Download GLOBAL OUTSOURCING OF HUMAN CAPITAL AND

The Impact of Global HumanCapital Outsourcing on the
Employment Patterns in the United
States
Constantin Ogloblin
School of Economic Development
March, 2005
The Problem

An established view: global economic integration tends to shift
low-skilled jobs from developed to developing countries while
creating high-skilled jobs in the developed world.

The new round of globalization challenges this view.

Anecdotal evidence of companies in developed economies
shipping high-skilled jobs offshore piles up, raising fears of job
losses among high-skilled workers in the West and sparking
hot political debates.

830,000 white-collar jobs will be outsourced from the U.S. offshore
by 2005, and by 2015 the number is expected to rise to 3.4 million
(Forrester Research Inc.).

The supply of IT services is the most global: 16% of all the work
done by the world’s IT-services is carried out away from where
these services are consumed (in the software industry the
proportion is 6%).
Why?

Growth of human capital in the developing
world relative to the U.S.



Undergraduate degrees in engineering
granted annually:
China
195,354
India
129,000
Japan
103,440
Russia
82,409
U.S.
60,914
The K-12 system does a good job of weeding
out any students interested in math and
science.— Craig Barrett CEO, Intel
Low price of human capital in developing countries
 Typical monthly salaries:
Chip designer:
$1,000 in India,
Info-tech support: $500 in India,
Financial analyst: $1,000 in India,
Accountant:
$300 in the Philippines

$7,000 in the U.S.
$10,000 (up to) in the U.S.
$7,000+ in the U.S.
$5,000+ in the U.S.
Low cost of transportation and communication
Literature

Although the literature on the labor market effects of
international trade is ample, international outsourcing of
human capital has been studied very little.

Direct data on the number and composition of jobs
outsourced are not publicly available.

Much of the current research has been conducted or
ordered by politically or financially interested groups.
The Purpose of the Study

One of the first independent attempts to examine the influence
of human-capital outsourcing on the incidence of
unemployment in the U.S.

Does belonging in an “outsourceable” occupation increase the
risk of unemployment for a worker in the U.S.?

Are high-skilled workers more likely to be involuntarily
unemployed than low-skilled workers?

Is the incidence of unemployment across different skill levels
related to outsourcing?
Approach

Statistical inference based on the individual-level data
from CPS combined with the best available information
on occupational categories threatened by offshore
outsourcing

Probit equation that estimates the expected rate of
involuntary unemployment conditional on the worker’s
level of education and on whether his/her occupation is
at risk of outsourcing

The analysis is empirical: no formal theoretical model
of job loss to outsourcing is presented.
The Sample

The April basic CPS datasets for 2000 and 2004

Individuals in civilian labor force, aged 18-64, who are
either wage employed or involuntarily unemployed

In all descriptive statistics and estimation procedures
observations are weighted using the CPS final weights.
Major SOC groups threatened by outsourcing
Threatened by outsourcing
Not threatened by outsourcing
11
Management
21
Community and social service
13
Business and financial operations
25
Education, training, and library
15
Computer and mathematical
29
Healthcare practitioner and technical
17
Architecture and engineering
31
Healthcare support
19
Life, physical, and social science
33
Protective service
23
Legal
35
Food preparation and serving related
27
Arts, design, entertainment, sports,
and media
37
Building and grounds cleaning and
maintenance
41
Sales and related
39
Personal care and service occupations
43
Office and administrative support
45
Farming, fishing, and forestry
47
Construction and extraction
49
Installation, maintenance, and repair
51
Production
53
Transportation and material moving
55
Armed forces
The Estimation Model

Average effects:
P(Ui  1)  (αEi  Ri  γCi )

Skill specific effects of outsourcing:
P(Ui  1)  (αEi  Ri  δRi Ei  γCi )
Results – Average Effects
Variable
No high school
Some college
Associate degree
Bachelor’s degree
Graduate/professional
degree
Occupation is at risk
of outsourcing



2000
Marginal
Coefficient
effect
0.176***
0.670
(0.049)
-0.089**
-0.272
(0.045)
-0.127**
-0.366
(0.063)
-0.271*** -0.735
(0.056)
-0.234*** -0.614
(0.085)
-0.079**
-0.255
(0.038)
2004
Marginal
Coefficient
effect
0.121***
0.794
(0.042)
-0.102***
-0.576
(0.037)
-0.167***
-0.879
(0.050)
-0.169***
-0.920
(0.040)
-0.235***
-1.175
(0.061)
-0.043
-0.257
(0.032)
The patterns of average effects of education on the probability of
unemployment are virtually the same in 2000 and 2004.
In general, the new wave of global outsourcing has not shifted the
risk of unemployment from low-skilled to high-skilled workers.
Outsourcing has no significant influence on overall involuntary
unemployment.
Results – Specific Effects, Occupations not at Risk
Variable
No high-school
diploma
Some college
Associate degree
Bachelor’s degree
Graduate/professional
degree

2000
Coefficient Marginal
effect
0.176***
0.668
(0.054)
-0.093
-0.284
(0.061)
-0.120
-0.348
(0.086)
-0.214**
-0.602
(0.088)
-0.115
-0.336
(0.139)
2004
Coefficient Marginal
effect
0.100**
0.642
(0.047)
-0.045
-0.261
(0.048)
-0.134**
-0.714
(0.064)
-0.308***
-1.543
(0.069)
-0.426***
-1.826
(0.104)
In 2004, the negative relation between the level of education and
the probability of involuntary unemployment holds only for the
occupational categories that are not threatened by outsourcing.
Results – Specific Effects, Occupations at Risk
Variable
2000
Coefficient Marginal
(δ – ά)
effect
High-school diploma
-0.062
-0.201
(0.055)
No high-school
-0.151
-0.586
diploma
(0.158)
Some college
0.097
0.295
(0.139)
Associate degree
0.104
0.297
(0.194)
Bachelor’s degree
0.126
0.336
(0.192)
Graduate/professional
-0.069
-0.161
degree
(0.297)

2004
Coefficient
Marginal
(δ – ά)
effect
-0.065
-0.386
(0.049)
0.006
0.050
(0.129)
-0.066
-0.344
(0.111)
0.060
0.302
(0.150)
0.509***
2.919
(0.148)
0.712***
4.008
(0.221)
For the outsourceable occupations, more highly educated
workers are at a greater risk of unemployment than those with
lower education.
Concluding Remarks





Currently, belonging in an outsourceable occupational category
does not increase the risk of unemployment for an average
U.S. worker.
Global outsourcing has not shifted the risk of unemployment
from lower-skilled to higher-skilled workers in general.
But more highly educated workers in the outsourceable
occupations are currently significantly more likely to be
involuntarily unemployed than workers with lower education .
It remains to be seen whether or not this relation continues to
hold and becomes prevalent for the entire economy as the new
wave of global outsourcing gets more strength.
Further research: the influence of the global human-capital
outsourcing on wages in the U.S. across different skills
categories.