United States Government Accountability Office

GAO Report to Congressional Committees

OFFSHORING OF 

SERVICES 

An Overview of the 

Issues 

November 2005 

On December 19, 2005, this report was revised to correct the 

omission of (1) an individual from the list of experts interviewed

on page 68 and (2) a published source from the bibliography 

page 78. 

GAO-06-5
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

November 2005

OFFSHORING OF SERVICES 

An Overview of the Issues 

Highlights of GAO-06-05, a report to 

congressional committees 

Much attention has focused on the 

“offshoring” of services to lowerwage locations abroad. Offshoring 

generally refers to an organization’s

purchase of goods or services from 

abroad that were previously

produced domestically. Extensive

public debate has arisen about both 

the potential benefits of services 

offshoring, such as lower consumer 

prices and higher U.S. productivity, 

as well as the potential costs, such 

as increased job displacement for 

selected U.S. workers. 

In response to widespread 

congressional interest, GAO 

conducted work under the 

Comptroller General’s authority to 

help policy makers better 

understand the potential impacts

and policy implications of services

offshoring. This report: 

(1) provides an overview of 

experts’ views on the potential

impacts of services offshoring, 

(2) describes the types of policies 

that have been proposed in

response to offshoring, and 

(3) highlights some key areas 

where additional research might

help advance the debate about

offshoring. 

In its comments, the Department of

Commerce generally agreed with 

the findings of this report.

Commerce, Treasury, and the Office

of the United States Trade 

Representative also provided 

technical comments that have been

incorporated as appropriate. 

Analysts of the offshoring phenomenon have expressed a range of views 

about the likely impacts of offshoring on four broad areas. The differing 

views reflect several factors: the fact that services offshoring is a relatively 

recent development whose impact is not fully known, the limitations of 

available data on offshoring, and different theoretical expectations about 

how services offshoring will impact the U.S. economy. These four areas are: 

• The average U.S. standard of living: Traditional economic theory 

generally predicts that offshoring will benefit U.S. living standards in the 

long run. However, some economists have argued that offshoring could 

harm U.S. long-term living standards under certain scenarios, such as if 

offshoring undermines U.S. technological leadership. 

• Employment and job loss: While economic theory generally predicts that

offshoring will have little effect on overall U.S. employment levels in the 

long-run, there is widespread recognition that pockets of workers will 

lose jobs due to offshoring, though there is disagreement about the 

expected magnitude of job loss and implications for displaced workers.

• Distribution of income: Some economists maintain that offshoring 

could increase income inequality in the U.S., while others argue that 

changes in the income distribution are driven primarily by factors other 

than offshoring, such as technological change. 

• Security and consumer privacy: Experts express varying degrees of 

concern about the impact of services offshoring on the security of our 

national defense system and critical infrastructure—such as utilities and 

communication networks—as well as the privacy and security of 

consumers’ financial and medical information.

A wide range of policies has been proposed in response to concerns about 

offshoring and its potential effects. These proposals can be categorized into 

four areas by the concerns they seek to address: (1) improving U.S. global 

competitiveness, (2) addressing effects on the U.S. workforce, (3) addressing

security concerns, and (4) reducing the extent of offshoring. Some analysts 

have recommended policies in more than one area. 

Determining appropriate policy responses to the offshoring phenomenon is 

challenging due to the limited state of knowledge about the extent and 

impacts of offshoring. Nonetheless, there are some key areas where 

additional research might help advance the debate, such as trends in the 

wages and skill levels of jobs being offshored, reemployment experiences of 

workers displaced by offshoring, and the extent to which current laws and 

practices in different sectors of the economy mitigate any increased 

security-related risks posed by offshoring. In the face of limited federal data, 

researchers have begun using a variety of approaches to examine such areas.

www.gao.gov/cgi-bin/getrpt?GAO-06-05.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Sigurd Nilsen at 

(202) 512-7215 or nilsens@gao.gov. 
Contents 

Letter 1

Results in Brief 2

Background 5

While Traditional Economic Theory Predicts That Offshoring Will 

Benefit the Overall Economy, Concerns Have Been Raised about 

Four Areas of Potential Impact 13 

A Wide Range of Policies Have Been Proposed to Address 

Concerns about Offshoring’s Potential Impacts 40 

Additional Research in Key Areas May Help Advance the 

Offshoring Debate 50 

Concluding Observations 59 

Agency Comments 60 

Appendix I Scope and Methodology 64 

Appendix II List of Experts Interviewed 66 

Appendix III Comments from the Department of Commerce 69 

Appendix IV GAO Contacts and Staff Acknowledgments 70 

GAO Related Products 71 

Bibliography 73 

Table 

Table 1: Some Key Areas for Additional Research on Services 

Offshoring and Possible Approaches for This Research 54 

Page i GAO-06-5 Offshoring of Services
Figures 

Figure 1: Overall U.S. Trade Balance and Trade Balance in Services 8 

Figure 2: Timeline of Legislation Enacted in Response to TradeRelated Concerns 12 

Figure 3: Four Areas of Potential Impact of Offshoring 14 

Figure 4: Real Hourly Wage Growth and Labor Productivity 

Growth, Wages, and Labor Compensation as a Share of 

National Income 21 

Abbreviations 

BEA Bureau of Economic Analysis 

BLS Bureau of Labor Statistics 

BPT business, professional, and technical

COTS commercial off the shelf

DOD Department of Defense 

GAO Government Accountability Office 

IT information technology 

MLS Mass Layoff Statistics 

TAA Trade Adjustment Assistance 

VAT value-added tax 

WARN Worker Adjustment and Retraining Notification

WIA Workforce Investment Act of 1998 

WTO World Trade Organization 

This is a work of the U.S. government and is not subject to copyright protection in the 

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Page ii GAO-06-5 Offshoring of Services
United States Government Accountability Office

Washington, DC 20548 

November 28, 2005 

Congressional Committees 

Although “offshoring” has existed for decades in the manufacturing sector,

recently concerns have been raised about the emergence of services 

offshoring. Offshoring generally refers to the practice, by either U.S. 

companies or government entities, of replacing goods or services 

previously produced domestically with goods and services produced 

abroad. Advances in information technology (IT) and developments in the 

management of business processes, coupled with a large pool of educated 

workers in other countries, allow companies to move services work 

outside of the U.S. as part of a larger trend toward global interdependence. 

For example, U.S. companies are now able to move software 

programming, accounting, or telephone call center services to lower-wage 

locations such as India, the Philippines, and Eastern Europe. While U.S. 

government data have limitations, these data indicate that in recent years 

the imports of services associated with offshoring have been growing.1

This has contributed to heightened public debate about both the potential

benefits of services offshoring, such as lower consumer prices and higher

U.S. productivity, as well as the potential costs, such as increased job 

displacement for U.S. workers. 

Services offshoring raises issues on a wide array of topics, including the 

economy, workforce, consumer privacy, and national security. Moreover,

various pieces of federal and state legislation have been introduced, such 

as bills to restrict the offshoring of some government services or to 

provide more assistance for displaced workers. In response to widespread 

congressional interest, we have prepared this report under the 

Comptroller General’s authority to help the Congress understand and 

examine the potential impacts and policy implications of services 

offshoring. As this report may prove helpful in the deliberations of 

committees with oversight responsibilities or jurisdiction over issues 

raised by offshoring, we have addressed this report to these committees. 

Although this report focuses on services offshoring, much of our 

discussion is applicable to offshoring in the manufacturing sector as well. 

 1

GAO, International Trade: Current Government Data Provide Limited Insight into 

Offshoring of Services, GAO-04-932 (Washington D.C.: Sept. 22, 2004).

Page 1 GAO-06-5 Offshoring of Services
This report addresses three broad areas. First, it provides an overview of 

experts’ views on the potential effects of offshoring. Where possible, we 

identify empirical research that provides support for various views. Where 

experts express different opinions on the potential effects of offshoring, 

we highlight the key issues that underlie the debate. However, the report 

does not attempt to resolve such differences in views. Second, the report 

provides an overview of the various types of policies that have been 

proposed in response to offshoring. We generally categorize policy 

proposals on the basis of the broad concerns that they seek to address, 

and we provide illustrative examples of policies that have been proposed. 

Third, the report highlights some key areas where additional research 

might advance the debate about the effects and policy implications of 

offshoring. Our discussion identifies some relevant data sources and 

potential approaches for such research. 

To carry out this study, we conducted an extensive literature review and

interviewed a wide range of experts, often with conflicting points of view, 

from academia, government, think tanks, industry groups, and labor 

groups (see app. II for a list of experts interviewed). In addition, we 

attended several conferences to hear presentations on services offshoring 

and dialogue with experts during the course of our work. We conducted

our review from May 2004 through November 2005 in accordance with 

generally accepted government auditing standards. See appendix I for a 

detailed discussion of our scope and methodology. 

While traditional economic theory predicts that offshoring is likely to 

benefit the overall economy, concerns have been raised about four areas 

of potential impact: on the average U.S. standard of living, employment 

and job loss, income distribution, and security. Observers of offshoring 

have expressed a range of views about the likely impact of offshoring on 

each of these areas. These debates reflect several factors: the fact that 

services offshoring is a relatively recent development whose impact is not 

fully known, the limitations of currently available data about the extent of 

offshoring and its impacts, and different theoretical expectations about 

how services offshoring will impact the U.S. economy. 

Results in Brief 

• Potential impacts on the average U.S. standard of living: Traditional 

economic theory on international trade predicts that in the long run, 

offshoring is likely to be beneficial for the average U.S. standard of living;

however, some economists have argued that offshoring could harm U.S. 

living standards if it contributes to the erosion of important U.S. 

industries, undermines U.S. technological leadership, or leads to a 

Page 2 GAO-06-5 Offshoring of Services
decrease in average U.S. wages. Underlying this debate are different 

predictions about what new areas of comparative advantage the U.S. will 

develop as globalization intensifies—that is, what new goods and services

will be developed that are produced most efficiently in the U.S.—and 

different assessments about whether offshoring is contributing to 

downward pressure on U.S. wages. 

• Potential impacts on employment and job displacement: Many 

economists agree that offshoring is not likely to affect aggregate U.S. 

employment in the long run but acknowledge that in the short run some 

workers will lose their jobs when employers relocate production abroad. 

In addition, some economists argue that an important effect of offshoring 

and increased trade are structural changes that will generate permanent 

shifts in the types of work conducted by the U.S. labor force. However, 

there is debate about the expected magnitude of job losses related to 

offshoring, the implications of job displacement for those workers who are 

directly affected by it, and the expected direction of any structural 

changes in the labor market caused by offshoring.

• Potential impacts on distribution of income: There is disagreement 

among economists about whether offshoring is likely to significantly affect 

the distribution of income in the U.S. Some economists have expressed 

concern that offshoring could accelerate income inequality in the U.S.; 

however, others argue that changes in the income distribution are driven 

primarily by factors unrelated to offshoring, such as technological 

developments, and still others point out that offshoring could potentially 

decrease income inequality. Underlying these disagreements are debates 

about the extent to which, in the long run, offshoring will change the 

demand for U.S. workers at various income and skill levels. 

• Potential impacts on national security and consumer privacy: 

Experts express varying degrees of concern about the impact of services 

offshoring on the security of our national defense system and critical 

infrastructure—systems and structures that are essential to the nation, 

such as utilities and communication networks—as well as the privacy and 

security of consumers’ financial and medical information. Underlying 

these debates are unresolved questions about the extent to which offshore 

operations, such as software development or medical records processing, 

pose increased security risks and the extent to which current laws and 

practices mitigate these risks. 

Analysts of the offshoring phenomenon have proposed a broad range of 

policies in response to offshoring, and these proposals represent a diverse 

set of potential directions for public policy in this area. We have 

Page 3 GAO-06-5 Offshoring of Services
categorized these proposals into four areas; some analysts have 

recommended policies in more than one area. 

• Proposals to improve U.S. global competitiveness: Many observers 

view offshoring as one aspect of a much broader process of increasing 

global interdependence and propose policies that seek to improve the 

ability of U.S. firms and workers to compete in the global economy. 

Proponents of these policies contend that increased foreign competition 

signals a need for policies to help the U.S. economy strategically develop 

new areas of comparative advantage. Examples of these proposals include 

increasing government support for research and development and 

improving education and training of U.S. workers. 

• Proposals to address effects on the workforce: In response to 

concerns about job displacement due to offshoring, many have proposed

policies to assist displaced workers who bear the immediate costs of 

offshoring. Some proposals would build on existing programs, such as 

extending the Trade Adjustment Assistance program to dislocated services 

workers. Currently, the program provides workers in the manufacturing 

sector who are dislocated due to trade with extended unemployment 

benefits and subsidized retraining. Other proposals would involve broader 

and more extensive reforms, such as instituting a wage insurance program 

to replace a portion of wages at reemployment for workers who 

experience wage declines after displacement or establishing universal or 

portable health insurance. 

• Proposals to enhance security: Some proposals seek to address 

concerns that offshoring could pose risks to national security, critical

infrastructure, or the privacy of personal data. These proposals can be 

broadly categorized into two types—those that would restrict the type of 

work that can be sent to foreign locations and those that would strengthen

requirements governing security and data protections. 

• Proposals to reduce the extent of offshoring: Some policy proposals 

address concerns about offshoring by government agencies or the private 

sector by seeking to reduce the extent of offshoring’s occurrence. For 

example, some proposals would prohibit or constrain offshoring in 

government procurement. Other proposals seek to modify firms’ 

incentives to offshore by altering tax provisions or enhancing incentives 

for firms to locate work in the U.S. 

Determining appropriate policy responses to the offshoring phenomenon 

is especially challenging due to the limited state of knowledge about 

offshoring and its effects. Nonetheless, areas where further research might 

Page 4 GAO-06-5 Offshoring of Services
help advance the debate about the impacts and policy implications of 

services offshoring include 

• impacts of offshoring on various sectors of the U.S. economy, particularly 

sectors that are emerging as new sources of comparative advantage; 

• impacts of offshoring on the workforce, such as numbers of workers 

displaced and their reemployment experiences; 

• impacts of offshoring on the U.S. income distribution, including trends in 

wage levels of jobs moving offshore; and 

• any increased security-related risks posed by offshoring and the extent to

which these are mitigated by current practices and laws. 

Further research in these areas could help inform policy making by 

providing more information about the nature and magnitude of any 

problems resulting from offshoring. Researchers have begun to use a 

variety of approaches to examine these areas, such as in-depth studies of 

services offshoring in particular industries (e.g., semiconductors and 

radiology) and statistical methods applied to current federal data series 

(e.g., to obtain information on the re-employment experiences of workers 

dislocated due to trade). While these approaches face various challenges 

and limitations, they offer some prospect for additional insights on aspects 

of the services offshoring phenomenon. 

In its comments, the Department of Commerce generally agreed with our 

observations. Commerce stated that it appreciated the thoroughness of 

our review and that the report will be a useful reference starting point for 

discussions of the causes and impacts of offshoring. Commerce, Treasury,

and the Office of the United States Trade Representative also provided 

technical comments, which we incorporated into the report as

appropriate.

Offshoring generally refers to a company’s purchases from abroad 

(imports) of goods or services that were previously produced 

domestically. A company may offshore services either by purchasing 

services from another company based overseas or by obtaining services inhouse through an affiliate located overseas. For example, a U.S.-based 

Background 

Defining Offshoring 

Page 5 GAO-06-5 Offshoring of Services
company might stop producing parts of its accounting and payroll services 

in-house and instead outsource them to a foreign-based company. A U.S.-

based multinational company might also offshore by moving parts of its 

accounting and payroll services from its domestic operations to its foreign 

affiliate, thus keeping the services in-house. Importing services that had 

previously been acquired domestically or relocating services to foreign 

affiliates both can result in the displacement of U.S. service production 

and employment, though as we discuss later, will likely have other 

economic effects, such as on consumer prices and productivity. 

However, other business activities that do not directly result in the 

displacement of U.S. workers are sometimes included in broader 

definitions of offshoring. Offshoring could include other business activities 

that may result in foregone job creation domestically but would not result 

in job losses. For example, a U.S.-based company might expand its 

accounting and payroll services through a foreign company or affiliate, but 

do so without affecting its U.S. workforce.2

Broader definitions of offshoring sometimes include the movement of 

production offshore. This definition of offshoring focuses on U.S. 

companies’ investing in overseas affiliates. Offshoring defined in this way 

could but would not necessarily result in the displacement of U.S. service 

production or employment. For example, a U.S.-based company investing 

in its overseas affiliate to produce accounting and payroll services to sell 

to other companies abroad might do so without affecting its production 

and employment levels in the U.S. 

Types of services associated with offshoring tend to be those that are 

capable of being performed at a distance and whose product can be 

delivered through relatively new forms of advanced telecommunications. 

Examples of these business functions include software programming and 

design, call center operations, accounting and payroll operations, medical

records transcription, paralegal services, and software research and 

testing. 

More than three-quarters of U.S. private-sector employees are in serviceproviding industries; however, not all services jobs are likely to be at risk 

Types of Services 

Associated with Offshoring 

 2

For more information about the definition of offshoring, see appendix II of GAO-04-932. 

Page 6 GAO-06-5 Offshoring of Services
from offshoring.3

 Many services jobs, such as child care providers and 

hairdressers, require face-to-face contact with customers. Other jobs, such 

as transportation workers, construction workers, and auto mechanics, 

require hands-on contact with physical equipment. In addition, some work, 

such as marketing and creative design, may be done more efficiently and 

productively in close proximity to customers and other workers. 

While government data on trade and foreign direct investment offer 

limited insight into the extent of offshoring, the data provide some 

evidence that services imports are growing.4

 Trade data from the 

Department of Commerce’s Bureau of Economic Analysis (BEA) show

that imports of services associated with offshoring are growing. For 

example, U.S. imports of business, professional, and technical services 

grew from $20.8 billion in 1997 to $40.7 billion in 2004—an increase of 

about 10% per year.5

 It is important to note that these import data show 

that U.S. entities have been purchasing these services offshore, but the 

data do not indicate whether these entities had previously been 

purchasing these services from domestic U.S. sources. 

The U.S., Canada, and the United Kingdom are among the world’s leading 

exporters of services. According to World Trade Organization data, the 

U.S. was the world’s largest exporter of commercial services in 2004.6

 BEA 

data show that in 2004 Canada and the United Kingdom accounted for 

42 percent of the U.S.’s imports of unaffiliated business, professional, and 

technical (BPT) services, or BPT services traded between firms that are 

separate entities from each other. 

The U.S. currently exports more services than it imports and therefore 

maintains a trade surplus in services overall. In 2004, this surplus was 

nearly $48 billion, according to BEA data. However, since 1997, the trade 

surplus in services has generally been shrinking. At the same time, the 

U.S. Trade and Foreign 

Direct Investment 

 3

Goods-producing industries may also employ workers in “services” occupations (e.g.,

computer programmers at a computer manufacturer or accountants at an automobile 

company). 

4

See GAO-04-932. 

5

These numbers have not been adjusted for inflation. 

6

The World Trade Organization defines commercial services as services (as defined by the 

International Monetary Fund and Commerce Department’s Bureau of Economic Analysis) 

less government services. 

Page 7 GAO-06-5 Offshoring of Services
overall trade deficit has generally been expanding (see fig. 1), though 

imported services comprise a small share (about 17 percent) of total U.S. 

imports of goods and services. 

Figure 1: Overall U.S. Trade Balance and Trade Balance in Services 

BEA data on direct investment abroad capture U.S. multinational 

companies’ establishment of affiliates abroad, including establishment of 

affiliates to produce services. The data suggest that most services 

produced abroad by U.S. majority-owned foreign affiliates are sold to 

foreign markets rather than to the U.S. In addition, the data show that 

U.S. direct investment abroad tends to be concentrated in other developed 

countries, rather than in developing countries frequently associated with 

services offshoring. For example, according to BEA data, 61 percent of 

U.S. direct investment abroad in 2004 took place in the European Union, 

Canada, and Japan. In the same year, U.S. direct investment in developing 

countries that are frequently cited as suppliers of offshore services (e.g., 

India, the Philippines, Malaysia, and China) was relatively small—about 

Page 8 GAO-06-5 Offshoring of Services
1 percent or less of total U.S. direct investments in each case.7

 In addition, 

BEA data from 2003 show that over nine-tenths of services sold by U.S.-

majority-owned nonbank foreign affiliates are sold to foreign markets 

rather than to the U.S. 

BEA data also show that the U.S. receives large amounts of direct 

investment by other countries. In 2004, the U.S. received nearly $96 billion

in foreign direct investment. The countries that are the largest recipients 

of U.S. foreign direct investment abroad are also the largest foreign direct

investors in the U.S., with the European Union, Japan, and Canada 

accounting for 82 percent of foreign direct investment in the U.S. Foreign

firms investing in the U.S. employ U.S. workers. U.S. affiliates of foreign 

multinational corporations employed 5.3 million U.S. workers in 2003, 

accounting for 5 percent of total U.S. employment in private industries.8

Firms have been offshoring long before the recent trend in services 

offshoring. In previous decades, U.S. manufacturing companies were 

motivated to offshore because of the low costs and availability of skilled 

labor, production and supply networks in some developing countries, and 

reductions in cost of transporting goods. At the same time, U.S. companies 

divided their production processes into discrete pieces, which allowed 

them to offshore some of the components. As a result, some businesses 

offshored total production, and others offshored parts of the production 

process. Firms generally retained higher-end, higher-skilled services 

functions in the U.S., such as management, finance, marketing, and 

research and development. 

Offshoring has recently expanded into services due to three key factors. 

First, technological advances, such as advances in telecommunications 

and the emergence of the Internet, have enabled workers in different 

locations in the world to communicate and be connected electronically 

and has also facilitated the digitization and standardization of activities 

needed to complete business processes. These changes in turn have 

allowed business processes to be divided into smaller components, some 

of which could be done in different locations. For example, standardized 

software has made it possible for firms to outsource financial or human 

Enabling Factors and 

Incentives for Offshoring 

 7

BEA’s country-level foreign-direct investment data is valued on a historical cost basis. 

8

These numbers refer to employment by majority-owned nonbank U.S. affiliates of foreign 

multinational corporations. 

Page 9 GAO-06-5 Offshoring of Services
resources activities to a separate overseas company that performs them

for many clients, rather than handling the functions internally.9

 Thus, in 

many cases, the offshoring of services constitutes an outgrowth of 

outsourcing business functions. Second, countries such as India, China, 

Russia, and much of Eastern Europe have increasingly opened their 

borders to the global economy. Third, other countries have highly 

educated populations with the technical skills for performing services and 

technology-related work.

According to several business studies, a primary reason that organizations

engage in offshoring is to reduce costs.10 The cost savings from offshoring 

are primarily the result of differences between the U.S. and developing

countries in the unit cost of labor, the worker compensation (wages and 

benefits) that must be paid to produce one unit of goods or services. Unit 

labor costs are lower for certain services in developing countries primarily 

because workers’ wages in those countries are lower than in the U.S. 

However, unit labor costs also depend upon the productivity levels of 

workers. Although labor costs in a developing country may be lower than

in the U.S., it may still be possible for the unit cost of labor to be lower in 

the U.S. than the other country if U.S. workers’ productivity is much 

higher, meaning than the U.S. worker can produce many more or higher 

quality products within a certain time frame than a worker in the other 

country. Differences in unit labor costs can also result from differences in 

costs of employee benefits, such as health care and pension benefits. In 

addition, cost savings can be affected by currency exchange rates, 

countries’ tax policies, and government-provided incentives such as tax 

rebates. 

Aside from cost savings, firms may have other incentives to offshore. 

Access to a workforce in different time zones across the globe may enable 

companies to conduct work around the clock and consequently meet 

worldwide customer needs. Establishing a presence in foreign countries 

can provide companies access to overseas markets. In addition, offshoring 

 9

Rafiq Dossani and Martin Kenney, “Went for Cost, Stayed for Quality? Moving the Back

Office to India,” Berkeley Roundtable on the International Economy Paper. BRIEWP156 

(Berkeley, Calif.: University of California, Berkeley, 2003).

10Forrester Research, Inc., Offshore Outsourcing: The Complete Guide (Sept. 7, 2004); 

Booz Allen Hamilton, Business Process Offshoring: Making the Right Decision (December 

2003); The Boston Consulting Group, Capturing Global Advantage: How Leading 

Industrial Companies Are Transforming Their Industries by Sourcing and Selling in

China, India, and Other Low-Cost Countries (April 2004).

Page 10 GAO-06-5 Offshoring of Services
non-core services can enable companies to focus their resources on their 

core functions. By outsourcing non-core functions to overseas firms that 

specialize in them, businesses may also experience improvements in the 

quality of these functions. 

Although firms may have many incentives to offshore, they may also face 

disincentives to offshore. Offshoring has several costs associated with it, 

including costs to start up an offshore operation and to manage and train 

an offshore workforce. In addition, some experts have noted that wages of

workers in developing countries are rising more rapidly than U.S. wages, 

therefore shrinking the cost savings of offshoring over time.11

Furthermore, offshoring carries potential risks, such as possible political 

instability in overseas locations, less reliable civil infrastructure, exchange 

rate volatility, less developed legal and regulatory systems, and risks to 

intellectual property. 

In the last few decades, the Congress has enacted various pieces of 

legislation related to trade and increasing global interdependence, 

primarily due to concerns about their effects on the manufacturing sector.

(See fig. 2.)12 This legislation sought to expand U.S. exports; establish fair 

trading practices; assist workers, firms, and communities adversely 

affected by trade; and improve U.S. competitiveness through support for 

education and research and development. For example, trade acts of 1962, 

1974, and 1979 sought to expand U.S. exports by establishing mechanisms 

for negotiating and entering into trade agreements. The trade acts also 

established remedies for industries hurt by import competition through 

unfair trade practices. The Trade Act of 1974, as amended, established a 

trade adjustment assistance program to provide financial assistance and 

Legislation Enacted in 

Response to Trade-Related 

Concerns

 11Deloitte Touche Tohmatsu, Making the Off-Shore Call: The Road Map for 

Communications Operators (2004); Nirupam Bajpai, Jeffrey Sachs, Rohit Arora, and 

Harpreet Khurana, “Global Services Sourcing: Issues of Cost and Quality,” CSGD Working 

Paper 16 (New York, N.Y.: The Earth Institute at Columbia University, June 2004). 

However, some experts note that although wages are rising in some developing countries, 

the wage differential between the U.S. and developing countries is likely to remain sizable 

for some time to come. In addition, as wages rise in some developing countries, firms could

turn to other countries where labor costs remain low. 

12These include the Trade Expansion Act of 1962 (Pub. L. No. 87-794), Trade Act of 1974

(Pub. L. No. 93-618), Trade Agreements Act of 1979 (Pub. L. No. 96-39), Export 

Administration Act (Pub. L. No. 96-72), Stevenson-Wydler Technology Innovation Act of 

1980 (Pub. L. No. 96-480), Omnibus Trade and Competitiveness Act of 1988 (Pub. L. No. 

100-418); and the Trade Act of 2002 (Pub. L. No. 107-210). 

Page 11 GAO-06-5 Offshoring of Services
retraining to workers involved in the manufacturing of articles who lost 

their jobs due to foreign competition. In addition, the act also established 

a program that enabled manufacturing firms and communities hurt by 

trade to receive technical assistance and financial support to develop new 

strategies to improve their competitiveness. Congress enacted various 

other legislation to enhance the competitiveness of the U.S. economy by 

improving education and supporting research and development. Among 

others, these included the Stevenson-Wydler Technology Innovation Act of 

1980, which authorized the creation of various technology centers. With 

regard to services specifically, the Trade and Tariff Act of 1984 required 

the Commerce Department to establish a program on international trade in

services and to issue a report every 2 years.13 In addition, the Omnibus 

Trade and Competitiveness Act of 1988 directs the Secretary of Commerce 

to conduct a benchmark survey of services transactions. 

Figure 2: Timeline of Legislation Enacted in Response to Trade-Related Concerns 

Aside from these laws, other legislation enacted by the Congress may 

address some concerns raised by trade and globalization. For example, 

under the Workforce Investment Act of 1998 (WIA), the Department of 

Labor oversees an employment and training system operated by states and 

localities to assist displaced workers in obtaining new jobs, which could 

include workers who become displaced due to trade-related reasons.14

 13Pub. L. No. 98-573; 19 U.S.C. § 2114b. 

14Pub. L. No. 105-220; 29 U.S.C. § 2801. 

Page 12 GAO-06-5 Offshoring of Services
WIA funds may also be used to provide training for employed workers to 

upgrade their skills. 

Traditional economic theory predicts that expansion of international 

trade, including offshoring, will have beneficial effects on the U.S. 

economy, but a number of concerns have also been raised about the 

potential economic and social impacts of offshoring. We have identified 

four areas of concern about the potential impacts of offshoring: potential

impacts on the average U.S. standard of living, including average wages; 

employment and job displacement among American workers; the 

distribution of income; and national security and consumer privacy. 

Economists and other policy analysts have expressed in literature and in 

interviews with us a range of views about the likely impacts of offshoring 

on each of these areas. This diversity of views reflects several factors: the

fact that services offshoring is a relatively recent development in 

international trade whose impact is not yet fully known; the limitations of 

currently available data about the extent of offshoring and its impacts; and 

different theoretical expectations about the likely impact of expanded

trade in services on the U.S. economy. The issues identified in this section 

may not be exhaustive; others may raise concerns about offshoring that 

are not discussed in this report. Figure 3 summarizes experts’ different 

views about the four areas of potential impact for the U.S. that we identify. 

While Traditional 

Economic Theory 

Predicts That 

Offshoring Will 

Benefit the Overall 

Economy, Concerns 

Have Been Raised 

about Four Areas of 

Potential Impact 

Page 13 GAO-06-5 Offshoring of Services
Figure 3: Four Areas of Potential Impact of Offshoring 

Traditional economic theory on international trade predicts that 

offshoring is likely to be beneficial for the average U.S. standard of living 

in the long run; however, some economists have argued that offshoring 

could harm U.S. living standards. Economists who contend that offshoring 

will increase average U.S. living standards expect that it will do so through 

raising productivity (and thereby increasing national income), increasing 

average wages for American workers, and providing consumers with 

Potential Impacts on the 

Average U.S. Standard of 

Living 

Page 14 GAO-06-5 Offshoring of Services
lower prices and access to a broader range of goods and services.15 In 

addition, they expect that U.S. companies will respond to the challenges of 

international competition by developing new areas of specialization in the

global economy. Economists who argue that offshoring may lower U.S. 

average living standards focus on the possibility that offshoring may 

contribute to a decline in the strength of some U.S. industries and may 

threaten U.S. leadership in innovation and technological development. 

Some economists also focus on the possibility that offshoring may lead to

downward pressure on U.S. wages even if it has positive effects on the 

U.S. economy overall. Underlying these disagreements are different 

predictions about what areas will emerge as new sources of comparative 

advantage in the global economy, as well as different assessments about 

whether offshoring is contributing to downward pressure on U.S. wages. 

Effects on Productivity: Offshoring of services represents an expansion 

of trade into sectors of the economy that in the past were relatively 

untraded; as such, many economists we interviewed or who have 

published literature on offshoring expect offshoring to increase 

productivity in these sectors. Offshoring is expected to lead to

productivity increases through several mechanisms. First, increased 

Traditional Economic Theory 

Predicts that Offshoring Will 

Benefit Average U.S. Living 

Standards in the Long Run 

 15Productivity is a measure of the efficiency with which an economy uses its resources, 

often defined as increases in output per hour worked, and economists believe that 

productivity is key to long-term per-capita income and real wage growth. Labor 

productivity is defined as output per hour of labor worked and depends on (1) the skills (or 

“quality”) of the workforce, (2) the amount and quality of the technology available to the

workforce, and (3) additional factors such as the efficacy of management. Labor

productivity is the most commonly used productivity measure. This measure is convenient 

for researchers because the Bureau of Labor Statistics (BLS) produces quarterly measures 

of labor productivity. A broader productivity measure that is sometimes used is multifactor 

productivity (MFP), also known as total factor productivity (TFP). The BLS produces two 

sets of MFP indexes. One multifactor productivity index, produced by the Major Sector

Multifactor Productivity program, is produced for major sectors of the U.S. economy

(private business and private non-farm business), the manufacturing sector in aggregate, 

and 20 2-digit Standard Industrial Classification (SIC) manufacturing industries and the 

utility and gas industries. The multifactor productivity indexes for the private business and

private nonfarm business sectors measure output per combined unit of labor and capital 

input, while the multifactor productivity indexes for total manufacturing and for the 2-digit 

SIC manufacturing industries provide measures of sector output per combined unit of

capital (K), labor (L), energy (E), materials (M), and purchased business services (S)

inputs—called KLEMS inputs. A second multifactor productivity index, produced by the 

Industry Multifactor Productivity Program, is produced for 140 3-digit SIC manufacturing

industries and the railroad transportation industry. The industry multifactor productivity 

measures are constructed in a manner similar to the manufacturing sector series. The 

sector multifactor productivity measures and the KLEMS multifactor productivity 

measures are available annually. 

Page 15 GAO-06-5 Offshoring of Services
competition could lead to pressures for greater efficiency, causing least 

productive firms to exit the market so that firms that remain in the market 

are increasingly focused on managing for greatest productivity. Second, 

offshoring—like domestic outsourcing—could enable U.S. firms to 

specialize in the core functions in which they add the greatest value, while 

moving lower-value job functions out of the country. As U.S. firms 

reallocate resources toward higher-value activities, moving lower-value 

activities overseas, the U.S. economy overall could see productivity gains. 

Third, offshoring could enhance productivity by promoting reductions in

the costs of technology and other inputs that improve the efficiency of 

business processes. For example, some economists have argued that 

offshoring of IT services will reduce the cost of these services, making 

IT-enabled products and services more affordable and leading to increased

diffusion of productivity-enhancing technology throughout many 

industries.16 For instance, the lower cost of offshored health-record 

transcription services might encourage more health care providers to keep

digitized medical records, improving the efficiency and productivity of the 

health care industry. 

Because the acceleration in services offshoring is a relatively recent 

phenomenon, empirical evidence about its effects on the productivity of

the U.S. economy remains preliminary. However, the effects of offshoring 

in manufacturing have been observed over many years and can shed some 

light on the potential impact of services offshoring on U.S. productivity. A 

number of research studies suggest that offshore outsourcing contributed 

to productivity improvements in U.S. manufacturing. Catherine Mann, 

among others, has argued that offshoring in the production of computer 

hardware—along with domestic innovation—kept prices of new hardware 

low and thereby played a role in the deepening of IT investment 

 16IT-enabled services are broader than IT services. IT-enabled services are those services 

that have been transformed by information and communications technology, enabling them

to be digitized, codified, and fragmented and therefore able to be undertaken at any 

distance from the core business and final customer. These services include those often 

associated with offshoring, including accounting, financial analysis, call-center services, 

architectural drafting, and health-record transcription, among other services activities. See 

Catherine L. Mann, “Offshore Outsourcing and the Globalization of U.S. Services: Why

Now, How Important, and What Policy Implications,” The United States and the World

Economy: Foreign Economic Policy for the Next Decade, ed. C. Fred Bergsten and the 

Institute for International Economics (Washington, D.C.: Institute for International 

Economics, January 2005), 281-312. 

Page 16 GAO-06-5 Offshoring of Services
throughout the U.S. during the 1980s and 1990s.17 Since the mid-1990s, the 

U.S. has experienced a period of unusually rapid productivity growth, 

which many attribute to accelerating investment in IT and the rapid 

diffusion of new applications and uses that occurred in the 1980s and 

1990s.18

New Areas of Comparative Advantage: Traditional economic theory 

also predicts that increased trade—including offshoring—will increase 

economic growth, and therefore average living standards in the long run, 

by driving the economy to develop new innovative and high-value areas of 

comparative advantage—that is, to specialize in the creation of high-value

goods and services that are produced most efficiently in the U.S.19

Although increased competition due to offshoring and other trade may 

lead to contraction of production and employment within some U.S. 

industries, trade is also expected to reallocate the resources of the U.S. 

economy to sectors that are comparatively more efficient, such that U.S. 

companies are expected to eventually develop new areas of comparative 

advantage in the global economy that will lead to continued economic 

growth. Some economists contend that advantages that the U.S. has over 

less developed countries, such as a relatively high-skilled workforce, 

abundance of capital, and well-developed financial markets and 

investment opportunities will enable the U.S. economy to specialize in 

higher-value work. In particular, they expect that offshoring will 

 17Catherine L. Mann, “Globalization of IT Services and White Collar Jobs: The Next Wave of

Productivity Growth,” International Economics Policy Briefs PB03-11 (Washington, D.C.: 

Institute for International Economics, December 2003). This paper has also received 

criticism for its methodology. See L. Josh Bivens, “Truth and Consequences of Offshoring:

Recent Studies Overstate the Benefits and Ignore the Costs to American Workers,” 

Briefing Paper #155 (Washington, D.C.: Economic Policy Institute, Aug. 2, 2005).

18For a summary of this literature, including references to both case studies and analyses 

based on aggregate data and industry and firm level data, see Kevin Stiroh, “Information

Technology and the US Productivity Revival: A Review of the Evidence,” Business 

Economics 37:1 (January 2002), 30-37. See also Erik Brynjolfsson and Lorin Hitt. “Beyond 

Computation: Information Technology, Organizational Transformation and Business 

Performance,” Journal of Economic Perspectives 14:4 (fall 2000): 23-48.

19A country is said to have a comparative advantage in the production of a good or service 

if it can produce that good or service at a lower opportunity cost than another country. The

opportunity cost of producing a particular good or service, say cloth, is defined as the 

amount of production of other goods and services that must be given up in order to

produce one more unit of cloth. This concept should be distinguished from absolute 

advantage, which reflects the quantity of productive resources that must be used, rather 

than what other goods or services must be given up by using those productive resources to

make cloth.

Page 17 GAO-06-5 Offshoring of Services
contribute to the reduction or elimination of certain lower-skilled 

occupations in the U.S., but lead to the creation of new jobs in 

occupations that require higher levels of skill, shifting U.S. production and 

the distribution of employment to fields with higher returns.20

Some empirical studies suggest that the U.S. economy has historically 

developed new high-value areas of comparative advantage as trade has 

increased. The process of the U.S. developing higher-value areas of 

comparative advantage as lower-value work is moved offshore has been

observed over many years in some manufacturing industries. For example, 

in the semiconductor industry, assembly work that was originally 

conducted in the U.S. began to be moved offshore in the 1960s. Although 

this offshoring did lead to job losses in the U.S., economists Clair Brown 

and Greg Linden assert in their research that this movement also kept the 

U.S. semiconductor industry competitive and permitted the U.S. industry 

to specialize in higher-value work within the industry. According to Brown 

and Linden, as chip assembly moved offshore, U.S. firms specialized in 

higher-value fabrication work, and when fabrication work began to move 

offshore, U.S. firms specialized in design.21 Offshoring of services has not 

been occurring long enough to observe the relationship between 

offshoring and the emergence of new areas of specialization; however, 

economists J. Bradford Jensen and Lori Kletzer have argued that recent 

data demonstrates that workers in industries and occupations that are 

more likely to be affected by international trade tend to have higher wages 

and higher skills than workers in “non-tradable” service sector jobs, which 

is consistent with the hypothesis that offshoring and globalization is 

 20Some economists have also argued that in the long-term as the economies of low-wage 

trading partners grow, the U.S. will benefit from the emergence of intra-industry trade with 

such trading partners. For example, see Jagdish Bhagwati, Arvind Panagariya, and T.N.

Srinivasan, “The Muddles Over Outsourcing,” Journal of Economic Perspectives 18:4 (Fall 

2004): 93-114. Intra-industry trade occurs when a country imports and exports goods in the

same industry (for example, passenger cars are exported and imported by both the U.S and

Germany). In intra-industry trade, countries still benefit from trade, as the larger market 

created by trade permits economies of scale and consequent product differentiation. See 

also Roy J. Ruffin, “The Nature and Significance of Intra-Industry Trade,” Economic and 

Financial Review (Dallas, Tex.: Federal Reserve Bank of Dallas, fourth quarter 1999).

21Clair Brown and Greg Linden, “Offshoring in the Semiconductor Industry: A Historical 

Perspective,” Berkeley-Doshisha Employment and Technology Working Paper cwts-02-

2005 (Berkeley, Calif.: University of California, Berkeley, 2005). 

Page 18 GAO-06-5 Offshoring of Services
leading the U.S. economy to specialize in higher-value work.22 Historical 

trends also suggest that openness to trade has increased the economy’s 

aggregate output in the past. The U.S. economy has grown as trade has 

expanded, and internationally, there is some evidence that countries that 

are more open to trade typically experience faster growth than those that 

are more closed.23

Effects on Wages: Some economists also argue that offshoring could 

increase average living standards by contributing to growth in average real 

wages for U.S. workers, corresponding to offshoring’s effects on 

productivity. Economic theory predicts that average real wages should 

typically rise with average productivity rates, as workers are compensated 

for producing more per hour of work. Wages are expected to move with 

productivity growth in the long run if the share of national income that 

accrues to workers versus the share that accrues to firms’ profits and 

other income remains fairly constant. Historically, wage growth in the 

U.S. has broadly tracked productivity growth, although changes in wages

and productivity may have diverged for periods of time (see fig. 4). During

the post-World War II period, the share of national income spent on total 

compensation—wages and benefits—rose throughout the 1950s, 1960s, 

and 1970s, and has been fairly constant since 1980, averaging about 66 

percent of national income, with the remainder accruing to corporate 

profits, proprietor’s income, rental income, and net interest.24 Since 1970,

an increasing amount of total labor compensation has been spent on 

benefits rather than wages and salaries. In recent years—since the end of 

 22J. Bradford Jensen and Lori G. Kletzer, “Tradable Services: Understanding the Scope and

Impact of Services Offshoring” (July 14, 2005, forthcoming in Brookings Trade Forum,

2005: Offshoring White-Collar Work—The Issues and the Implications, Lael Brainard and 

Susan M. Collins, ed.).

23There is some consensus in the literature that openness to trade is positively correlated 

with economic growth. For a survey of this literature, see Andrew Berg and Anne Krueger,

“Trade, Growth and Poverty: A Selective Survey,” IMF Working Paper WP/03/30 

(Washington, D.C.: International Monetary Fund, February 2003). However, there is also 

some disagreement. For an opposing view, see Francisco Rodriguez and Dani Rodrik,

“Trade Policy and Economic Growth: A Skeptic’s Guide to the Cross-National Evidence,” 

NBER Working Paper 7081 (Cambridge, Mass.: National Bureau of Economic Research, 

April 1999). Robert Baldwin also reviews this literature in “Openness and Growth: What’s 

the Empirical Relationship?” NBER Working Paper 9578 (Cambridge, Mass.: National 

Bureau of Economic Research, March 2003). 

24Proprietor’s income is the income of noncorporate businesses. It is difficult to attribute to

labor or capital. Some percentage of proprietor’s income may be considered a wage paid

by the business owner to themselves for their own labor, while some percentage may be

considered a return on capital investment. 

Page 19 GAO-06-5 Offshoring of Services
the 2001 recession—wages have not moved up with productivity growth, 

and total labor compensation as a share of national income has declined 

somewhat, from 66 percent in 2001 to 64 percent in 2004. During this time, 

wages and salaries as a share of national income declined from 55 percent 

in 2001 to 52 percent in 2004. Some economists have argued that this 

divergence of compensation growth from productivity growth is 

problematic and runs counter to assertions that increased productivity 

gains from offshoring will necessarily raise average living standards; 

however, this fluctuation is considered by other economists to fall within 

recent norms. 

Page 20 GAO-06-5 Offshoring of Services
Figure 4: Real Hourly Wage Growth and Labor Productivity Growth, Wages, and 

Labor Compensation as a Share of National Income 

Note: Total compensation includes wages and salaries, plus employers’ contributions for employee 

pension and insurance funds and government social insurance. Productivity growth and hourly

compensation growth are both obtained from the Bureau of Labor Statistics’ (BLS) “Productivity and 

Costs” data series. Both of these measures are highly cyclical and have therefore been averaged 

over each business cycle (peak to peak) in order to more easily show trends over time. Productivity 

growth is seasonally adjusted nonfarm business output per hour. Hourly compensation includes 

wages and salaries of employees plus employers’ contributions for social insurance and private 

benefit plans. Except for nonfinancial corporations, where there are no self-employed, data also 

include an estimate of wages, salaries, and supplemental payments for the self-employed. Hourly 

compensation growth is deflated in recent quarters based on the Consumer Price Index for all urban 

consumers (CPI-U). The trend from 1978-2004 is based on the Consumer Price Index research

series (CPI-U-RS). 

Effects on Prices and Availability of Consumer Goods and Services: 

Traditional economic theory also predicts that offshoring will improve 

average U.S. living standards by lowering consumer prices and providing 

consumers access to a wider range of goods and services than would 

otherwise be available. Many economists expect that competition will lead 

companies to pass the cost savings from offshoring onto consumers in the 

Page 21 GAO-06-5 Offshoring of Services
form of lower prices. However, economic theory also predicts that the 

extent to which cost savings are passed onto consumers depends on how 

competitive the market is for particular goods and services. While firms in 

highly competitive markets are likely to pass most of the cost savings from 

offshoring through to the purchasers of the service, in less competitive 

markets, economic theory predicts that firms may retain some or all of the 

cost savings.25

Although the most commonly cited economic trade theories predict that

offshoring will likely have positive effects on the average U.S. living 

standard, some trade models generate scenarios under which the U.S. 

could lose either its absolute or relative position in the global economy, 

and some economists have argued that services offshoring is better 

described by these latter types of economic models.26 Models in which the 

U.S. could face potential losses from increased trade such as offshoring 

reflect the possibility that as our trading partners become more productive 

in creating goods and services that the U.S. specializes in, the economic 

position of the U.S. could be undermined. For example, Ralph Gomory and 

William Baumol have described scenarios in which a trading partner 

experiences productivity improvements in an important U.S. export 

industry, resulting in declines in U.S. national income because U.S. firms 

lose their position as the most competitive producers in the industry.27 The 

impact on the U.S. workforce, in this model, is particularly detrimental if 

the industry in which the U.S. is challenged is highly profitable and pays 

high wages, such as industries in which the U.S. has long held 

Some Economists Have Argued 

That Offshoring Could 

Negatively Impact U.S. Living 

Standards 

 25It should be noted that it is not always straightforward to determine the extent to which

price declines can be attributed to the effects of trade. In part, this is because most traded

products are manufactures and are generally subject to greater productivity growth (and 

hence steeper declines in costs) than nontraded products such as some services. 

26A summary of trade models and their applicability to services offshoring can be found in 

James R. Markusen, “Modeling the Offshoring of White-Collar Services: From Comparative

Advantage to the New Theories of Trade and FDI,” (paper prepared for the Brookings

Trade Forum 2005, Offshoring White-Collar Work: The Issues and the Implications,

Washington, D.C., May 12-13, 2005). 

27Ralph E. Gomory and William J. Baumol, Global Trade and Conflicting National 

Interests (Cambridge, Mass.: Massachusetts Institute of Technology, 2000). 

Page 22 GAO-06-5 Offshoring of Services
technological superiority or an industry that is difficult to enter.28 Other 

economists have developed different models in which productivity 

changes abroad lead to losses in the absolute or relative position of the 

U.S. in the global economy.29 The negative results of increased trade in 

these models are not specific to offshoring—they could result from other 

forms of trade too, but they are sometimes cited when concerns about 

offshoring are raised because services offshoring raises the specter of the 

movement of high-value work from the U.S. to foreign trading partners. 

Some have raised concerns that offshoring poses risks to U.S. leadership 

in innovation, particularly in high-value areas such as technology fields 

and research and development, raising the possibility that the global

economic position of the U.S. could be eroded over time.30 Economists and 

other offshoring observers have suggested a range of mechanisms through 

which offshoring could have a negative impact on U.S. innovation. Some 

argue that innovation results from solving technical problems during 

manufacturing, design, and research and development. To the extent that

this work is conducted overseas, offshoring could promote faster 

technological diffusion to foreign firms, which may over time lead to 

foreign competitors coming to dominate an industry in which the U.S. was 

once the technological leader. Some contend that offshoring portions of 

the research and development infrastructure could threaten U.S. 

technological leadership by disrupting important innovation networks in 

the U.S., such as the IT cluster in Silicon Valley in California, or the 

biotechnology cluster in Cambridge, Massachusetts, and promoting the 

emergence of such networks abroad. In addition, some express concern 

that offshoring routine or entry-level work in some technical industries 

 28In other scenarios in Baumol and Gomory’s model, the U.S. loses its relative position in 

the global economy as trading partners start to catch up with U.S. living standards, 

although in absolute terms productivity improvements abroad are beneficial for the U.S.

standard of living. In general the detrimental impact on the U.S. predicted by these models

does not result specifically from services offshoring but from any developments abroad 

that lead to foreign firms competing successfully with U.S. exports. 

29Another paper that presents a theoretical example of this situation is Paul A. Samuelson,

“Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists 

Supporting Globalization,” Journal of Economic Perspectives, 18:3 (summer 2004): 135-

146. See also Markusen, which summarizes several trade models in which productivity 

changes abroad lead to losses in the absolute or relative position of the U.S. in the global 

economy. 

30See, for example, Ron Hira’s testimony before the U.S. House Committee on Small 

Business, The Globalization of White-Collar Jobs: Can America Lose These Jobs and Still 

Prosper? 108th Congress (June 18, 2003). 

Page 23 GAO-06-5 Offshoring of Services
could hurt the U.S.’s ability to maintain an innovative workforce by closing 

off career prospects for some U.S. workers and discouraging U.S. students 

from entering those fields. 

Another concern raised by some economists is that offshoring could 

reduce average living standards for American workers by slowing the 

growth of average wages. These economists raise the concern that even if 

offshoring promotes economic growth and productivity, it could decrease 

labor’s share of national income by subjecting American workers to direct

competition with foreign workers, leading to slower growth or even a 

decline in average wages.31 As we previously noted, recent statistics show 

a dip in the share of national income accruing to total worker 

compensation in recent years, and some economists believe that 

offshoring may be contributing to this trend. 

Finally, some question whether firms will use the cost savings from 

offshoring in ways that lead immediately to the productivity improvements 

and consumer price reductions predicted by trade theory.32 Under certain 

market conditions, an individual firm could retain supernormal profits 

(profits above the usual for their particular industry and product) for a 

period of time, distributing these gains to shareholders or their remaining 

employees, rather than passing on cost savings to consumers in the form 

of price reductions or investing their cost savings in productivityenhancing reorganization or new technology. Although economic theory 

predicts that under many market conditions competitive forces will 

constrain the ability of firms to earn supernormal profits on an ongoing 

basis, the assumption that individual firms face perfectly competitive 

market conditions may not necessarily be accurate. Thus, some offshoring 

experts stress the importance of examining firm-level decisions to 

determine whether, how, and how quickly offshoring leads to price 

reductions and the reorganization of firms and industries toward 

specialization in higher-productivity activity. 

Underlying the debate about the effects of offshoring on the average U.S. 

standard of living are different perspectives on the following questions: 

 31For example, see Economic Policy Institute, “Offshoring,” EPI Issue Guide, 

www.epinet.org (June 2004, accessed on July 12, 2005). 

32For example, see Bivens. 

Page 24 GAO-06-5 Offshoring of Services
• What new areas of comparative advantage will the U.S. economy develop 

to compensate for declines, if any, in areas threatened by offshoring? 

• How will offshoring affect average U.S. wages? Will the possible benefits

of productivity gains offset the possible downward pressure exerted by 

increased exposure of U.S. workers to global competition? 

Many economists agree that offshoring is not likely to affect aggregate U.S. 

employment in the long run, but acknowledge that in the short run, 

workers will lose their jobs when employers relocate production abroad. 

At the same time, some economists have commented that offshoring may 

cause structural changes in the labor market because increased trade 

alters the mix of goods and services produced in the U.S. These structural 

changes could generate permanent changes in the types of work 

conducted by the U.S. labor force and could also possibly have longerterm effects on the U.S. unemployment rate. There is disagreement about

the expected direction of any structural changes in the labor market due 

to offshoring, the expected magnitude of job displacement due to 

offshoring, and the implications of this displacement for those workers 

who are directly affected by it. Underlying these disagreements are 

different estimates about the projected extent of job losses due to 

offshoring, which types of jobs will be offshored, which areas of the 

economy will generate growth in job opportunites, and the re-employment 

experiences of workers whose jobs are offshored. 

Economic theory predicts that expansions in trade, including offshoring,

typically should not affect the overall employment level (net employment) 

in the U.S. in the long run. Some economists argue that the U.S. labor 

market is generally expected to adjust quickly to changes in economic 

conditions because new jobs will be created as jobs are lost, and as a 

result, those who lose their jobs due to economic changes such as 

offshoring are expected to readily find new work. Given a flexible labor 

market, these economists theorize that the primary determinant of 

Potential Impacts on 

Employment and Job 

Displacement 

Many Economists Expect 

Offshoring to Have Little Effect 

on Long-Run Aggregate 

Employment, but Expect It to 

Have Effects on the Structure 

of Employment 

Page 25 GAO-06-5 Offshoring of Services
fluctuations in the employment rate is aggregate demand in the overall

economy, observed in the business cycle.33

Historically, the U.S. economy has rarely experienced unemployment rates 

higher than 10 percent of the labor force, with the exception of unique 

periods such as the Great Depression.34 According to Bureau of Labor 

Statistics (BLS) data, since 1947, the civilian employment rate has 

increased gradually from around 59 percent in the 1940s and 1950s, to an 

average of 66 percent over the past 20 years.35 During this period, the 

unemployment rate has generally fluctuated between about 4 percent to

8 percent, averaging 5.6 percent per year, even though the U.S. labor force 

has grown by, on average, 1.4 million people per year. Furthermore, the 

U.S. employment rate has not been correlated with trade or imports. While 

traded goods and services have increased from about 4 percent of the 

gross domestic product (GDP) to about 14 percent of GDP over the past 

60 years, employment rates have steadily increased.36 Even shocks to the 

percentage of the economy that is open to trade, such as the passage of 

major trade agreements, have not been correlated with significant changes 

in employment rates. Some have argued that while balanced trade may not 

affect employment levels, large and continued trade deficits put American 

jobs at risk. Historically, however, although employment in certain sectors 

 33Aggregate demand is the overall demand for output in the economy and reflects consumer 

and government spending as well as investment demand and net exports. These in turn are 

dependent on income, interest rates, investor and consumer confidence, and fiscal and

monetary policy, among other things. It is thought that monetary policy, set by the Federal 

Reserve, can be used to stimulate aggregate demand during recessions so that the economy 

remains close to full employment. According to this view, while deviations from fullemployment will occur in the short-run, in the long-run monetary policy can stabilize 

employment around the full-employment level. 

34The unemployment rate (or civilian unemployment rate) is the number of U.S. civilians 

aged 16 and over who are in the labor force but not employed, divided by the number of

U.S. civilians aged 16 and over who are in the labor force. The denominator excludes 

persons not in the labor market (those under 16; those not employed but not looking for 

work). 

35The civilian employment rate (or employment to population ratio) is the number of U.S. 

civilians aged 16 and over who are employed, divided by the total number of civilians aged 

16 and over in the population. The denominator includes persons not in the labor market 

(those not employed but not looking for work). 

36Congressional Research Service, Job Losses: Causes and Policy Implications, RL32194 

(Washington, D.C.: Dec. 22, 2004). 

Page 26 GAO-06-5 Offshoring of Services
of the economy is sensitive to trade balances, there has been no evidence 

of a correlation between trade deficits and overall employment.37

Although there is dispute over the number of jobs likely to be lost due to

offshoring in years to come, even the larger estimates generally represent 

a small enough fraction of the total number of jobs destroyed and created 

in the U.S. that many believe the U.S. labor market is likely to be able to 

absorb the change. For example, some private sector studies estimate that 

between 100,000 to 500,000 information technology jobs will be displaced

over the next few years, and potentially several million jobs across all 

occupations could shift outside the U.S. over the next decade.38 Several 

economists have pointed out that even the larger job loss estimates 

represent a relatively small percentage of the total number of jobs 

destroyed and created annually in the U.S. According to BLS statistics, 

since the end of the last recession in the fourth quarter of 2001, the U.S. 

has shed an average of 7.64 million jobs per quarter, while creating an 

average of 7.77 million jobs per quarter. Viewed in this context, some note 

that estimates of the number of jobs that could be lost due to offshoring do 

not appear to be as large of a shock to the economy. Moreover, some 

maintain that job losses due to offshoring should also be viewed in the 

context of the two-way flow of trade. Jobs are created as a result of U.S. 

firms exporting goods and services to other countries and foreign firms 

locating their production in the U.S. through direct foreign investment. 

Although some economists argue that trade, including offshoring, is 

unlikely to affect long-term employment rates, others have noted that 

increases in offshoring and globalization could lead to changes in the 

structure of employment, which could lead to changes in the number of 

jobs available in different occupations and industries and could also 

potentially increase unemployment. Structural changes to employment 

 37Standard economic analysis predicts that trade deficits are not expected to generate 

unemployment. When the U.S. sustains a trade deficit, the U.S. is consuming goods and 

services of greater value than its GDP. This in turn means that other countries are 

necessarily supplying a net inflow of capital to the U.S., which permits the U.S. to pay for

imports that exceed the value of its exports. The net capital inflow from foreign countries

that accompanies a trade deficit is used in economic activities that generate jobs, such as 

direct investment in U.S. companies, or purchases of U.S. treasury debt which keeps U.S. 

interest rates low and thus stimulates domestic investment. The jobs generated by this net

capital inflow should in theory offset the jobs that are lost when export industries decline. 

The BEA publishes a measure “Gross Domestic Purchases” that matches U.S. consumption 

of goods and services and can be compared to Gross Domestic Product. 

38See GAO-04-932. 

Page 27 GAO-06-5 Offshoring of Services
involve the permanent reallocation of workers and resources throughout 

the economy.39 Offshoring could contribute to structural changes in 

employment by changing employers’ demand for different skill-sets and 

occupations within certain industries. For example, offshoring could lead 

to substantial reductions in low-skilled IT-based services work while 

generating increases in high-skilled work such as IT systems management. 

It may take a long time for the economy to replace jobs lost to structural 

changes with new jobs because workers must switch industries, locations, 

or skills in order to find re-employment and because employers must 

create new jobs.40 Although the workforce should eventually adjust to the 

structural changes in the economy, a significant structural change could 

potentially lead to an increase in unemployment in the meantime.41

Regardless of the impact of offshoring on aggregate employment and the 

unemployment rate, many economists acknowledge that offshoring and 

increased trade could produce structural changes that could generate 

permanent shifts within the U.S. labor market. Some economists believe 

these structural changes will lead to the U.S. workforce gaining better jobs 

overall, as U.S. businesses respond to offshoring and globalization by 

creating jobs in new areas of specialization that capitalize on the relatively

highly skilled workforce and abundance of capital of the U.S. economy. 

For example, some note that while the U.S. has lost significant numbers of 

computer programming jobs, potentially due to offshoring, the U.S. 

economy at the same time has experienced an increase in the number of 

more sophisticated computer-related occupations, such as computer 

software engineers.42 Other economists suggest that structural changes 

 39Erica L. Groshen and Simon Potter, “Has Structural Change Contributed to a Jobless 

Recovery?” Current Issues in Economics and Finance 9:8 (New York, N.Y.: Federal

Reserve Bank of New York, August 2003).

40Cyclical job loss, in which jobs are temporarily suspended due to short-term declines in 

demand, leads to ready re-employment of laid-off workers in the same industry (and often 

the same job) when demand increases. 

41Michael Klein, Scott Schuh and Robert Triest, “Job Creation, Job Destruction, and

International Competition: A Literature Review,” Federal Reserve Bank of Boston Working 

Paper 02-7 (Boston, Mass.: Federal Reserve Bank of Boston, December 2002) citing Carl

Davidson, Lawrence Martin, and Steven Matusz, “Trade and Search Generated 

Unemployment,” Journal of International Economics 48:2 (1999): 271-299.

42Martin Neil Baily and Robert Z. Lawrence, “What Happened to the Great U.S. Job

Machine? The Role of Trade and Electronic Offshoring,” Brookings Papers on Economic 

Activity 2 (2004): 211-284.

Page 28 GAO-06-5 Offshoring of Services
could lead to lower-quality jobs if the U.S. develops comparative 

advantage in areas that primarily produce low-skilled jobs. 

Research has been done on the extent to which job gains and losses in 

recent years have resulted from structural changes in the economy; 

however, this research does not indicate whether the structural changes 

were due to offshoring. For example, in their study of the recent U.S. labor 

market, Erica Groshen and Simon Potter found evidence of structural 

change following the end of the 2001 recession, although they did not 

investigate whether offshoring was a cause of the structural change.43

Although many economists believe that aggregate employment will not be 

significantly affected by offshoring, there is widespread recognition that 

offshoring may nevertheless displace at least some workers from their 

jobs, leading to adjustment costs incurred by these workers and their 

families as they seek re-employment. In other words, although net job loss

due to offshoring may be minimal, with losses in some industries and 

occupations offset by employment growth in other areas, gross job losses 

due to offshoring could be significant. 

Limited data make it difficult to draw conclusions about the current extent 

of job loss due to offshoring. The data limitations have led to conflicting 

claims, with some arguing that offshoring is a minor phenomenon and 

others arguing that it is being underestimated. For example, some cite data 

from the Mass Layoff Statistics (MLS) program produced by the Bureau of

Labor Statistics, which showed that about 16,000 manufacturing and 

services job separations—less than 3 percent of the nonseasonal mass 

layoffs that took place in 2004—resulted from “movement of work” to 

locations outside the U.S. However, the MLS undercounts total job 

separations due to offshoring because it is designed to capture only mass 

layoffs, not total layoffs.44 In contrast, others cite privately collected data 

that suggests that the extent of offshoring is much greater. For example, 

There is Widespread 

Recognition That Offshoring 

Will Cause Some Job 

Displacement but Considerable 

Disagreement about the 

Expected Magnitude of This 

Problem 

 43See Groshen and Potter. 

44The MLS program does not collect statistics from small establishments—those employing 

fewer than 50 workers. In establishments employing 50 or more workers, MLS does not 

collect statistics on layoffs of less than 50 workers in a 5-week period. As a result, it 

collects data on only a portion of total layoffs. GAO previously reported that in 2003, the

MLS survey covered only 4.6 percent of all U.S. establishments and 56.7 percent of all 

U.S. workers. In addition, MLS data is collected by employer self-report, and some 

employers may be unwilling to provide information when interviewed about reasons for 

layoffs. See GAO-04-932. 

Page 29 GAO-06-5 Offshoring of Services
some have cited data collected by Kate Bronfenbrenner and Stephanie 

Luce, who attempted to measure the extent of offshoring with data 

collection from media reports and other sources. Extrapolating from a 

three month period, they estimate that as many as 406,000 manufacturing 

and services jobs were shifted from the U.S. to other countries in 2004.45

Although there is considerable uncertainty about the number of jobs that 

have been lost due to offshoring, a number of economists expect that 

offshoring is likely to expand in the future, both in absolute numbers and 

in types of work. For example, Cynthia Kroll has estimated that nearly 

15 million people, or 12 percent of the employed labor force, are in whitecollar occupations at risk to offshoring, though she notes that not all jobs

in these occupations are likely to be offshored.46 Private sector studies 

have also attempted to create forecasts of the effects of offshoring on 

employment in “at-risk” occupations; some of these studies project that 

between 100,000 and 500,000 IT jobs will be displaced within the next few

years, and potentially several million jobs across all occupations will shift 

outside the U.S. over the next decade.47 However, these studies face 

challenges in estimating the effects of offshoring because they are often 

based on federal statistics that currently provide limited information on 

the level and effects of offshoring. 

Some economists have expressed concerns about the potential size of the

dislocation costs for workers who lose their jobs due to offshoring, based

in part on the experiences of manufacturing workers whose jobs were lost 

due to trade; others argue that the costs of displacement might not be as 

 45By searching media sources for evidence of job shifts from the U.S. to other countries and

corroborating the information with company records, Kate Bronfenbrenner and Stephanie 

Luce identified 48,417 job losses due to offshoring that occurred between January and

March 2004. The authors believe that this methodology underestimates the number of job

losses from offshoring because media reports do not capture all job losses. On the

assumption that media reports capture two-thirds of job shifts to Mexico and one-third of 

shifts to other countries, the authors estimate that as many as 406,000 jobs were shifted 

overseas in 2004. See Kate Bronfenbrenner and Stephanie Luce, The Changing Nature of 

Corporate Global Restructuring: The Impact of Production Shifts on Jobs in the U.S., 

China, and around the Globe, paper submitted to the U.S.-China Economic and Security 

Review Commission (Oct. 14, 2004). We did not assess the reliability of this or other studies

that estimate the magnitude of job losses due to offshoring (see app. I). 

46Cynthia Kroll, “State and Metropolitan Area Impacts of the Offshore Outsourcing of 

Business Services and IT,” Fisher Center Working Paper 293 (Berkeley, Calif.: University 

of California, Berkeley, Fisher Center for Real Estate & Urban Economics, 2005). 

47These studies are summarized in GAO-04-932. 

Page 30 GAO-06-5 Offshoring of Services
large for services workers as they have been for manufacturing workers. 

Dislocation costs that workers could potentially experience include lost 

income during their period of unemployment and a lifetime of reduced 

wages if they cannot find a job that pays as much as the job they lost. 

Dislocation costs could be higher if job losses are concentrated in 

geographic areas because it may be difficult for the regional economy to 

absorb so many job seekers quickly and the local real estate market could 

be impacted.

48 Research on workers dislocated from jobs in manufacturing

industries that faced import competition suggests that workers who lose 

their jobs due to trade-related employment changes tend to be less likely 

to find reemployment and to face larger income declines after job 

displacement than workers displaced from industries that are less tradesensitive. However, some have raised questions about whether these 

results are applicable to trade-impacted services workers, who tend to 

have more desirable labor market characteristics than manufacturing 

workers. Research by J. Bradford Jensen and Lori Kletzer suggests that in

recent years, services workers displaced from “tradable jobs”—jobs in 

industries and occupations likely to be affected by trade—had labor 

market advantages over those displaced from “non-tradable” service 

sector jobs and from manufacturing jobs, such as more education and 

higher predisplacement earnings.49 Re-employment rates were slightly 

higher for displaced service sector workers in tradable jobs, compared to 

those in non-tradable jobs, and were significantly higher than the 

reemployment rates for displaced manufacturing workers. Earnings losses 

were significant for displaced services workers in tradable jobs, however. 

Of those re-employed, 55 percent experienced a decrease in earnings, with 

the average re-employed worker experiencing a 30 percent decline in 

earnings after reemployment. These large losses reflect the fact that 

displaced services workers in tradable jobs tended to have had relatively 

high wages prior to displacement. 

Underlying the debate about the effects of offshoring on employment and 

job displacement are different perspectives on the following questions: 

• Will offshoring contribute to structural changes in U.S. employment, and 

how will these changes affect aggregate employment levels and the type of 

occupations available to U.S. workers? 

 48See Kroll for a discussion of potential impacts of services offshoring on state and

metropolitan areas. 

49See Jensen and Kletzer. 

Page 31 GAO-06-5 Offshoring of Services
• How many workers will be displaced due to offshoring? 

• What are the reemployment experiences of workers dislocated due to 

offshoring? 

Some economists have expressed concern that offshoring could accelerate 

income inequality in the U.S.; however, others argue that changes in the 

income distribution are driven primarily by factors unrelated to offshoring, 

and still others point out that offshoring could potentially decrease income 

inequality. Those who think offshoring might accelerate income inequality 

believe it could do so by lowering the wages of some lower-wage and 

middle-class jobs, while potentially increasing the wages of smaller 

numbers of highly compensated positions. Those who disagree argue that 

offshoring is unlikely to have significant effects on wages and the U.S. 

income distribution because changes in demand for different skills are 

driven more by technological developments than by the changing 

international division of labor. Those who argue that offshoring could 

reduce income inequality note that this could occur if offshoring generates 

wage pressure on high-wage jobs, such as engineering, without 

significantly affecting the wages of low-wage jobs. Offshoring could also 

reduce income inequality if it reduces the cost of services that are 

consumed by primarily lower- and middle-income Americans. Underlying

these disagreements are debates about whether, in the long run, offshoring 

will change the demand for U.S. workers with different skill levels, which 

sectors of the income distribution are most likely to be affected by this 

changing demand, and whether offshoring leads to reductions in the cost

of services that primarily benefit lower- and middle-income Americans. 

Because offshoring is expected to have effects on the structure of 

employment within the national economy, it is expected to affect the 

distribution of income in the U.S.; however, experts hold differing views 

about the direction of these effects. Some contend that offshoring will 

increase income inequality and note several possible ways that it could do

so. First, offshoring could increase income inequality if it primarily led to 

job losses or wage reductions among relatively low-income workers but 

had less of an effect on the jobs or wages of middle- and higher-income 

workers. Some offshoring observers argue that offshoring in the service

sector has thus far primarily affected lower-wage jobs, such as call-center 

work and office support functions, rather than middle- or higher-income 

jobs. Second, some economists and policy analysts have expressed 

concern that offshoring could reduce wages at the middle of the income 

Potential Impacts on the 

Distribution of Income 

Some Economists Expect That 

Offshoring Could Affect the 

Distribution of Wage Income 

among U.S. Workers 

Page 32 GAO-06-5 Offshoring of Services
distribution and lead to a “hollowing out” of the middle class if it is 

primarily middle-income jobs that are moved offshore or experience wage

declines. For example, some economists and other policy analysts have

noted that sophisticated and well-paid job functions, such as computer 

programming and radiology analysis, are increasingly susceptible to 

offshoring. In addition, some contend that offshoring will lead to increased 

inequality by contributing to income growth among those at the high-end

of the income distribution. For example, an increase in corporate profits 

resulting from offshoring may promote growth in high-wage managerial 

positions and income accruing to business owners. 

However, some economists contend that offshoring could also reduce 

income inequality if it leads to job losses or reduced wages among higherwage occupations, such as engineering, without significantly affecting the 

jobs and wages of low-wage workers. In addition, some argue that 

offshoring could reduce inequality if it led to a decline in the wages, and 

consequently fees charged, by highly compensated workers who provide 

services to lower- and middle-income households. For example, if 

offshoring puts downward pressure on the wages of accountants, the 

resulting decrease in the cost of accounting services represents an 

increase in real wages for lower- and middle-income households who use 

these services, reducing inequality. 

Trade theory can provide a rationale for those who have noted that 

offshoring could lead to increasing income inequality. One of the most 

commonly cited models, the Heckscher-Ohlin model, predicts that when 

the U.S. initiates or expands trade with a country that has a dissimilar 

workforce, such as a developing country, this trade is likely to have a 

negative effect on the distribution of wage income within the U.S. 

Page 33 GAO-06-5 Offshoring of Services
workforce.50 For example, when trade expands between the U.S., a country

with a large pool of highly-skilled and educated workers, and a developing 

country with a large pool of less skilled and educated workers, this model 

generally predicts that the U.S. will specialize in those goods and services 

that are best produced by more skilled and educated workers, while the 

developing country will specialize in those goods and services best 

produced by less skilled and less educated workers. The implication of 

this international specialization for U.S. workers is that demand for skilled 

workers in the U.S. will grow, while demand for less skilled workers in the 

U.S. will shrink. As a result, wages for more skilled and educated U.S. 

workers will increase relative to the wages of less skilled and educated 

U.S. workers, thus increasing income inequality. However, to the extent

that services offshoring involves the movement of higher-skilled work to 

developing countries, more complex versions of this model generate 

different predictions about income inequality in the U.S.—income 

inequality could decline if the demand for higher-skilled workers declines 

relative to the demand for lower-skilled workers.51

 50The Heckscher-Ohlin (HO) model explicitly models the wage rate received by different

factors of production in each trading partner. Different factors of production may refer to 

workers of different skill levels, such as college-educated versus high school-educated 

workers, or the model can be used to examine the impact of trade on the income earned by

owners of capital compared to wage earners. An argument similar to that which explains 

increased income inequality between workers of different skill levels can explain why

increased trade with a developing country is likely to increase the return to capital (i.e., 

corporate profits) relative to wage income in the U.S. A developing country is likely to have 

a larger workforce relative to the amount of capital stock (financial resources and physical 

capital) than the U.S. Therefore, simple trade theory models predict that as trade between 

the U.S. and a developing country increases, the developing country will specialize in goods 

and services that are more labor intensive, while the U.S. will specialize in goods and

services that are more capital-intensive. These patterns of specialization imply that in the

U.S., corporate profits as a share of national income may rise, while employee 

compensation as a share of national income may fall, as demand for capital in the U.S.

grows.

51See Markusen. In addition, if the developing country does begin to compete in areas that 

employ higher-skilled and higher-paid U.S. workers, the factor-price equalization theorem 

predicts that income inequality in the U.S. would decline, due to falling relative wages 

among higher-skilled U.S. workers. A further caveat to the prediction that trade with a

developing country is likely to increase income inequality in the U.S. that some economists 

have discussed is the potential for the emergence of intra-industry trade with developing 

country trading partners. These economists have argued that over time, as the economies

of developing countries grow and become more similar to developed countries’ economies, 

all trading partners will benefit from the emergence of intra-industry trade, where a 

country imports and exports goods in the same industry. Because intra-industry trade is

not based on scarce and abundant factors of production, it is not expected to lead to large

changes in the distribution of income within each country. 

Page 34 GAO-06-5 Offshoring of Services
Although many economists agree that international trade, including 

offshoring, could have some impact on the distribution of income, some 

argue that these factors are not among the more important determinants 

of the U.S. income distribution. These economists argue that other factors 

are much more significant determinants of the changing U.S. income 

distribution. In particular, technological change is viewed by some 

economists as the primary determinant of the growing wage gap between

more and less skilled workers. Many economists claim that as 

technological advances have occurred, particularly in computers and IT, 

requirements for technological skills for workers across a range of 

occupations have increased, requirements that often translate into 

increased demand for more educated workers. At the same time, 

technological advances have permitted some routine work to be 

automated, decreasing demand for less-skilled workers. Numerous studies 

have examined whether trade or technological change explained a larger 

share of the growing wage gap between more and less educated workers 

during the 1980s and 1990s, with the majority concluding that

technological change was a more important determinant than trade.52 On 

balance, these studies conclude that trade has made a small contribution 

to the increase in income inequality. Estimates suggest that trade explains 

between 10 and 20 percent of the increase in income inequality, with the 

majority of the increase attributable to other factors such as technological

change that favors higher-skilled workers. However, the impact of services 

offshoring on income inequality has not been examined to the same extent 

that manufacturing trade has. 

Underlying the debate about the effects of offshoring on U.S. income 

distribution are different perspectives on the following questions: 

• What are the characteristics (occupation, skill level, and wages) of jobs 

that are moving offshore? 

• What are the characteristics of jobs that are being created? 

• Will offshoring reduce the cost of goods and services that are important 

consumption items for middle and lower income households? 

 52A summary of this literature is provided in Congressional Research Service, Foreign 

Outsourcing: Economic Implications and Policy Responses, RL32484 (Washington, D.C.: 

June 21, 2005). 

Page 35 GAO-06-5 Offshoring of Services
Potential Impacts on 

Security 

Experts express varying degrees of concern that offshoring could pose 

security risks, including increased risks to national security, critical 

infrastructure, and personal privacy. Underlying these disagreements are 

unresolved questions about the extent to which offshore operations pose 

additional risks than outsourcing services domestically and the extent to

which U.S. laws and standards apply and are enforceable for work 

conducted offshore. 

Some security and offshoring experts, including the Department of 

Defense (DOD), have raised concerns that offshoring could pose increased 

risks to national security and critical infrastructure, but others believe that 

offshoring will not. National security concerns relate to government 

programs and systems involved in national defense, particularly military 

and intelligence operations. Critical infrastructure concerns relate to 

systems and structures owned by either government or private entities 

that are essential to the country, such as utilities, transportation, and 

communications networks.53

One concern raised by security experts is that offshoring the development 

of software used in defense systems could pose additional security risks, 

specifically, that foreign workers with hostile intentions could obtain 

critical information or introduce malicious code into software products 

that could interfere with defense or infrastructure systems. There are 

currently few explicit restrictions on the type of services work that can be

sent offshore.54 DOD’s Defense Security Service has analyzed this issue 

and identified concerns with the potential exploitation of software 

developed in foreign research facilities and software companies for 

projects related to classified or sensitive programs.55 We have reviewed 

Some Concerns Have Been 

Raised That Offshoring May 

Pose Increased Risks to 

National Security and Critical 

Infrastructure, Though Some 

Experts Contend That 

Offshoring May Not Pose 

Additional Major Risks 

 53Presidential Decision Directive/NSC-63 on Critical Infrastructure Protection defines 

critical infrastructure as “those physical and cyber-based systems essential to the minimum 

operations of the economy and government. They include, but are not limited to, 

telecommunications, energy, banking and finance, transportation, water systems, and 

emergency systems, both governmental and private.” 

54There are some restrictions in annual defense appropriations and authorization acts

requiring certain DOD procurements to be performed by U.S. firms, for instance research

contracts in connection with weapons systems and the Ballistic Missile Defense Program.

See GAO, Federal Procurement: International Agreements Result in Waivers of Some 

U.S. Domestic Source Restrictions, GAO-05-188 (Washington, D.C.: Jan. 26, 2005); also 

Defense Federal Acquisition Regulation Supplement, Subpart 225.70.

55Defense Security Service, Technology Collection Trends in the U.S. Defense Industry

2002 (Alexandria, Va.: 2002). 

Page 36 GAO-06-5 Offshoring of Services
DOD’s management of software developed overseas for defense weapons 

systems as well.56 Our report noted that multiple requirements and 

guidance acknowledge the inherent risks associated with foreign access to

classified or export-controlled information and technology and are 

intended to protect U.S. national security by managing such access. 

However, we found that DOD does not require program managers of major 

weapons systems to identify or manage the potential security risks from 

foreign suppliers. For instance, DOD guidance for program managers to 

review computer code from foreign sources not directly controlled by 

DOD or its contractors is not mandatory. In addition, DOD programs 

cannot always fully identify all foreign-developed software in their 

systems. 

Private-sector groups and government officials have raised similar 

concerns about the added security risks posed by offshoring to U.S. nonmilitary critical infrastructure, such as nuclear power plants, the electric 

power grid, transportation, or communications networks. For example, 

some have noted that sensitive but unclassified information, such as the 

plans of important U.S. utilities or transport networks, could be sent to 

foreign locations where it could be released improperly or made available 

to hostile foreign nationals. Other concerns relate to the offshoring of 

software development and maintenance. Software security experts in the 

public sector—including DOD and the Central Intelligence Agency—have 

expressed concern that organizations and individuals with hostile 

intentions, such as terrorist organizations and foreign government 

economic and information warfare units, could gain direct access to 

software code by infiltrating or otherwise influencing contractor and 

subcontractor staff, and then use this code to perpetrate attacks on U.S. 

infrastructure systems or conduct industrial or other forms of espionage. 

Security experts also note that critical infrastructure systems rely 

extensively on commercial off the shelf (COTS) software programs that 

are developed in locations around the world. These programs include 

exploitable vulnerabilities and potentially even malicious code that can 

allow indirect access to infrastructure systems to cause the systems to 

perform in unintended ways. Thus, some experts believe that ongoing use 

of COTS software modules, whether developed offshore or not, as well as 

offshoring of software-related services could increase the risk of 

 56GAO, Defense Acquisitions: Knowledge of Software Suppliers Needed to Manage Risks, 

GAO-04-678 (Washington, D.C.: May 25, 2004). 

Page 37 GAO-06-5 Offshoring of Services
unauthorized access to critical infrastructure code in comparison to inhouse development and maintenance of proprietary programs and code. 

Security experts also express concerns about longer-term effects of 

offshoring. For instance, some note that continued offshoring of certain

products might make the U.S. dependent on foreign operations for critical 

civilian or military products, and therefore vulnerable if relations between 

the U.S. and those countries become hostile. Another concern is the ability 

to control access to certain civilian technologies with military uses when 

work on these technologies takes place in foreign locations. Some fear 

that offshoring certain high-tech work may lead to the transfer of 

information and technology that could be used by foreign entities to match 

or counter current U.S. technical and military superiority. The U.S. can 

control exports of such dual-use technologies by requiring firms to obtain 

an export license from the Department of Commerce before they can be 

worked on in foreign locations or by foreign nationals. We have reviewed 

some aspects of this export licensing program and found key challenges to

Commerce’s primary mechanism for ensuring compliance with export 

licenses.57

Some representatives of business groups contend that offshoring may not 

pose major increased security concerns for a variety of reasons. Some 

believe that protections currently in place are adequate to manage the 

added risks posed by offshoring. Currently, the Department of Defense has 

mandatory procedures to safeguard classified information that is released 

to U.S. government contractors, and firms that offshore certain work 

related to military technologies are required to obtain export licenses from 

either the State or Commerce departments.58 In addition, some argue that 

foreign workers in offshore locations do not necessarily pose added

 57GAO, Export Controls: Post-Shipment Verification Provides Limited Assurance That 

Dual-Use Items Are Being Properly Used, GAO-04-357 (Washington, D.C.: Jan. 12, 2004). 

This GAO review did not look at controls over service inputs specifically but found 

weaknesses in Commerce’s post-shipment verification checks for confirming that 

controlled items sent to countries of concern arrive at their proper location and are used in

compliance with the conditions of export licenses.

58The State Department manages the regulation of defense articles and services, while the 

Commerce Department manages the regulation of dual-use items with both military and 

commercial applications. In most cases, Commerce’s controls are less restrictive than 

State’s. GAO has reviewed this export-control system, and found that Commerce has 

improperly classified some State-controlled items. See GAO, Export Controls: Processes

for Determining Proper Control of Defense-Related Items Need Improvement, GAO-02-996 

(Washington, D.C.: Sept. 20, 2002). 

Page 38 GAO-06-5 Offshoring of Services
security risks, relative to U.S. workers in domestic outsourced operations, 

because domestic workers could also improperly handle information. 

Some foreign affairs experts also argue that offshoring could have positive 

effects on national security. They contend that increased international 

trade may reduce the threat of international tensions because countries 

with integrated economies have a stake in one another’s well-being. 

Experts express varying degrees of concern about the impact offshoring 

may have on personal privacy when medical and financial records become 

accessible in overseas locations. Privacy advocates, academics, and 

offshoring researchers have noted concerns with the possibility that 

personal information sent to foreign locations could be improperly 

released, leading to identity theft, diversion of funds, and breaches of 

confidentiality. However, others note that the Gramm-Leach-Bliley Act, 

which covers the privacy of financial information, limits disclosure of 

personal information and requires financial institutions to protect the 

security and confidentiality of their customers’ personal information 

through written agreements when information is sent to a third-party 

service provider. The privacy of medical information is covered under the 

Health Insurance Portability and Accountability Act Privacy Rule, which 

requires certain entities that hold medical records to receive satisfactory 

written assurance that any of their business associates will handle 

information appropriately. We are currently conducting work that 

examines offshoring of protected health information and related privacy 

issues. 

Underlying the debate about the effects of offshoring on security are 

difference perspectives on the following questions: 

Concerns Have Been Raised 

about the Impact of Offshoring 

on Personal Privacy 

• To what extent does offshoring pose added security risks? 

• Do existing laws, regulations, and controls provide adequate protection 

from the added risks posed by offshoring that do exist? 

Page 39 GAO-06-5 Offshoring of Services
Offshoring observers have proposed a broad range of policies in response 

to offshoring, representing a variety of different ideas about how public 

policies could address the concerns raised by offshoring. We have 

categorized these proposals into four types on the basis of concerns they 

seek to address: (1) improving U.S. global competitiveness, (2) addressing 

effects on the U.S. workforce, (3) addressing security concerns, and 

(4) reducing the extent of offshoring. Some analysts have proposed 

policies in more than one of these areas. On the other hand, it is also 

possible to take the position that services offshoring does not warrant any 

changes in government policies. While we indicate the rationales that have

been presented for the various policy proposals, we do not evaluate the 

merits and drawbacks of these proposals. Relevant factors to consider in 

evaluating proposals would include the magnitude of the problems that 

policy proposals seek to address, likely effectiveness of the proposals, 

potential negative consequences, financial costs to government, and 

feasibility of administration. 

Proponents of policies that seek to improve U.S. global competitiveness 

view offshoring as one aspect of much broader economic and trade issues 

and maintain that the debate should be focused on issues broader than the 

offshoring of work by companies headquartered in the U.S. They contend

that the appropriate focus should be on the broader public policy issue of

how the U.S. can continue to compete and attract high-paying jobs in a 

time of rapidly increasing trade and open global markets that allow 

multinational firms to hire labor from around the world. These proponents 

have articulated proposals that seek to help the U.S. economy develop 

new areas of specialization in response to increased foreign competition 

by fostering the types of industries and businesses that can succeed in a 

global economy and promote the creation of high-value jobs. In addition, 

some regard these proposals as important for promoting U.S. economic 

growth, regardless of the offshoring debate. Many of these proposals have 

been articulated as broad policy objectives, such as “fostering innovation” 

or “improving education” rather than as specific policy mechanisms to 

achieve these objectives. Suggestions for how to improve U.S. global 

competitiveness include proposals to promote innovation and creative 

industries, improve human capital and the skill level of the U.S. workforce, 

reduce the costs of doing business in the U.S., and establish trade 

practices that promote U.S. exports. 

Many economists and policy analysts have predicted that for the U.S. 

economy to successfully adjust to offshoring, it will need to develop and 

produce new, innovative goods and services that require and reward 

A Wide Range of 

Policies Have Been 

Proposed to Address 

Concerns about 

Offshoring’s Potential 

Impacts 

Proposals to Improve the 

Competitiveness of the US 

Economy 

Promoting Innovation 

Page 40 GAO-06-5 Offshoring of Services
higher levels of skill, and they believe that government actions can help to 

bring about this development. In addition, they point out that private 

companies can lack the incentives and time horizons to invest sufficiently 

in basic research—research undertaken without specific desired 

applications but that can lead to innovations. Some have also noted that 

federal funding for basic research has recently declined as a percentage of

GDP and that foreign governments are increasing their research spending 

to improve their own economies’ innovative capacity.59 Policies that have 

been proposed to promote innovation include: 

• Increasing government support for basic research and development 

projects. 

• Making permanent the current research and development tax credit to 

encourage companies to increase their own spending. Currently, the tax 

system allows businesses to obtain a tax credit for certain spending on 

research and development, but this credit requires regular reauthorization, 

rather than being a permanent feature of the tax code.60

• Increasing government spending on particular forms of infrastructure and 

technology that can support innovation, such as broadband Internet 

connections. 

Many who emphasize the broad goal of improving U.S. competitiveness 

also support upgrading the nation’s workforce skills and human capital by 

improving education, increasing opportunities for worker training, and 

reforming immigration policy. They contend that for the economy to move 

into higher-end, innovative products to replace job functions that have 

been offshored, more American workers will need to develop the 

knowledge and skills to perform complex, nonroutine work. In particular, 

they emphasize the importance of education programs in the science, 

Improving Workforce Skills 

 59The Congressional Research Service reports that the intensity of government-funded

basic research has fallen from about 0.7% of GDP in 1953 to about 0.2% of GDP in 2002. See

Congressional Research Service, RL 32484. 

60In a review of the research and development tax credit, GAO concluded that the credit’s 

net benefits to society are uncertain. Private sector studies concluded that during the

1980’s each dollar of foregone tax revenue due to the credit resulted in a dollar of spending

on research, but we raised questions about the methodologies of these studies. In addition, 

these studies did not examine the benefits gained by society from research stimulated by 

these credits or the costs to society from the collection of taxes required to fund the 

credits. See GAO, Tax Policy and Administration: Review of Studies of the Effectiveness

of the Research Tax Credit, GAO/GGD-96-43 (Washington, D.C.: May 21, 1996). 

Page 41 GAO-06-5 Offshoring of Services
technology, engineering, and mathematics fields.61 In addition, some have 

noted that workers will increasingly need to upgrade their skills 

continually throughout their careers in order to adjust to rapid changes in

the modern economy. As a result, many policies proposed in response to 

offshoring seek to increase the skill level of current and future generations 

of U.S. workers, including the following proposals: 

• Improving K-12 education, with special attention on increasing 

achievement in math and science fields. Proponents of these policies 

argue that U.S. students demonstrate poor achievement in these subjects 

relative to students in other nations, bringing into question whether the 

U.S. will have an adequate supply of scientists and engineers to sustain a 

globally competitive and innovative economy. 

• Expanding and improving lifelong learning through increased federal 

support of worker training and advanced adult education programs. One 

specific proposal is instituting “human capital tax credits” that could be

offered either to businesses that spend money on worker training 

programs or to individuals who spend money on their own education. 

Such tax credits could partially offset the costs to business of training 

workers who may not stay with a company for long and the costs to 

workers of learning skills that may not guarantee long-term employment. 

• Encouraging immigration of high-skilled workers. Proponents of these 

policies note that a large and growing segment of U.S. scientists and 

engineers are foreign-born. Specific proposals to increase the number of 

highly educated immigrants in the U.S. include raising the number of 

temporary work visas that allow high-skilled workers to enter the country 

and expediting the issuance of green cards for foreign graduates of U.S. 

universities. 

Other proposals to improve competitiveness focus on ways to reduce the 

costs of doing business in the U.S. relative to other countries. Proponents 

of these policies note that cost reduction is a leading motive for businesses 

to offshore service-sector work and that higher costs can affect the ability

of U.S. firms to compete against foreign firms in the global economy. 

Proposals to reduce business costs in the U.S. include: 

Reducing Business Costs 

 61GAO recently examined federally-funded higher education programs in these fields. See

GAO, Higher Education: Federal Science, Technology, Engineering, and Mathematics 

Programs and Related Trends, GAO-06-114 (Washington, D.C.: Oct. 12, 2005). 

Page 42 GAO-06-5 Offshoring of Services
• Reducing federal taxes and regulatory requirements on businesses. 

Proponents of these policies argue that complex and high taxes and 

extensive regulations raise costs for companies to do business in the 

U.S. These proposals assume that taxes in foreign countries would remain 

unchanged, so that a decline in U.S. taxes would reduce the cost of doing 

business in the U.S. relative to the cost of doing business overseas, thus 

increasing incentives for companies to keep work in the U.S.

• Reducing costs to businesses of providing health care to employees. 

Proponents of these policies argue that high health care costs drive up the 

total cost of labor compensation for employers, although it is possible that 

increases in U.S. health care costs could be partially or fully offset by 

decreases in other components of labor compensation. Various 

approaches have been proposed to decrease health care costs, such as use 

of improved technology in the management of patient care, establishing 

association health plans that would allow small businesses greater 

leverage in negotiations with health insurance providers, and establishing

a universal healthcare system. 

Another type of policy response to offshoring and increasing global 

interdependence focuses on expanding the market for U.S. exports. 

Proponents of these policies contend that several factors may be 

depressing U.S. exports and that more can be done to “level the playing

field” of international trade. One concern is that while the U.S. has opened 

up its markets to foreign competition, some foreign governments have not

opened certain of their markets, especially for services in which U.S. 

companies are globally competitive, such as financial services. Where 

trade agreements are in place, some have raised concerns that certain 

foreign governments may be violating them, such as by providing subsidies 

to their own industries or imposing nontariff barriers to their markets. A 

further concern that has been expressed is that some foreign governments 

may be artificially lowering the value of their currencies relative to the

dollar so that their exports are relatively inexpensive, while U.S. exports 

Enhancing U.S. Exports 

Page 43 GAO-06-5 Offshoring of Services
become relatively more expensive.62 Policies that have been proposed to 

redress these concerns and enhance U.S. exports include the following: 

• Continuing to negotiate trade agreements that will open foreign markets in 

which U.S. companies have export opportunities. 

• Taking more aggressive actions to challenge foreign government actions 

that may violate existing trade agreements, such as bringing actions at the

World Trade Organization (WTO) and imposing retaliatory measures 

allowed under WTO rules. Such violations could include foreign countries’ 

tax incentives to U.S. companies that offshore or inadequate protection of

intellectual property rights of U.S. imports, which harms the sales of U.S. 

products forced to compete with unlicensed versions.63

• Continuing to persuade countries that may have undervalued currencies to

raise their currency values or to otherwise engineer a controlled decline in

the value of the dollar.64

 62The Department of the Treasury is required to assess annually whether foreign countries

are manipulating their currencies for trade advantage. GAO examined the Treasury’s 

process for making these assessments and reported that Treasury has not found that either

China or Japan meet all legal criteria for currency manipulation. However, GAO also noted 

that many experts have concluded that China’s currency is undervalued, though by widely 

varying amounts, and some maintain that undervaluation cannot be determined. See GAO,

International Trade: Treasury Assessments Have Not Found Currency Manipulation, 

but Concerns about Exchange Rates Continue, GAO-05-351 (Washington, D.C.: Apr. 19,

2005). 

63GAO has previously found that the U.S. government lacks a coordinated strategy to 

handle the growing workload involved in monitoring and enforcing trade agreements. See

GAO, International Trade: Further Improvements Needed to Handle Growing Workload

for Monitoring and Enforcing Trade Agreements, GAO-05-537 (Washington D.C.: June 30,

2005). More specifically, GAO has found limitations in the World Trade Organization’s 

(WTO) intended mechanism to review China’s compliance with its trade commitments and 

made recommendations for key agencies to improve their management of China’s WTO

compliance. See GAO, U.S.-China Trade: Observations on Ensuring China’s Compliance 

with World Trade Organization Commitments, GAO-05-295T (Washington D.C.: Feb. 4,

2005). 

64In a previous study, GAO concluded that a revaluation of the Chinese renminbi would 

have implications for various aspects of the U.S. economy—with both costs and benefits—

although the impacts are hard to predict. See GAO-05-351. 

Page 44 GAO-06-5 Offshoring of Services
Proposals to address concerns about offshoring’s effects on workers seek 

to reduce the costs borne by some individuals when an economy becomes 

increasingly open to foreign trade and competition. Many of these 

proposals would provide assistance to workers during their period of 

unemployment and to help them obtain new jobs. While some of these 

proposals put particularly strong emphasis on retraining displaced 

workers, not all observers agree that retraining policies would be 

effective. Other proposals would expand broad social insurance programs 

that would cover all workers and provide benefits to anyone who loses a 

job. 

Many proposals to help workers affected by offshoring focus on programs 

designed to help workers adjust to job losses and to facilitate their 

reemployment. These include the following proposals: 

Proposals to Assist 

Workers Affected by 

Offshoring 

Assisting Displaced Workers in 

Transition to New Employment 

• Amending the Worker Adjustment and Retraining Notification (WARN) 

Act to increase the notice that employers must give employees from 60 to 

90 days when offshoring will cause a mass layoff or plant closure.65

• Extending the Trade Adjustment Assistance (TAA) program to services 

workers. The TAA program provides extended unemployment benefits and 

subsidized training to workers involved in the production of articles who 

can demonstrate that they were displaced due to increased imports or 

shifts in production to foreign countries. It generally serves workers who 

have been laid off from the manufacturing sector.66

• Expanding or developing income support and reemployment programs 

that would assist displaced workers in general, not just those who meet 

TAA criteria. Several policy advocates and researchers who have studied 

offshoring have stated that existing government programs to serve 

displaced workers do not provide adequate protections or assistance for a

changing economy in which global trade affects more workers. For 

instance, they have questioned the effectiveness of existing worker 

retraining programs or expressed doubts that retraining will be an 

effective response as international pressures begin to affect higher-skilled 

occupations and workers who already have advanced educations. 

 65Pub. L. No. 100-379; 29 U.S.C. § 2101-2109. 

66Pub. L. No. 93-618; 19 U.S.C. § 2271. 

Page 45 GAO-06-5 Offshoring of Services
• Establishing wage insurance, a program that would pay displaced workers 

who find reemployment at a lower wage a percentage of the difference 

between their previous and new earnings for a limited time. Proponents of 

wage insurance contend that it would provide incentives for dislocated 

workers to reenter the labor market quickly, even if they must do so at 

lower wages. In addition, proponents maintain that wage insurance could 

encourage workers to take jobs in unfamiliar fields where their 

inexperience commands lower wages, but where the job imparts new indemand skills, and allow them to build new careers.67

Some have proposed broader reforms to strengthen the social safety net 

and mitigate some of the hardships generated by the economic insecurity 

associated with an increasingly integrated global economy. Proponents of 

these policies emphasize the need to accompany open trade policies with 

enhanced social protections for all workers who are increasingly exposed 

to risks by international competition, such as job loss, job insecurity, or 

downward wage pressure. In addition, proponents contend that 

government policies should compensate workers who bear the costs of 

trade-induced economic disruptions. Such proposals would potentially 

affect large segments of the population and would require extensive 

rethinking and redesign of U.S. social policy, but proponents maintain that 

they could increase public acceptance of open trade policies. Such 

proposals include the following: 

Broader Reforms of Social 

Insurance Programs 

• Making health and pension benefits portable and/or universal so that 

workers who lose their jobs can retain their access to medical care and 

retirement plans. Some favor the government’s providing universal health 

care coverage, and others propose preserving or expanding portable or 

universal retirement coverage. 

• Requiring employers that move jobs offshore to pay some of the costs for 

worker assistance programs. Proponents contend that government should 

play a role in redistributing some of the gains from offshoring to workers 

who have been negatively affected. Proponents believe that such 

proposals would serve this principle and could mitigate some concerns

about offshoring’s effects on income inequality. 

 67The Trade Act of 2002 that reformed the TAA program created a demonstration wage 

insurance benefit for workers 50 years of age and over in the TAA program who meet a

series of criteria. Pub. L. No 107-210 § 124; 19 U.S.C. § 2318. 

Page 46 GAO-06-5 Offshoring of Services
Proposals to address concerns about security seek to reduce the added

risk that information sent to foreign locations could be used in ways that 

could impair U.S. national security, critical infrastructure, or personal 

privacy. Proposals include restrictions on certain types of work with 

security implications and strengthening standards governing how 

information is handled. 

Concerns that offshoring could pose increased risks to national security or 

critical infrastructure have led to proposals to restrict some services work 

from being sent to foreign locations or performed by foreign nationals and 

to improve security standards for work that is performed offshore, 

including the following proposals: 

• Requiring that certain projects involving defense acquisitions or military 

equipment be performed exclusively in the U.S. 

• Requiring that work on critical infrastructure projects such as electricity

grids or pipelines be done within the U.S. 

• Increasing the standards and review procedures that apply to use of 

offshore services. For example, GAO has previously recommended that

DOD adopt more effective practices for developing software and 

increasing oversight of software-intensive systems, such as ensuring that 

risk assessments of weapons programs consider threats to software 

development from foreign suppliers.68

Concerns that offshoring could pose added risks to the privacy of personal 

information have led to a variety of proposals to enhance protections, 

including the following:

Proposals to Protect 

Security 

Protecting National Security 

and Critical Infrastructure 

Protecting Personal Privacy

• Requiring companies to keep work involving sensitive private information 

in the U.S. 

• Requiring companies to notify and obtain consent from U.S. residents 

before sending personal information to be processed in other countries. 

• Ensuring that consumers have legal recourse against U.S. firms for privacy 

breaches by foreign contractors. 

 68See GAO-04-678. 

Page 47 GAO-06-5 Offshoring of Services
• Strengthening U.S. laws and regulations concerning the handling of 

personal information, regardless of whether the data are handled 

domestically or overseas. Those who propose this option contend that U.S.

laws and regulations do not provide adequate protections for personal 

information in general, regardless of where the information is handled. 

Another type of policy that has been proposed to address the various 

concerns raised by offshoring focuses on reducing the extent of 

offshoring. Some of these policy proposals focus on offshoring by 

government agencies, while others seek to modify firms’ incentives with 

respect to where they source their work. 

There have been numerous proposals to limit or constrain offshoring by 

federal and state governments, including the following examples:69

Proposals to Reduce the 

Extent of Offshoring 

Restricting Offshoring by 

Government Agencies 

• Legislation proposed to prohibit federal work or federally funded work 

from being performed in foreign countries, unless the foreign goods or 

services are for use in that country. 

• Legislation proposed to require contractors with the U.S. military and 

executive agencies to have at least 50 percent of their workforce in the 

U.S. 

• Legislation proposed to prohibit the federal government from providing 

assistance to, or doing business with, companies that in the last 5 years 

offshored jobs previously performed in the U.S., unless the company also 

creates significant replacement jobs in the U.S. 

• Legislation proposed in several states to restrict the procurement of statefunded services from overseas. 

 69We are examining the occurrence and nature of services offshoring in several government 

human services programs and the extent to which legal restrictions limit the ability to 

procure services from foreign locations. We have also examined impacts of legislation 

restraining imports. See, for example, GAO, Maritime Issues: Assessment of the 

International Trade Commission’s 1995 Analysis of the Economic Impact of the Jones 

Act, B-279386 (Washington, D.C.: Mar. 6, 1998). This study examined legislation requiring 

that, with few exceptions, cargo transported by water between points in the U.S. be carried 

on U.S.-built, -registered, -owned, and -crewed ships.

Page 48 GAO-06-5 Offshoring of Services
• Proposals to prohibit government contracts from going to countries that 

have not signed trade agreements with the U.S. on non-discrimination in 

government procurement. 

Another proposed means of reducing offshoring is to change tax policy to

alter the relative costs of domestic versus foreign production. Many 

economists and policy analysts believe the current tax system provides 

incentives for U.S. multinational firms to locate work at their overseas 

affiliates because it allows them to defer taxes on profits earned on some 

activities in foreign countries until the profits are brought back to the U.S.

However, some note that this tax treatment helps U.S.-owned businesses 

compete in foreign markets against foreign-owned businesses.70 Proposals 

for changing the tax code include: 

Modifying the U.S. Tax Code to 

Reduce Incentives for 

Offshoring

• Eliminating the ability of firms to defer foreign-earned income by taxing 

foreign profits at the same rate as domestic profits in the year they are 

earned. This proposal would affect only offshoring that takes place 

between U.S.-based multinational firms and their foreign affiliates. It 

would not affect offshoring that involves outsourcing work to separate 

firms located overseas. 

• Establishing a value-added tax (VAT) system, in which a tax could be 

applied to products imported to the U.S. and rebated on products the 

U.S. exports. However, as GAO and others have reported, many 

economists believe that such border tax adjustments would not affect the 

trade balance in the long run because exchange rates would adjust to 

offset the border adjustments.71

Other policy proposals would enhance incentives for firms to locate work 

domestically. Proponents of these policies note that foreign governments 

award incentives, such as providing buildings, infrastructure, and tax 

exemptions, to companies that export service products. In response, some 

Providing Incentives for 

Businesses to Locate Work in 

the U.S. 

 70Many countries do not tax the foreign-source income of their resident corporations. 

Consequently, in the absence of deferral, these foreign-based corporations would often 

have an advantage when competing against U.S.-owned subsidiaries operating in a third 

country. 

71GAO, Tax Administration: Potential Impact of Alternative Taxes on Taxpayers and 

Administrators, GAO/GGD-98-37 (Washington, D.C.: Jan. 14, 1998); Congressional 

Research Service, The Flat Tax, Value-Added Tax, and National Retail Sales Tax: 

Overview of the Issues, RL32603 (Washington, D.C.: Dec. 14, 2004). 

Page 49 GAO-06-5 Offshoring of Services
suggest that the U.S. provide similar incentives, including the following 

proposals: 

• Providing tax reductions or subsidies to companies that employ domestic 

workers. One specific proposal is a tax credit for companies in certain 

industries identified as affected by offshoring that would cover the payroll 

taxes of newly hired employees. 

• Providing federal assistance for regional economic development plans, 

including infrastructure improvements and grants targeted at attracting 

work that might otherwise be offshored. 

Determining appropriate policy responses to the offshoring phenomenon 

is challenging for several reasons. Services offshoring is a relatively recent 

phenomenon that raises a broad range of issues. No federal data series 

directly measure the extent of offshoring or its effects. Moreover, experts 

have expressed differing views about the potential impacts of offshoring. 

Nevertheless, there are some key areas where further research might help

to provide more information about the impacts and policy implications of 

services offshoring. These areas include 

Additional Research 

in Key Areas May 

Help Advance the 

Offshoring Debate 

• impacts of offshoring on various sectors of the U.S. economy, and 

especially the sectors that are emerging as new sources of comparative 

advantage; 

• impacts of offshoring on the workforce, such as numbers of workers 

displaced and their reemployment experiences; 

• impacts of offshoring on the U.S. income distribution, including trends in 

wage levels of jobs moving offshore; and 

• any increased security-related risks posed by offshoring and the extent to

which these are mitigated by current practices and laws. 

Further research in these areas could help inform policy making by 

providing more information about the nature and magnitude of the 

benefits and costs resulting from offshoring. For example, research on 

whether offshoring is negatively impacting important sectors of the 

economy could help to inform the need for new policies to enhance U.S.

competitiveness. Further information on the number of job losses 

resulting from offshoring as well as how workers fare in the labor market 

after their dislocations could help inform the need for new policies to 

Page 50 GAO-06-5 Offshoring of Services
assist displaced workers and to target these policies appropriately. 

Research on how offshoring is affecting the distribution of income in the 

U.S. could help to inform policy makers whether new policies are needed 

to address income inequality. Research that examines whether offshoring 

increases risks to national security, critical infrastructure, and consumer 

privacy can help to inform policy makers whether there is a need for 

additional security protections. Finally, research in all of these areas may 

help to advance the debate about whether policies to reduce the extent of 

offshoring are warranted. 

Researchers are conducting studies that can shed light on some of these 

areas. For example, some researchers have conducted case studies that 

examine the effects of offshoring in the semiconductor, call center, and 

radiology industries.72 Among other issues, these studies examined the 

types of work that are conducted offshore and the types of work that are 

conducted in the U.S. In their study of the radiology industry, for instance, 

Frank Levy and Ari Goelman conclude that radiology work conducted 

overseas is unlikely to displace radiology work done in the U.S., noting 

that offshore work primarily consists of preliminary readings of 

radiological images conducted at night when few radiologists in the 

U.S. would be available. However, the radiology industry may not be 

comparable with other industries in which offshoring takes place. Other

researchers have utilized statistical methods for analyzing existing data 

series. For example, Martin Baily and Robert Lawrence have used a variety

of methods to analyze trade and employment data and examine 

offshoring’s effects on unemployment.73 In some instances, researchers 

may be able to apply statistical methods that were utilized in research on 

 72Rosemary Batt, Virginia Doellgast, and Hyunji Kwon, “A Comparison of Service 

Management and Employment Systems in U.S. and Indian Call Centers” and Frank Levy 

and Ari Goelman, “Offshoring and Radiology,” (prepared for the Brookings Trade Forum 

2005: Offshoring White-Collar Work—The Issues and the Implications, Washington, D.C., 

May 12-13, 2005); Clair Brown and Greg Linden, “Offshoring in the Semiconductor Industry:

A Historical Perspective,” Berkeley-Doshisha Employment and Technology Working Paper 

Series cwts-02-2005 (Berkeley, Calif.: University of California, Berkeley, 2005). 

73Martin Baily and Robert Lawrence use data from U.S. and Indian trade statistics, as well 

as additional sources, to estimate the number of jobs lost due to offshoring in both the

manufacturing and services sector between 2000 and 2003. Their results suggest that 

offshoring did not cause large enough job dislocations to be a significant source of 

unemployment in either services or manufacturing. See Martin Neil Baily and Robert Z.

Lawrence, “What Happened to the Great U.S. Job Machine? The Role of Trade and 

Electronic Offshoring,” Brookings Papers on Economic Activity 2 (2004): 211-284. 

Page 51 GAO-06-5 Offshoring of Services
offshoring and trade in the manufacturing sector to conduct research on 

services offshoring. 

There may also be opportunities to expand or improve current federal data 

series to obtain more information on this topic. For example, some have 

raised concerns that there is a significant discrepancy between data on the 

levels of services imports from India as reported by U.S. federal 

government sources and the data reported by India. In a review of BEA 

and Indian services data, we identified several factors that contributed to 

this discrepancy, such as differences in each country’s definitions of trade 

in services. We also recommended ways in which BEA can further 

improve its services trade data.74 Other examples of limitations of current 

databases identified by offshoring researchers are that data on services 

trade are not available at a sufficiently detailed industry level, trade data

may not capture services that are bundled with goods or other services, 

and data on foreign affiliates of multinational corporations lack 

information on occupations of workers employed overseas.75

Table 1 illustrates some key areas where further research might contribute 

to a better understanding of the effects and policy implications of 

offshoring. The table identifies some pertinent data sources, though none 

of the sources can directly answer the research questions. Generally 

speaking, these data sources can provide information on a phenomenon, 

such as changes in employment in a given occupation or changes in the 

output produced by an industry, but they cannot provide information on 

the extent to which these changes resulted from offshoring. For example, 

BLS collects data on employment levels in various industries and 

occupations, but the data capture job losses and gains that occur for all 

reasons, not only because of offshoring. Table 1 also identifies some of the 

methodological approaches that have been, or could be, used in these 

areas of research. These include conducting in-depth studies of firms and 

industries and using statistical methods for analyzing existing data. Table 1 

also highlights some potential challenges and limitations of the various 

approaches. For example, while in-depth studies of services offshoring in 

 74GAO, International Trade: U.S. and India Data on Offshoring Show Significant 

Differences, GAO-06-116 (Washington, D.C.: Oct. 27, 2005).

75See, for example, Brookings Institution, “Services Offshoring: What Do the Data Tell Us?”

Summary of Data Workshop (Washington, D.C.: June 22, 2004); Office of Senator Joseph 

Lieberman, Data Dearth in Offshore Outsourcing: Policymaking Requires Facts 

(Washington, D.C.: December 2004). 

Page 52 GAO-06-5 Offshoring of Services
particular industries may shed light on some dynamics of the offshoring 

phenomenon, their findings are not necessarily reflective of what is 

occurring nationally. Our overview of research questions, data sources, 

research methods, and limitations is not meant to be exhaustive. 

Researchers will continue to pose new questions and approaches to gain 

further insights into offshoring. 

Page 53 GAO-06-5 Offshoring of Services
Table 1: Some Key Areas for Additional Research on Services Offshoring and Possible Approaches for This Research

Page 54 GAO-06-5 Offshoring of Services
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Services offshoring is likely to remain an important public policy issue for 

years to come. The extent of offshoring could increase in the future as 

technology advances, U.S. firms become more adept at offshoring, and 

other countries continue to improve their abilities to provide services for 

the global economy. Because the services offshoring phenomenon is 

relatively new, little is known about its effects on the U.S. economy and 

society. Due to limited data and empirical research thus far, the debate

about offshoring has largely been theoretical in nature. Policy makers and 

analysts face data challenges as they seek to assess the wide range of 

Concluding 

Observations 

Page 59 GAO-06-5 Offshoring of Services
policies that have been proposed in response to offshoring. In making 

these assessments, they may consider various relevant factors, such as the 

magnitude of the problems that policy proposals seek to address, likely 

effectiveness of the proposals, potential negative consequences, financial 

costs to government, and feasibility of administration. 

As the offshoring phenomenon continues, researchers in both the public 

and private sectors are likely to conduct more studies and collect more 

data that will provide a clearer understanding of offshoring and its effects. 

We have highlighted some key areas where further research might help 

advance the debate about the impacts and policy implications of 

offshoring. While such research faces numerous challenges and 

limitations, it offers some prospect for additional insights on diverse 

aspects of services offshoring. 

We provided a draft of this report to the Departments of Commerce, 

Labor, Treasury, and the Office of the United States Trade Representative. 

We received written comments from Commerce, which are reprinted in 

appendix III. Commerce stated that it appreciated the thoroughness of our 

review and that the report will be a useful reference starting point for 

discussions of the causes and impacts of offshoring. Commerce also stated 

that offshoring may raise living standards for the average American and

affect fewer workers than the headlines seem to indicate, but that all of us

must be troubled when any American workers lose their jobs, for 

whatever reason. Commerce added that the most powerful remedy for this 

problem is a growing economy that can ensure every American who wants 

a job is able to find one. Commerce, Treasury, and the Office of the U.S. 

Trade Representative provided technical comments, and we modified the 

report as appropriate to address these comments. The Department of 

Labor did not have comments. 

Copies of this report are being sent to the Departments of Commerce, 

Labor, and Treasury; the Office of the U.S. Trade Representative; 

appropriate congressional committees; and other interested parties. 

Copies will be made available to others upon request. The report is also 

available at no charge on the GAO Web site at http://www.gao.gov. 

Agency Comments 

Page 60 GAO-06-5 Offshoring of Services
If you or your staff have any questions about matters discussed in this 

report, please contact me at (202) 512-7215 or at nilsens@gao.gov. Contact 

points for our Offices of Congressional Relations and Public Affairs may 

be found on the last page of this report. Other contacts and staff 

acknowledgments are listed in appendix IV. 

Sigurd R. Nilsen 

Director, Education, Workforce, 

 and Income Security Issues 

Page 61 GAO-06-5 Offshoring of Services
List of Committees 

The Honorable Ted Stevens 

Chairman 

The Honorable Daniel K. Inouye 

Ranking Minority Member 

Committee on Commerce, Science,

and Transportation 

United States Senate 

The Honorable Charles E. Grassley 

Chairman 

The Honorable Max Baucus 

Ranking Minority Member 

Committee on Finance 

United States Senate 

The Honorable Michael B. Enzi 

Chairman 

The Honorable Edward M. Kennedy 

Ranking Minority Member 

Committee on Health, Education, Labor, 

and Pensions

United States Senate 

The Honorable John A. Boehner 

Chairman 

The Honorable George Miller 

Ranking Minority Member 

Committee on Education and 

the Workforce 

House of Representatives 

The Honorable Joe Barton 

Chairman 

The Honorable John D. Dingell 

Ranking Minority Member 

Committee on Energy and Commerce 

House of Representatives 

Page 62 GAO-06-5 Offshoring of Services
The Honorable William B. Thomas 

Chairman 

The Honorable Charles B. Rangel 

Ranking Minority Member 

Committee on Ways and Means 

House of Representatives 

Page 63 GAO-06-5 Offshoring of Services
Appendix I: Scope and Methodology Appendix I: Scope and Methodology 

Our objectives in this study were to: (1) describe experts’ views about the 

potential effects of services offshoring on the U.S. economy, workforce, 

national security, and consumer privacy; (2) describe the types of policies 

that have been proposed in response to offshoring; and (3) discuss areas 

where further research could advance the debate on offshoring. Our 

methodology consisted of an extensive literature review and interviews of 

selected experts. In addition, we attended several conferences on services

offshoring during the course of our work. We conducted our work from

May 2004 to November 2005 in accordance with generally accepted 

government auditing standards. 

We reviewed literature on services offshoring produced by academic 

experts, think tanks, business groups, labor groups, and government 

agencies such as the Congressional Research Service. Our literature 

review built upon work conducted under previous GAO studies of services 

offshoring.1

 We collected additional literature by reviewing research 

databases such as Econlit and Proquest and through general Internet 

searches. We also conducted targeted searches of the literature produced 

by various think tanks, interest groups, and other government agencies. In

addition, we were referred to literature through citations in other 

literature, through media accounts, and by experts we interviewed. 

Through the course of our work, we sought to obtain a diverse body of 

literature that described various views on the potential effects of services 

offshoring and policy proposals. For studies summarizing empirical 

research findings, GAO reviewed these studies solely to describe the views 

of various experts on the effects of offshoring and the research 

methodologies they used. The inclusion of studies in this report does not 

imply that we deem them definitive or that the evidence presented in them

is conclusive. Additionally some of these studies contain estimates of job 

losses due to offshoring of services that are of undetermined reliability. 

These estimates are presented for illustrative purposes and should not be 

considered in the same manner as the official government data on 

employment and trade discussed in the report. See the bibliography for a 

list of key literature reviewed for this report. 

We interviewed experts from government agencies, academia, think tanks, 

and organizations representing business and labor interests. We met with 

 1

We relied particularly upon literature collected for GAO, International Trade: Current 

Government Data Provide Limited Insight into Offshoring of Services, GAO-04-932 

(Washington, D.C.: Sept. 22, 2004). 

Page 64 GAO-06-5 Offshoring of Services
Appendix I: Scope and Methodology 

government officials at the departments of Commerce, Labor, and 

Treasury, and at the Office of the U.S. Trade Representative because each 

of these agencies analyzes issues related to offshoring. We selected other 

experts to interview based upon literature they published related to the 

offshoring phenomenon and through referrals by other experts. We strove 

to obtain a balance of views among the experts we interviewed. In 

addition to interviewing experts, we also reviewed interviews conducted

for other GAO work on services offshoring. See appendix II for a list of 

experts interviewed for this report. 

We also attended several conferences related to services offshoring to 

obtain further viewpoints on this topic, including conferences organized 

by the Brookings Institution, William Davidson Institute at the University 

of Michigan Business School, CATO Institute, Labor and Worklife Program 

at Harvard Law School and the North American Alliance for Fair 

Employment, Stanford Business School’s Sloan Masters Program and 

World Affairs Council of Northern California, Asia-Pacific Research Center 

at Stanford University, and the Bernard and Audre Rapoport Center for 

Human Rights and Justice of the University of Texas School of Law. 

Page 65 GAO-06-5 Offshoring of Services
Appendix II: List of Experts Interviewed Appendix II: List of Experts Interviewed 

Jodie Allen 

Senior Editor 

Pew Research Center 

Robert Atkinson 

Vice President & Director 

Technology & New Economy Project 

Progressive Policy Institute 

Ashok Bardhan 

Senior Research Associate 

Fisher Center for Real Estate & Urban Economics, Haas School of 

Business, University of California Berkeley 

William Baumol 

Professor of Economics 

New York University 

Jagdish Bhagwati 

Professor of Economics 

Columbia University 

Josh Bivens 

Trade Economist 

Economic Policy Institute 

Susan Collins 

Senior Fellow, Economic Studies 

The Brookings Institution 

Ralph Gomory 

President 

Alfred P. Sloan Foundation 

Ron Hira 

Assistant Professor of Public Policy 

Rochester Institute of Technology and 

Vice President for Career Activities, Institute of Electrical and Electronics 

Engineers-USA 

Josh James

Manager of Research 

American Electronics Association 

Page 66 GAO-06-5 Offshoring of Services
Appendix II: List of Experts Interviewed 

Matthew Kazmierczak 

Director of Research 

American Electronics Association 

Martin Kenney 

Professor of Human and Community Development 

University of California Davis 

Lori Kletzer 

Professor of Economics 

University of California, Santa Cruz 

Cynthia Kroll 

Senior Regional Economist 

Fisher Center for Real Estate & Urban Economics, Haas School of 

Business, University of California Berkeley 

Jeff Lande 

Senior Vice President 

Information Technology Association of America 

Robert Lawrence 

Professor of International Trade and Investment 

Center for Business & Government, John F. Kennedy School of 

Government, Harvard University 

Thea Lee 

Assistant Director for International Economics 

AFL-CIO 

Robert Litan 

Senior Fellow 

Economic Studies 

The Brookings Institution 

Catherine Mann 

Senior Fellow 

Institute for International Economics 

Page 67 GAO-06-5 Offshoring of Services
Appendix II: List of Experts Interviewed 

Lee Price 

Research Director 

Economic Policy Institute 

Robert Reich 

Professor of Social and Economic Policy 

Brandeis University 

Dani Rodrik 

Professor of International Political Economy 

John F. Kennedy School of Government, Harvard University 

Enrique Sanchez 

Director 

Bank of America (retired) 

Robert Scott 

Director of International Programs 

Economic Policy Institute 

Timothy Sturgeon 

Senior Research Affiliate

Industrial Performance Center 

Massachusetts Institute of Technology 

Diane Swonk 

Chief Economist 

Mesirow Financial 

Page 68 GAO-06-5 Offshoring of Services
Appendix III: Comments from the Department Appendix III: Comments from the of Commerce 

Department of Commerce 

Page 69 GAO-06-5 Offshoring of Services
Appendix IV: 

A

GAO Contacts and Staff 

cknowledgments 

Page 70 GAO-06-5 

Appendix IV: GAO Contacts and Staff 

Acknowledgments 

GAO Contacts Sigurd R. Nilsen, (202) 512-7215, nilsens@gao.gov

In addition to the contact named above, Andrew Sherrill, Assistant 

Director; Yunsian Tai and Katrina Ryan, Analysts in Charge; 

Rhiannon Patterson; Eric Wenner; Margaret Armen; Lawrance Evans, Jr.; 

and Tovah Rom made significant contributions to this report. 

Staff 

Acknowledgments 

Offshoring of Services
GAO Related Products GAO Related Products 

Defense Acquisitions: Knowledge of Software Suppliers Needed to 

Manage Risks. GAO-04-678. Washington, D.C.: May 25, 2004. 

Defense Trade: Better Information Needed to Support Decisions 

Affecting Proposed Weapons Transfers. GAO-03-694. Washington, D.C.: 

July 11, 2003.

Export Controls: Post-Shipment Verification Provides Limited 

Assurance That Dual-Use Items Are Being Properly Used. GAO-04-357. 

Washington, D.C.: January 12, 2004. 

Export Controls: Processes for Determining Proper Control of DefenseRelated Items Need Improvement. GAO-02-996. Washington, D.C.: 

September 20, 2002. 

Federal Procurement: International Agreements Result in Waivers of 

Some U.S. Domestic Source Restrictions. GAO-05-188. Washington, D.C.: 

January 26, 2005. 

Higher Education: Federal Science, Technology, Engineering, and 

Mathematics Programs and Related Trends. GAO-06-114. Washington, 

D.C.: October 12, 2005. 

Highlights of a GAO Forum: Workforce Challenges and Opportunities for

the 21st Century: Changing Labor Force Dynamics and the Role of 

Government Policies. GAO-04-845SP. Washington, D.C.: June 2004. 

Industrial Security: DOD Cannot Ensure Its Oversight of Contractors 

under Foreign Influence Is Sufficient. GAO-05-681. Washington, D.C.: July 

15, 2005. 

International Trade: Current Government Data Provide Limited Insight 

into Offshoring of Services. GAO-04-932. Washington, D.C.: September 22, 

2004. 

International Trade: Further Improvements Needed to Handle Growing 

Workload for Monitoring and Enforcing Trade Agreements. GAO-05-537. 

Washington D.C. June 30, 2005. 

International Trade: Treasury Assessments Have Not Found Currency 

Manipulation, but Concerns about Exchange Rates Continue. GAO-05-

351. Washington, D.C.: April 19, 2005.

Page 71 GAO-06-5 Offshoring of Services
GAO Related Products 

International Trade: U.S. and India Data on Offshoring Show 

Significant Differences. GAO-06-116. Washington, D.C.: October 27, 2005. 

Tax Policy and Administration: Review of Studies of the Effectiveness of 

the Research Tax Credit. GAO/GGD-96-43. Washington, D.C.: May 21, 

1996. 

Trade Adjustment Assistance: Reforms Have Accelerated Training 

Enrollment, but Implementation Challenges Remain. GAO-04-1012. 

Washington, D.C.: September 22, 2004. 

The Worker Adjustment and Retraining Notification Act: Revising the 

Act and Educational Materials Could Clarify Employer Responsibilities 

and Employee Rights. GAO-03-1003. Washington, D.C.: September 19, 

2003. 

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