Dr. Raynor is a Professor of Finance at the State University of New York (SUNY) at Delhi, and, during the summer, is a visiting professor at Universidad Catholica Santo Toribio De Mogrovejo in Peru. He has had broad professional experience in both academic settings and the private sector, as well as extensive international experience in Peru, Ecuador, Puerto Rico, the Dominican Republic, Mexico, and China. He has special interest in Latin American economic and trade issues.

How adversely impacted is the middle-class in the United States when jobs are sent abroad? During the past 18 months, the dramatic increase in outsourcing professional jobs overseas (offshoring) has been well documented. No doubt, this has contributed to the limited number of jobs being created domestically during the current economic recovery. Many of the white-collar professional jobs--engineering, accounting, architecture, etc.--are gone forever. Yes, GDP, productivity, and other economic indicators have substantially improved, but domestic employment expectations fall short in at least two ways:

1. Number of jobs: "American employers hired far fewer workers than expected in November... The number of workers on U.S. payrolls outside the farm sector last month edged up by 57,000... far lower than economists' forecasts of a 150,000-job gain..." (Willard, 2003).

2. Quality of jobs: According to Dr. Paul Craig Roberts, "Only a few of the 116,000 private sector jobs created in October provide good incomes... the remainder of the 116,000 new jobs consist of temps, retail trade, telephone marketing, and fund raising, administrative and waste services, and private education and health services." (Roberts, 11/12/03).

Of course not all of the disappointing job news is from outsourcing, and a significant portion of domestic output can be attributed to productivity gains. Because of technology advances and new ways of working, firms can produce more with fewer people. "Productivity of U.S. companies rocketed at a 9.4 percent annual rate in the third quarter, the best showing in 20 years..." (Aversa, 2003).

On the other hand, productivity numbers can be very misleading, as Dr. Roberts points out: "Pundits tend to associate "productivity" with factories and assume the high number means manufacturing is prospering." (Roberts, 12/9/03). But manufacturing is where many jobs have been lost, and distortions can occur when productivity comparisons are made to other sectors of the economy.

What about the professional and high-tech sectors? U.S. firms increasingly are replacing domestic engineers, IT workers, accountants, medical professionals, and almost any other middle-class job you can think of, with equally qualified individuals overseas, especially in India. "Many U.S. white-collar workers are also in for wrenching change... No wonder India is at the center of a brewing storm in America, where politicians are starting to view offshore outsourcing as the root of the jobless recovery in tech and services... As companies rely more on IT engineers in India and elsewhere, the argument goes, the U.S. could cede control of other core technologies." (Kripalani, Engardio, and Hamm, 12/8/03).

Increasingly, there is a global surplus of highly educated workers, which is too enticing for U.S. firms to ignore. Not only can they hire high-end workers for a fraction of domestic salaries, but often also save money by avoiding U.S. OSHA, EEOC, EPA and other regulations.

"Predicts Nandan M. Nilekani, managing director of Bangalore-based Infosys Technologies Ltd: 'Just like China drove down costs in manufacturing and Walmart in retail,' he says, 'India will drive down costs in services.' But deflation will also mean plenty of short-term pain for U.S. companies and workers who never imagined they'd face foreign rivals." (Kripalani, Engardio, and Hamm, 12/8/03).

While current news stories have focused on the possibility of inflation because of robust economic activity, the Fed has taken a guarded position:

"'The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation,' the Fed declared in its statement. Thus, the Fed has declared the economic and inflation risks each balanced - more evidence of neutrality." (Wallace, 12/10/03).

Outsourcing jobs overseas contributes to deflationary possibilities, because it encourages additional increases in foreign capacity, both for manufacturing and high tech services. Capacity is still slack in the U.S., and is another reason the Fed is not yet worried about inflation: "Greenspan & Co. believe they have the latitude to let the economy steam along until the output gap narrows significantly before considering any rate increases." (Wallace, 12/10/03).

However, the fact that the Fed has not already increased rates is very telling. Given the near unprecedented increase in output, the Fed's neutral position is an indicator of just how much permanent structural change there may be in our economy. From the Federal Reserve Bank of New York three months ago:

"The current recovery has seen steady growth in output but no corresponding rise in employment. A look at layoff trends and industry job gains and losses in 2001-03 suggests that structural change - the permanent relocation of workers from some industries to others may help explain the stalled growth in jobs." (Groshen & Potter, August, 2003).

Jim Jubak also takes note of the Fed's report: "The New York Fed's report goes out of its way to differentiate this downturn from past recessions...there are trends working their way through the economy that aren't cyclical. Some--and no one knows exactly how many--of the jobs lost in the recent economic downturn won't be coming back. They're gone for good, exported to low wage countries..." (Jubak, 9/9/03).

There are several other implications for middle-class America:

1. Even if there is an increase in inflation in the short-term, what will stop long-term downward pressures on costs/prices; i.e., deflation? India, and other countries, are only going to encourage more job outsourcing from the U.S. and add to capacity. Technology will only continue to evolve and allow firms to produce more with less.

2. If government intervention is not taken on the outsourcing issue, will it force intervention in other areas? What will the impact be on health care, for example? If jobs are outsourced or less secure, how long can middle-class America continue to have health care linked to jobs?

3. What is the optimal balance between lower prices and good paying jobs? The recent West Coast grocery store strike is "... emblematic of a larger national anxiety over tradeoffs between consumer prices and decent-paying jobs." (Wood, 12/11/03). While these jobs are not being outsourced, the same underlying reasons for moving jobs offshore, cost reduction, is the central issue. To what extent will middle-class Americans tolerate job losses and declining wages just to obtain lower consumer prices?

4. Middle-class America is already experiencing severe pressures in other areas:

A) Family relationships have changed: "These days many parents are facing a new fact of life: ongoing financial help to their adult offspring, even into middle age." (Gardner, 12/11/03).

B) To obtain middle-class status for their families, parents have financially leveraged themselves. Nobody has documented this stress better than Elizabeth Warren and Amelia Warren Tyagi. Their newly released book: The Two Income Trap: Why Middle-Class Mothers & Fathers Are Going Broke, is ground-breaking. They provide a comprehensive analysis of how middle-class families are too leveraged, and within a whisker of being pushed off a financial cliff. The continuation of outsourcing jobs overseas may be the final gust of wind that does it for many of them.

The University of Pittsburgh's Professor Emeritus Fred Thayer also writes about the disappearing middle class and the relentless cost reduction efforts by corporations. "Global competition now compels corporations to adhere to standard economic principles by drastically reducing costs by punishing workers and retirees in order to sell their output at the lowest possible prices. This trend will inevitably spill over into public and nonprofit sectors via privatization mania, and some of the actions now being taken are indeed tragic... I am old enough to remember when the streets were full of disabled people, many of them amputees, who themselves had no choice but to beg for assistance from passerby who themselves had little or nothing to spare. That world is returning." (Thayer, 8/19/03).

Is there anything that can be done to slow the excessive pace of the offshoring trend? Not entirely, but a more balanced and less destructive way to approach the issue is definitely needed. For example, possible reform initiatives might include:

1. Tax code modifications to create additional incentives for U.S. firms to retain domestic workers.

2. A national business accreditation process, perhaps patterned after the university system. Firms could obtain accreditation by meeting social responsibility criteria, including reasonable outsourcing policies. If consumers knew how to identify accredited firms, and companies themselves did business with other accredited firms, then there would be additional reasons to outsource in a more balanced way.

Incentives that do not encourage unbridled offshoring or completely dismiss minimal economic patriotism could have significant value. Offshoring advocates often suggest critics are not willing to change or accept new economic realities. However, this is not the case. Most individuals concerned about the mass exodus of jobs are only seeking fair and balanced policies. Individuals are not necessarily anti-free trade or protectionist if they are unwilling to surrender their jobs so quickly or their middle-class lifestyles.

Is there any other good news? Yes, the outsourcing problem has finally become a mainstream issue, and law makers are starting to pay more attention. For example, Indiana State Senator Jeff Drozda has been a leading public official on this issue and has begun "...working on a bill that would restrict the ability of Indiana's public agencies to outsource IT work to foreign countries..." (Parry, 12/10/03). However, many others in power need to follow Senator Drozda's commitment and diligence on offshoring before it is too late.

References

Aversa, Jeannine. "Companies' Productivity Soars 9.4 Percent". Yahoo News Service. December 3, 2003.

Gardner, Marilyn. "40 Years Old and Still Tied To Mom and Dad's Purse Strings". Christian Science Monitor. December 11, 2003.

Groshen, Erica and Potter, Simon. "Has Structural Change Contributed To A Jobless Recovery?". Federal Reserve Bank of New York. Vol. 9. No. 8, August, 2003.

Jubak, Jim. "A Jobless Recovery Can't Go On For Long". MSN Money On-line News Service: Jubak's Journal. September 9, 2003.

Kripalani, Manjeet; Engardio, Engardio; Hamm, Steve. "The Rise Of India". Business Week. December 8, 2003

Parry, Ed. "CIOs Caught In Middle Of Offshore Storm" . SearchCIO.com News. December 10, 2003

Roberts, Paul Craig. "Loss of Jobs In America". NewsMax On-line News Service. November 12, 2003.

Roberts, Paul Craig. "On the Road To Squanderville". NewsMax On-line News Service. December 9, 2003.

Thayer, Fred. "Linkages: Pension Crisis, Privatization, Deprofessionalization". American Society For Public Administration. August 19, 2003.

Wallace, Michael. "Greenspan Shifts Slips Into Neutral". Business Week. December 10, 2003.

Willard, Anna. "Payrolls Disappoint, Factory Orders Jump" Yahoo News Service. December 5, 2003.

Wood, Daniel. "A Strike That's Struck A Chord Nationwide". Christian Science Monitor.December 11, 2003