Immigrant Labor or Outsourcing: You Must Choose One

[Dr.Love]

Ok, so the title is a little hyperbolic, but much of the recent “discussion” on offshoring has reminded me of some interesting things I’ve read on the subject.

My memory was sparked by an article posted by Le Jacquelope in one of the other threads, about offshoring high-skill jobs:

The need to source talent globally is replacing low-skilled, low-cost labor as the decisive factor in companies’ offshoring strategy. Nearly three-quarters of the companies that establish or expand product development offshore report that “access to qualified personnel” is the most important driver of their offshoring strategy, and almost 70 percent of survey respondents select an offshoring location based on the availability of needed expertise. " Access to qualified personnel" has increased substantially (by 70 percent in the last two years) as a major reason for establishing or expanding innovation, product development and product extensions offshore.

Lewin, director of Duke/CIBER (Center for International Business Education and Research) and lead principal investigator of the ORN project, said, "Companies in the advanced economies of the U.S. and Europe cannot find domestically the high-skilled talent they need to sustain their innovation and growth strategies. The leading-edge companies are developing new ways to source and manage talent globally. They turn to China, India and other countries in Eastern Europe and Latin America in search of highly skilled talent.

“Companies offshore because they can’t get it at home; they are reacting to the steady decline in the supply of graduates with advanced degrees in engineering and science and with the cutback in the annual H1b quota. Last year, it was estimated that U.S. companies were in need of more than 50,000 master and Ph.D. graduates.” [Bolding in original]

It seems that Americans are unwilling are unwilling or unable to provide the high-level technical skills that some companies are looking for. And since we’ve been restricting immigration for foreign labor to come in and apply for these high-skill positions, companies are left with no choice but to offshore if they want to get their work done.

But the situation isn’t as bad as it would seem at first. The next two sentences in the next paragraph:

Contrary to popular belief, offshoring high-value tasks does not lead to major job losses at home, but to more net new jobs globally. In the U.S., offshoring projects that involved “high-skilled” functions such as research and development, sales and marketing, product design and engineering resulted in an average of one job created in the U.S. per project. [Bolding in original]

This reminded me of an article in the New York Times from a couple months ago discussing the relationship between immigration, offshoring and job creation

The study, “Immigration, Offshoring and American Jobs,” was written by two economics professors — Gianmarco I. P. Ottaviano of Bocconi University in Italy and Giovanni Peri of the University of California, Davis — along with Greg C. Wright, a Ph.D. candidate at Davis.

The study notes that when companies move production offshore, they pull away not only low-wage jobs but also many related jobs, which can include high-skilled managers, tech repairmen and others. But hiring immigrants even for low-wage jobs helps keep many kinds of jobs in the United States, the authors say. In fact, when immigration is rising as a share of employment in an economic sector, offshoring tends to be falling, and vice versa, the study found.

In other words, immigrants may be competing more with offshored workers than with other laborers in America.

American economic sectors with much exposure to immigration fared better in employment growth than more insulated sectors, even for low-skilled labor, the authors found. It’s hard to prove cause and effect in these studies, or to measure all relevant variables precisely, but at the very least, the evidence in this study doesn’t offer much support for the popular bias against immigration, and globalization more generally. [My bolding]

The abstract of the study in question:

How many “American jobs” have U.S.-born workers lost due to immigration and offshoring? Or, alternatively, is it possible that immigration and offshoring, by promoting cost-savings and enhanced efficiency in firms, have spurred the creation of jobs for U.S. natives? We consider a multi-sector version of the Grossman and Rossi-Hansberg (2008) model with a continuum of tasks in each sector and we augment it to include immigrants with heterogeneous productivity in tasks. We use this model to jointly analyze the impact of a reduction in the costs of offshoring and of the costs of immigrating to the U.S. The model predicts that while cheaper offshoring reduces the share of natives among less skilled workers, cheaper immigration does not, but rather reduces the share of offshored jobs instead. Moreover, since both phenomena have a positive “cost-savings” effect they may leave unaffected, or even increase, total native employment of less skilled workers. Our model also predicts that offshoring will push natives toward jobs that are more intensive in communication-interactive skills and away from those that are manual and routine intensive. We test the predictions of the model on data for 58 U.S. manufacturing industries over the period 2000-2007 and find evidence in favor of a positive productivity effect such that immigration has a positive net effect on native employment while offshoring has no effect on it. We also find some evidence that offshoring has pushed natives toward more communication-intensive tasks while it has pushed immigrants away from them. [My bolding]

One other set of studies, also mentioned in the NYT article:

Immigration in recent decades has significantly increased the presence of foreign-born workers in the United States. The impact of these immigrants on the U.S. economy is hotly debated. Some stories in the popular press suggest that immigrants diminish the job opportunities of workers born in the United States. Others portray immigrants as filling essential jobs that are shunned by other workers. Economists who have analyzed local labor markets have mostly failed to find large effects of immigrants on employment and wages of U.S.-born workers (see Borjas 2006; Card 2001, 2007, 2009; and Card and Lewis 2007).

This Economic Letter summarizes recent research by Peri (2009) and Peri and Sparber (2009) examining the impact of immigrants on the broader U.S. economy. These studies systematically analyze how immigrants affect total output, income per worker, and employment in the short and long run. Consistent with previous research, the analysis finds no significant effect of immigration on net job growth for U.S.-born workers in these time horizons. This suggests that the economy absorbs immigrants by expanding job opportunities rather than by displacing workers born in the United States. Second, at the state level, the presence of immigrants is associated with increased output per worker. This effect emerges in the medium to long run as businesses adjust their physical capital, that is, equipment and structures, to take advantage of the labor supplied by new immigrants. However, in the short run, when businesses have not fully adjusted their productive capacity, immigrants reduce the capital intensity of the economy. Finally, immigration is associated with an increase in average hours per worker and a reduction in skills per worker as measured by the share of college-educated workers in a state. These two effects have opposite and roughly equal effect on labor productivity.

Unsurprising, to me at least, was that these twin devils of popular political discourse are not nearly as dangerous as the rhetoric would make you think. I do find it interesting that immigration and outsourcing tend to negate the impact of each other.

What are the policy implications of this research? For example, does it suggest that free trade and open immigration should come hand-in-hand? Perhaps future free trade agreements should include provisions that make it easier for people to move between the countries? Would this even be politically feasible? I doubt it, since it gives both parties something to campaign vehemently against.

It seems to me that the serious research, not the economic superstitions that many people find intuitive, strongly support the idea that both freer trade and more open immigration would only be a boon to the US economy.

[XT]

I think everyone is burned out on the whole outsourcing thingy at this point, but I’ll bump the thread and just say that to me it’s obvious…immigration is what made this country great. For us (the US that is) it’s a great thing that we should be encouraging as much as possible and feasible. For the rest of the world it’s more ambiguous, since it entails a brain drain from them to us…something we’ve been successfully doing for over a century now, and something that we’d be god damned stupid to stop or inhibit.

As Bill Murry put it: Cut it out! Cut it out! Cut it out! The hell’s the matter with you? Stupid! We’re all very different people. We’re not Watusi. We’re not Spartans. We’re Americans, with a capital ‘A’, huh? You know what that means? Do ya? That means that our forefathers were kicked out of every decent country in the world. We are the wretched refuse. We’re the underdog. We’re mutts! Here’s proof: his nose is cold! But there’s no animal that’s more faithful, that’s more loyal, more loveable than the mutt. Who saw “Old Yeller?” Who cried when Old Yeller got shot at the end?

I certainly cried when Old Yeller bought the farm. Q.E.D. immigration is the way to go.

-XT

[Rushgeekgirl]

Immigrant labor, definitely. More hot Latinos for me to check out.