth. Every dollar that U.S. service industries are investing in outsourcing abroad, made 1,12-1,14 added value to the U.S. economy as a whole, lowering the prices and increasing the competition between companies.
Moreover, only a small number of jobs threatened by transfer from developed countries to India. In the high-tech sector, the real losses were only observed in the lower part of the corporate hierarchy – mainly ordinary programmers have lost their jobs. Meanwhile, project managers, consultants and business analysts have kept their jobs because their work requires more skill and constant communication with customers not just via the phone, but also personally. These jobs are not affected by outsourcing. On the contrary, since the programming services will become cheaper, more qualified staff will be able to earn more.
Federal Reserve Chairman, Alan Greenspan, called the effect of outsourcing as positive for the U.S. economy. In his view, even if the short-term effects of outsourcing can lead to some job losses, in the long run, the U.S. outsourcing will only be useful. Greenspan urged to reject any protectionist measures (those being discussed in the U.S. Congress), which, in his opinion, could lead to an increase rather than a reduction in unemployment – due to lower overall efficiency of the economy. According to the head of the Federal Reserve, the number of jobs in the U.S. can only grow due to the growth of education that will give American workers an advantage over their competitors in other countries. Therefore, he urged lawmakers instead of protectionist measures to increase budget spending on education to let labor productivity grew for more Americans.
Drezner, W. D. (2004). The outsourcing bogeyman. Foreign Affairs. Retrieved August 31, 2013, from: http://www.danieldrezner.com/policy/outsourcing.htm
Drucker, J., Solomon, J. (2004). Outsourcing booms, although quietly amid political heat. The Wall Street Journal. Retrieved August 31, 2013, from: http://www.citizenstrade.org/ctc/wp-content/uploads/2011/05/wsj_outsourcingbooms_10182004.pdf
Griswold, D. (2012). Outsource, outsource, and outsource some more. CATO Institute. Retrieved August 31, 2013, from: http://www.cato.org/publications/commentary/outsource-outsource-outsource-some-more
Farell, D. (2006). The emerging global labor market. Bay Area Economic. Retrieved August 31,2013, from:http://www.bayareaeconomy.org/media/files/pdf/InnovationEdgeSept2006.pdf
Hartung, A. (2013). Economically, could Obama be America's best President? Forbes. Retrieved August 31, 2013, from: http://www.forbes.com/sites/adamhartung/2013/05/16/economically-could-obama-be-americas-best-president/
Jackson, J. K. (2013). Outsourcing and insourcing jobs in the U.S. economy: Evidence based on foreign investment data. Congressional Research Service. Retrieved August 31, 2013, from: http://www.fas.org/sgp/crs/misc/RL32461.pdf
Partridge, M. C. (2011). Exchange rates: The BRICs’ great game. Diplomatic Courier. Retrieved August 31, 2013, from: http://www.diplomaticourier.com/news/regions/brics/171-exchange-rates-the-brics-great-game