I first became interested in outsourcing during my employment at Frontera Corporation in 1999. Less expensive employees working with H-1B visas or contractors replaced many of our most seasoned programmers and project managers. As I learned how decreasing transaction costs would cause price (wage) differences between countries to narrow, I realized just how important this topic would become for the next decade.

At over fifty pages with several pages of econometric tables, the paper is too large to attempt to reproduce here for you in HTML format. I have included the introduction as a teaser below and hope you will download and enjoy the full paper. I also hope that you find it interesting and I look forward to hearing your comments.


The February 5th, 2003 cover of BusinessWeek questioned:

Is Your Job Next? A new round of GLOBALIZATION is sending upscale jobs offshore. They include chip design, engineering, basic research-even financial analysis. Can America lose these jobs and still prosper?

A recent report from Forrester Research, a leading researcher of technology and its impact on business, predicted that 3.3 million jobs and $136 billion in wages will migrate from the U.S. to countries such as India, Russia, China, and the Philippines in the next thirteen years. Many dot-com survivors are wondering what will become of their jobs and wages in the face of falling demand for their labor and the increasing availability-and visibility-of exceptional foreign talent. Call centers in Bombay provide recent Indian college graduates with English linguistic and cultural skills, an exceptional opportunity for career growth, and excellent pay. U.S. firms are taking advantage of India’s call centers, architects, programmers, and PhD-trained scientists of equal or better quality than U.S. workers for forty to sixty percent of U.S. wages.1 For example, nearly twelve years ago, Boeing hired unemployed aerospace engineers in Russia at salaries as low as $5,400 per year. In the past two years, Boeing has laid off 5,000 U.S. engineers and refuses to make any agreement with its U.S. labor unions about its hiring practices.2

Many skilled service workers spend years learning their crafts, which may entail a decade of post-secondary education. Therefore, shifting their focus and skills into another specialty can be costly and difficult. In response to the seemingly insatiable demand for high-tech labor during the mid to late 1990’s, many students and workers began studies in computer science, biotechnology, physics, and other high-tech knowledge fields. Indeed, the number of U.S. graduates receiving degrees in potentially exportable knowledge-based fields (such as information technology) exploded between 1996 and 2000. Today these workers are having difficulty finding employment in their area of expertise.

In this paper, I analyze some of the theoretical models of trade in goods, related macroeconomic indicators, and current policies. Ultimately, I conclude with some reservations that the concerns of workers are justified. I suggest some measures to remediate the impact upon this important group of workers, noting the importance of balancing those suggestions against the needs of the firm and the best interests of the U.S. consumer.

Background and History

What is a knowledge worker? How are they different from other workers such as industrial workers or other service workers, and why are they important?

Peter Drucker coined the term in the 1950’s to describe:

…participants in an economy where information and its manipulation are the commodity and the activity. Contrast this with the industrial age worker who was primarily required to produce a tangible object. Examples of knowledge workers include–but are not limited to–marketing analysts, engineers, product developers, resource planners, researchers, and legal counselors.3

Another definition of ‘knowledge worker’ is: “A person whose primary work responsibilities involve one or more of the creation, production, storage, or delivery of information.”4 Therefore, the knowledge worker is an individual who utilizes their substantial stock of human capital to provide services based on the manipulation and discovery of ideas and concepts. Often, these workers work in an arena in which the marginal cost of sending their product to another consumer is nearly zero; once the first client has paid for the research or work, there is little or no cost to disseminate the product to additional parties. Finally, knowledge workers and their products make up a large component of U.S. GDP and employment. According to Peter Drucker, knowledge workers make up approximately 40% of the work force among developed nations.5

Plummeting technology prices, rapid gains in productivity, and strong consumer confidence tripled the NASDAQ composite index from 1500 points in 1996 to 4500 points in 1999. The Dow Jones Composite Average soared from 1500 points in 1996 to nearly 3500 points in 1999. High-technology industries, particularly industries connected to the Internet, were responsible for most of these gains. The striking increase in productivity created by the rapid development of the Internet sent shockwaves of growth across the world. Knowledge workers made up a large percentage of the work force for these industries, and many knowledge workers enjoyed incredible salaries, exciting work environments, and fast-track career growth.

These euphoric highs have since fallen, as has the need for the labor that drove much of the growth. Between 1996 and late 2000, U.S. technology firms demanded large numbers of skilled information technology professionals. Despite skyrocketing wages, unemployment rates for engineering and science technicians was well below the national average, even below 2% in 1997 (Figure 1). As a result, many firms began to look abroad for additional workers. When the information technology bubble burst, U.S. firms searched for cost-cutting measures. Cheaper immigrant workers became even more attractive, and many firms laid off nonimmigrant labor in disproportionate numbers. Today, many of those foreign workers have returned home and are starting outsourcing operations that they hope will be utilized by U.S. firms. The reduced cost of living and abundance of skilled labor in their home countries has created an extremely competitive global knowledge workforce.


Selected References

1. Kripalani, Manjeet. 2003. FOR INDIA’S TECH GRADS, THERE’S NO PLACE LIKE HOME Who needs Silicon Valley when Bangalore offers fulfilling work and an upwardly mobile lifestyle? Business Week, Feb 3, 2003.

2. Ostrovsky, Stanley Holmes and Simon. 2003. THE NEW COLD WAR AT BOEING. Business Week (3818):58.

3. Qun Liang, Haydee Hernandez, Arti Kirch, and Pamela Prescott. 2003. Gotcha Glossary [HTML Document]. Gotcha 1999 [cited April 2 2003]. Available from http://www.sims.berkeley.edu/courses/is213/s99/Projects/P9/web_site/glossary.htm.

4. Allen, Ken Abernethy and Tom. 2003. exploring the Digital Domain: Glossary [HTML Document], July, 1997 1997 [cited March 29 2003]. Available from http://s9000.furman.edu/DD/gloss/gloss3.html.

5. Brigham, Alex. 2003. Drucker on Managing Today’s Employee, the Knowledge-Worker [PDF Document] [cited April 10 2003]. Available from http://www.corpedia.com/welcome/corporateuniversityreview.pdf.

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