OFFSHORING, SKILLS, AND EMPLOYMENT: EVIDENCE FROM INFORMATION TECHNOLOGY WORKERS, 1995-2006

This study uses new employment micro data to evaluate how offshoring affects the employment of US-based IT workers. Our estimates suggest that workers providing services that do not require personal delivery are being displaced at firms that are offshoring. Offshoring firms appear to be retaining some of these workers and promoting them into new roles. However, workers that are displaced are less likely to be hired by firms that are offshoring, resulting in a net flow of these workers from firms that are offshoring to firms that are not. We discuss implications for workers, policy makers, and managers. The falling communication costs associated with information technologies have triggered important changes to the geographic organization of work. Among the most widely discussed of these has been the substitution of overseas labor for domestic labor, commonly referred to as “offshoring”. The term has been used by some to describe the movement of work to foreign affiliates by multinational firms, and by others to describe the outsourcing of work to third party vendors located overseas. In this study, we focus on the former definition, in keeping with the existing literature on offshoring and employment. Thus, we focus on how the expansion of affiliate employment abroad affects the employment of workers in the US, especially in skilled service industries. Our interest in this area is motivated by the recent upswing in the popularity of services offshoring, and accompanying concerns among the public, academic researchers, and policy makers about the future of American services jobs. While manufacturing jobs have long been subject to global competition, recent waves of services offshoring appear to be threatening the stability of high-wage, high-skill service jobs that were once considered safe from global competition. For instance, a number of recent press reports have linked offshoring to job displacement among US-based information technology workers and financial service workers (Amiti & Wei, 2005). Although current levels of offshoring appear to be small, recent analyses suggest that we may have so far only seen the tip of an “offshoring iceberg” (Blinder, 2006). Indeed, some of the more pessimistic estimates produced by recent studies suggest a substantial fraction of the US workforce will eventually feel job pressure from offshoring, either through displacement or increased wage competition (Blinder, 2007; Jensen & Kletzer, 2005). A potential employment shift of this magnitude may call for a reassessment of a wide array of government policies directed at trade, social insurance, worker training, regional development, and corporate tax policy. Evaluation of the potential benefits of these types of programs requires clear evidence on how offshoring impacts workers. However, there is currently disagreement not only about what jobs are at risk of being offshored, but also about whether offshoring ultimately leads to an expansion or contraction of domestic employment. For example, even if offshoring leads to the direct displacement of some workers, trade theorists argue that cheaper offshore labor inputs allow firms to expand production in other areas, ultimately creating new, better jobs to replace the ones that are lost (Baghwati, Panagariya, & Srinivasan, 2004). Furthermore, studies using skill-based categorizations of workers have generated a wide range of estimates of how many jobs are at risk of being offshored, making it difficult to understand the potential impact of services offshoring. For instance, recent estimates have ranged from essentially zero net job losses (Global Insight, 2004) to as much as 40% of US jobs at risk of being offshored (Blinder, 2007; Jensen & Kletzer, 2005). Thus, the implementation of effective policy measures requires developing a better understanding of the extent to which offshoring is displacing jobs, which workers are at risk of displacement, how offshoring-related displacement affects workers who are displaced, and how other workers are indirectly affected by offshoring. Despite the need for empirical guidance in this area, the evidence relating offshoring to employment is slim. This situation exists primarily because of an absence of nationally representative data describing the offshoring of services. Unlike manufacturing, where industry level import figures are collected, there is no definitive source of data on service imports by category. Therefore, changes in levels of service imports cannot be tied to changes in occupational demand. Most existing research in this area, primarily focused on skill-biased change and wage inequality, has related the offshoring of manufacturing to wages and employment at the industry level. However, services offshoring appears to be interacting with skills in different ways than earlier generations of technical change. Jobs that would traditionally be considered “high skill” such as programmers or financial analysis are readily offshored while less skilled service professions such as sales support have proven relatively safe. Thus, findings from manufacturing may not transfer to service occupations. Even with better access to data, however, there are still considerable challenges in producing accurate estimates of the employment effects of offshoring using industry data. Total labor offshoring is small compared to normal levels of job churn so any offshoring-related changes may be hard to detect. Some displaced workers may move within industry, making their displacements invisible in industry data. Finally, the actual decisions to offshore occur at the firm level and there may be substantial heterogeneity among firms within the same industry. Perhaps because of these difficulties, aggregate-level (industry or country) studies have produced conflicting findings about whether offshoring leads to a contraction or expansion of employment 1 Indeed, a report issued by the Government Accountability Office in 2004 was entitled “Current Government Data Provide Limited Insight Into Offshoring of Services” (Government Accountability Office, 2004) (Amiti & Wei, 2005; Desai, Foley, & Hines, 2005; Riker & Brainard, 1997). Thus, there may be considerable advantage to finding novel empirical approaches that can be used to estimate these changes at the worker and firm level. In this study, we use new sources of microeconomic data to address how services offshoring is affecting the employment of US workers. Our framework treats the decision of individual firms to offshore as exogenous, and empirically examines the relationship between firm level offshoring and worker outcomes. Our principal model relates individual worker-level employment outcomes (displacement, promotion, hiring) to individual worker characteristics, such as skills and prior job market behavior, and to various employer characteristics, including the extent of firm offshoring. We introduce two new data sources that address limitations in prior offshoring research. First, we utilize an employee-level data set on the overseas employment of information technology workers to create detailed measures of services offshoring activity. By aggregating these data to the firm level, we can estimate the extent to which different firms are offshoring information technology services work. These data, however, are not sufficiently comprehensive to track employment outcomes in the broader US labor market. Therefore, we utilize a second data set, a very large (>10 million workers), nationally representative sample of US based workers, which includes information about employee characteristics and job histories. These data enable us to examine worker flows among firms and measure the employment outcomes of individual workers. Moreover, these data provide information about workers’ occupational categories and job titles which can be linked to data on the skill composition of different occupations (through the O*Net database). Together, these two data sets, combined with other public sources of firm-level data, enable us to connect firm-level offshoring decisions to the employment outcomes of US IT workers. We restrict our analyses to the employment of IT workers because they represent the class of workers most affected by offshoring to date, and are well represented in our offshoring data set. However, lessons learned from these workers are also likely to apply to other skilled service workers, such as financial analysts, who are beginning to face significant offshore competition (Deloitte, 2007). A key part of our analysis focuses on how the relationship between services offshoring and US employment is affected by employee skills. To explore the specific role of skills, we map job titles to a skills index that categorizes jobs according to how important it is for the services performed by the worker to be personally delivered (Blinder, 2007). Our findings suggest a division in how the employment prospects of IT workers are affected by offshoring. Offshoring increases displacement among IT workers, but only among those who provide services that do not require personal delivery. For workers that are not displaced, it increases the frequency of promotion, consistent with arguments that by lowering the costs of certain skills, offshoring increases demand for other higher-value jobs (Baily & Lawrence, 2004; Kierkagaard, 2004). We also find that displaced workers are not being hired into other firms that offshore, but instead, appear to be moving to firms that are not yet aggressively offshoring. Thus, our analysis suggests three key findings: 1) that the adverse effects of offshoring are experienced by workers that perform tasks that can be electronically delivered, 2) that workers that are retained by firms may actually benefit from offshoring, and 3) the adverse impact of offshoring, thus far, has been tempered by a shift of vulnerable workers from firms that offshore to those that have not. In the next section