Jobbed: How Offshoring Threatens Economic Recovery

Last Updated Dec 15, 2010 3:12 PM EST

Weak economic growth isn't the only thing driving up unemployment. Another factor -- one that gets short shrift both in Washington and in corporate boardrooms -- is "offshoring." Even as CEOs browbeat President Obama over his alleged hostility to business, jobs are increasingly leaking overseas.

In 2008 and 2009, U.S. and European companies eliminated nearly 1.1 million jobs in financial services, IT, HR and other white-collar professions because of offshoring, productivity improvements and the sagging economy, according to The Hackett Group, a Miami consulting firm. Another 1.3 million jobs are expected to vanish by 2014.

The trend is hitting finance especially hard. Hackett expects the total number of industry jobs lost to offshoring to grow by a compound annual growth rate of 20 percent between 2010 and 2014. Indeed, that outflow is getting worse: The current rate of job losses resulting from offshoring during the financial crisis is nearly double the prevailing rate from 2000 to 2007. If the pattern continues, financial firms will soon be shipping more jobs overseas than tech companies, which have accounted for the lion's share of offshoring over the last decade.

As the firm noted in a recent report (no public link):

Our investigation of job-trend projections by function revealed that finance will become a far more significant contributor to total losses than it has been historically.
That's no surprise. Industries like banking, insurance and accounting are in many ways ideal for offshoring and automation. Much of the work today involves doing simple, routine transactions. (A cynic might suggest that foreclosure documents can be robo-signed just as easily in Bangalore as here in the states, and at a fraction of the cost.)

Earlier this year, for example, when Bank of America (BAC) staffed up to help homeowners seeking advice about lowering their mortgage, the company did at least some of its hiring in India. And for years B of A and other big banks have outsourced thousands of IT, customer service and other jobs to foreign markets.

Corporate execs argue that offshoring is essential for remaining competitive in a global economy. Not necessarily. As WaPo columnist Harold Meyerson notes, Germany has remained an export powerhouse by preserving well-paid domestic jobs focused on producing high-value goods. By contrast, and as the ongoing debate over federal deficits underscores, the U.S. has long been the world's preeminent importer. He writes:

The explosive growth of new markets has been a boon to advanced economies that still make products for export -- Germany's in particular. But here, our chief export has been the jobs and factories that once turned out products for export.
Another related factor that may be sapping employment is monetary policy. Although the Federal Reserve's policy of quantitative easing is aimed at stirring demand in the U.S., big American companies are using the cheap money to invest abroad. Of course, such investment could ultimately lead to economic growth and job-creation here at home. A secondary effect of QE also could eventually boost employment by weakening the dollar and strengthening foreign demand for U.S. exports.

For now, however, U.S. corporations are choosing to hoard their capital or direct it toward emerging markets rather than expand locally. Longer term, the issue is whether companies eventually reinvest earnings generated overseas on the home front or pile it into expanding their foreign operations and, say, boosting executive compensation.

That's why Obama's challenge in restoring the economy has little to do with mollifying irate chief executives. Whatever their complaints, after all, the government has done virtually nothing to pressure companies to create U.S. jobs. The White House is also brokering trade agreements that stand to benefit U.S. businesses and pushing to cut corporate taxes.

That may help American business, but it's far less likely to to help American workers. Here's why that's especially troubling. What we're seeing in wake of the financial crisis isn't merely a cyclical, if unusually deep, downturn -- it's a fundamental shift in the structure of the economy and the composition of the labor force. While many jobs will return once growth rebounds, many are likely gone forever. As finance and other white-collar jobs positions migrate to China or India, will newer, stronger industries fill the void? Not as long as a lid remains on federal spending.

As The Hackett Group's findings show, meanwhile, it's no longer "only" manufacturing jobs that are risk. Unconstrained offshoring is steadily eroding the economic relationship between companies and all manner of workers. No one is safe.

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    Alain Sherter covers business and economic affairs for