A Waking Nightmare?

As the essence of the American Dream travels throughout the world, igniting ambition in millions of Chinese and Indian youths, we struggle to keep up with it here at home.

By Sheridan Prasso
July 2006

Outsourcing. Today in the U.S. it's bandied about as a scare tactic by politicians, joked about by late-night comedians, and feared by those whose careers may be affected. But what does it really mean? What is the truth behind the fears? And what do they say about America's role as the richest and most powerful country in the world?

The reality is that outsourcing has affected few Americans so far. In the 2004 presidential campaign where outsourcing became a big issue, the U.S. Department of Labor reported that jobs moving overseas deprived only 10,722 Americans of work between January and September, a time when the U.S. economy generated hundreds of thousands of other jobs. During that period, outsourcing accounted for only 2.5% of all layoffs.

The real concern, it seems, is about the future, and what the trend signals about America's position in the world today. Already we know that the global pressure for lower prices has driven the jobs of millions of American factory and garment workers to cheaper countries such as China: We would rather pay $70 for running shoes made in China than $120 for running shoes made in America. That's fine, we thought. As long as workers could learn higher-tech skills and move up the knowledge ladder, we thought we would be okay, that our economy would no longer need to be based on its bedrock of manufacturing, but rather on services. Study hard, earn an advanced degree, and you will always be able to work, we thought. That has been part of the American dream. But now the same trend is spreading to services, affecting even our educated population with college degrees accountants, computer technicians, lawyers, etc. because millions of young Indians and Chinese now have the same dream.

The fear of outsourcing and America's losing its position in the world has to do with concerns over the quality of the U.S. education system and the kind of work force we are creating for the future: In a recent business survey, more than 60% of American employers rated high school graduates' math and language skills as fair or poor; 25% of students never finish high school, and the U.S. ranks 28th in the world in the math skills of its 15 year olds, far behind other countries of the world.

In addition to quality, there is quantity. About a third of all jobs in the U.S. require knowledge of science or technology, but only 17% of Americans graduate with such a degree. By contrast, the world average is 27%. China's rate is 52%. China graduated 600,000 engineers last year, India 250,000; America graduated only 70,000. Even if only 1/10th of those Indian and Chinese engineers are competent (and we can assume with China ranked No. 1 worldwide in math skills, that they are), there will still be more of them than American engineers.

The impact will be felt some 10 years from now, when American companies are expected to outsource 3.3 million jobs, worth $136 billion in salaries, to low-cost countries, taking advantage of all those highly educated Indians and Chinese who can work for lower salaries due to cost of living differentials, and who have the skills to tackle the job. With starting salaries for engineers in India at about $12,000 per year, compared to $60,000 in the U.S., for companies wanting highly educated workers for less money, this is an obvious choice. In the U.S. they have to pay $5,000 per month for the same accounting and auditing services that can be done in the Philippines for $300. They have to pay $7,000 per month to someone designing computer chips in the U.S., but instead can pay $1,000 per month to do it in India or China. Ultimately, this may affect the industries we know and rely on and their typical ways of doing business. What does it mean for the future of the legal profession when thousands of Indian lawyers trained in U.S. law can write up contracts in Bangalore overnight and email them to New York by the next morning? Certainly it is a future in which the earning power of a first-year legal associate in America is considerably diminished.

GE, for example, has hired 2,000 engineers and scientists in Bangalore, India instead of at its former research headquarters in upstate New York. Through its outsourcing operations, GE saves about $350 million per year, which means your GE toaster and light bulbs can cost significantly less than or about the same as they did a few years ago, and your GE stock price is higher, if you own shares. But that's little consolation to those 2,000 American engineers who can no longer work for GE in New York, and who may ultimately find it harder to keep earning the same salaries that their fathers and mothers did for the same kind of work.

The reality is that the educated professionals of America are starting to feel the downward pressure on their wages. Adjusted for inflation, the starting salaries for computer engineers and computer scientists have fallen by 12% since 2001, according to BusinessWeek*. It's similar for electrical engineers: -10.2%. Accountants: -2.3%. Marketing executives: -6.5%. Business managers: -5.7%. As globalization continues, as borders break down, and as the work forces of the world become more highly educated, this may continue at least until salaries and costs of living in both China and India start catching up to those in the West. That may take decades.

There is an altruistic view that outsourcing amounts to a transfer of wealth from the world's single richest nation (us) to the poorer nations of the world, and that in a world of global economic inequality, it's about time. Outsourcing creates jobs that empower women by placing them in managerial positions, and those jobs are less dangerous and less physically strenuous than factory work. Of course this is a positive benefit for humanity, but it may be hard for workers to find solace in this kind of big-picture altruism.

Is there anything we can do? The more our society tries to fix our broken educational system to create a solid work force for the future, and the more that Americans gain a better understanding of global issues and seek to increase their own knowledge and abilities, the better chance our society will have at competitiveness with the up-and-coming rest of the world.