The 1970s and 1980s saw a contraction, or “hollowing out,” of manufacturing in First World countries (Bronfenbrenner & Luce, 2004). Price differences and data mobility imply that, on the face of it, white-collar jobs will move from First to Third World countries. Not just clerical and call center jobs are threatened. It is reasonable to believe that work such as ar- chitectural drafting, product design, legal analysis, financial and market analysis, indexing of newspaper articles, programming, and systems design could be carried out in low-wage countries. Professional work can be loosely defined as transforming and analyzing data, or as obtaining information from data; any work done primarily on a PC can be done in a low-wage country. Some labor markets are now unconstrained by national boundaries;
an emerging global market, for example, for English-speaking call center operators, will supplant national markets and reflect converging remuneration for U.S. and Indian workers with identical skills.
Many consultants and interested parties have forecast the effects of offshoring on the First World job markets (Bardhan & Kroll, 2003; Business Council of Australia, 2004; Mann, 2003; McKinsey & Company, 2003). McKinsey argues that offshoring will increase the U.S.
standard of living; $1 spent offshore will generate direct and indirect net benefits conserva- tively estimated at $1.12-$1.14, but the benefits of spending onshore are not given.
EBS (2005) cites the following opinions:
• “By 2015, Forrester research estimates that as many as 3.3 million US jobs and $US13 6B in wages could be moved to countries such as India, China, and Russia.”
• “According to Deloitte consulting, 2 million jobs will move from the United States and Europe to cheaper locations in the financial services business alone. The exodus of service jobs across all industries could be as high as 4 million.” Gartner opines that “500,000 of the 10.3 million U.S. technology jobs could move offshore in 2003- 2004.”
• The Information Technology Association of America (2004, p. 1) opines that “In the software and services area, the economy is expected to create 516,000 jobs over the next five years in an environment with global sourcing but only 490,000 jobs without it. Of these 516,000 new jobs, 272,000 are expected to go offshore, while 244,000 are expected to remain onshore.” The report details essentially beneficial effects on growth, inflation, incomes, job markets, and interest rates.
The effect on job markets can be best understood using narrow and broad perspectives.
Narrow Perspective
This perspective considers the direct effects only. Assume that a firm transfers work from the USA to India, exploiting 80% labor cost reductions. U.S. workers and shareholders in supplanted suppliers lose jobs and income. The benefits are transferred to Indian workers through better working conditions and remuneration and to the clients’ customers and share- holders. In competitive markets, customers will enjoy most of the benefit as lower prices and/or better quality. This scenario perhaps characterizes the cutthroat U.S. auto market.
Broad Perspective
The broad perspective considers the indirect as well as the direct effects. Some indirect effects are:
• Stakeholders in Indian vendors spend their increased income. This will have a multi- plier effect on the Indian economy, stimulating imports some of which will come from the U.S., increasing employment. For example, more Indians will be able to afford American holidays.
• American consumers will have their quality of life increased by cheaper and better quality services. Clients’ shareholders will enjoy increased income, and consumers will spend a high proportion of the time and money saved on other goods and services.
• The extra competition will benefit consumers by limiting inflation and eroding the excess profits and restrictive practices of some industries hitherto protected from foreign competition. The medical and legal professions might suffer most.
The U.S. job market is dynamic. Edwards (2004, pp. 12-13) notes that most new technolo- gies have been perceived as a threat to employment, but that new occupations emerge. “ ...
Who would have guessed that America ... now has 139,000 psychologists, 104,000 floral designers, and 51,000 manicurists and pedicurists?”
It is important to realize that a serious socio/political problem remains (surfacing in the 2004 U.S. elections). The benefits of offshoring for the U.S., although large, are thinly spread and not immediate. The considerable costs of offshoring are shared among a comparatively few employees who lose well paid and stimulating jobs and may find it difficult to find equally satisfying employment. The adjustment process is likely to be more prolonged in other countries (e.g., Europe) with more protected and rigid labor markets.
Firms have been understandably reluctant to admit that they are offshoring. It is tempting to fudge the issue by outsourcing work to an ostensibly domestic vendor and taking care not to find out where the work is actually performed.
An.Australian.Case:.Qantas
We illustrate some of the complexities of offshoring by summarizing an Australian company’s as yet tentative steps.
Qantas is Australia’s dominant airline company. To reduce costs, it is threatening to off- shore activities traditionally performed in Australia. Some major offshoring decisions were proposed early in 2005. The company has to evaluate the cost savings, transition costs, the costs of possible strike action, and the possible loss of reputation that would be caused by
“exporting” Australian jobs.
Some characteristics of Qantas and its environment are: Qantas does not operate in a perfect market, for example, the Australian government protects Qantas’s share of the lucrative Australian-North American market, but insists on Qantas being Australian majority-owned (restricting its ability to raise capital). The company is locked into long-term contracts with pilots and cabin crew who are probably receiving compensation higher than they would in a perfect market. In common with other airlines, Qantas has to cope with air travel becoming commoditized and extremely competitive (there is excess capacity, and the failure of some U.S. airlines is symptomatic). Threats of terrorist activities, airport congestion, and SARS have deterred travelers. Although Qantas dominates the Australian domestic market, it would like to obtain economies of scale by merging with other airlines (e.g., Air New Zealand), but it has been frustrated by governments and regulations enforcing competition.
Qantas has taken some steps. Better information and accounting systems have facilitated better monitoring of costs (accentuating the competition between internal and external suppliers).
Partly to circumvent extant agreements with unions, Qantas has established Jetstar, a low-cost airline. A new generation of aircraft will substantially reduce passenger-mile costs.
Offshoring in an airline is less visible than in other domestic businesses. Aircraft receive between-flight maintenance wherever they land, crew must be accommodated overseas, and some food is loaded overseas. In 2002, Qantas’s CIO stated that [the] offshoring of tech- nology work to India was “a strategy for survival.” (Hayes, 2002, p. 36) In January, 2005, Qantas released plans to move more than 7,000 jobs offshore. These initiatives included proposals to:
• Hire overseas-based cabin crew who would be paid less than their Australian counter- parts. This provoked Australian employees, but it has obvious benefits. The outcome was an agreement with the flight attendants’ union for some staff to be based (more cheaply) in London.
• Have non-Australian contractors supply and load more passenger meals. This issue is not yet resolved.
• Have aircraft maintenance performed overseas. The outcome was some consolidation of maintenance operations and an agreement with the union on productivity targets.
The union proposed cost savings that contributed to the maintenance being done in Australia.
It is not clear (and scarcely matters) whether management’s ostensible intent to offshore was an ambit claim used in negotiations with unions or a firm intention. The issues of offshoring information technology and catering are in abeyance. Qantas recently agreed to outsource
$A1.4B worth of Information Technology and data center services to IBM and Telstra (Aus- tralia's dominant telecommunications company). The vendors could have some of Qantas's work done overseas. Qantas constantly opines that it will have to continuously reduce costs to stay competitive (a claim belied by its large and growing profits and cash flows), and that offshoring is a way of obtaining drastic rather than incremental cost reduction.
This section was sourced from the Qantas Chairman and CEO’s reports at http://www.
qantas.com.au/info/about/investors/annualReports, Qantas press releases at http://www.
qantas.com.au/regions/dyn/au/publicaffairs/introduction?, and reports from various Aus- tralian newspapers.