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Offshoring and Insourcing

In my book about recession-proof jobs, one of the criteria I used in selecting the recession-proof jobs was that they not be on the list of occupations that the U.S. Department of Labor considers vulnerable to offshoring. I can’t consider an occupation a good bet for bad economic times if the work can easily be farmed out to overseas workers.

In my book about recession-proof jobs, one of the criteria I used in selecting the recession-proof jobs was that they not be on the list of occupations that the U.S. Department of Labor considers vulnerable to offshoring. I can’t consider an occupation a good bet for bad economic times if the work can easily be farmed out to overseas workers.

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Offshoring is one of the painful results of the flat world that Thomas L. Friedman writes about. It’s important to understand that workers in the vulnerable occupations suffer from offshoring even if nobody’s job actually gets assigned to someone overseas; the fact that the work could be offshored means these workers are competing with lower-paid foreign workers, and thus their wages are depressed. On the other hand, some business writers and politicians have expressed optimism that the same flat-world forces causing offshoring are also operating in reverse, creating jobs here in the U.S. when foreign companies hire American workers.

Logically, this would be called “inshoring,” but unfortunately that term seems to be used mainly to refer to the practice of American companies outsourcing work to American workers–for example, a New York business creating a call center in North Dakota rather than in Bangalore. So instead this practice tends to be referred to as insourcing.

How much good is this doing for the U.S. economy? Not as much as it has been hyped. To begin with, a lot of insourcing is not actually a mirror image of offshoring. The classic model of offshoring is an American company contracting with a foreign company to do some of its work, as when Delta Airlines started paying Wipro Spectramind in India to handle its customer reservations. By contrast, most of the examples of insourcing that are trumpeted in the press consist of American businesses that are owned by foreign companies, as when Volvo purchased a facility in Hagerstown that formerly had made engines and transmissions for Mack trucks.

In some cases, foreign companies actually build new factories and create new jobs, as when Kia Motors decided to build a production plant in Georgia. But most of the time, foreign owners are merely taking over existing production facilities and are not creating new jobs. An economist at the Economic Policy Institute analyzed data from the Commerce Department and found that between 1991 and 2003, foreign multinational corporations acquired U.S. firms employing 4.51 million workers, but they created jobs in startups for only 290,000 workers over that same time period. In addition, although the foreign companies acquired or created enough facilities to have increased their employment of Americans by 4.8 million jobs, they actually increased employment by only 1.41 million jobs, because 3.39 million jobs in those acquired facilities were either eliminated or divested to American owners.

We’re sometimes told that it’s good for our economy when foreign companies buy U.S. facilities, and that workers in these facilities are paid 32% better than those employed by U.S.-owned companies, but the Commerce Department figures show that these gains have been exaggerated.

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