Off-Shoring Essay

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Off-shoring is the migration of jobs rather than people between countries and regions. Firms ship at least part  of their  production and  jobs abroad  and  then reimport  the products  and services into their home country. Examples include the relocation of call center and medical transcription jobs from the United States to India. In a sense, off-shoring is simply a different manifestation  of the principle of comparative advantage. India has a well-educated,  English-fluent labor force willing to work for less than comparably educated Americans.

Jobs can be off-shored  from  a rich  country  to a poorer  one, as in the  call center  example. But jobs can also be moved in the  opposite  direction.  Legal services, computer  programming,  engineering,  and management   services are  all examples  of jobs offshored from other countries to the United States. (The United  States  has  a substantial  surplus  in  services trade—more  than  $50 billion in 2003.) What  makes off-shoring a controversial topic is the qualitative difference between  traditional  trade  in goods and services (paired with labor mobility between  countries and regions) and the actual shift of the jobs.

When  taking advantage  of the  lower labor  costs in another  country required  either moving an entire factory or encouraging the low-wage workers to emigrate, trade in services was limited by the high cost of relocation. As communication costs fall, however, offshoring makes possible trade in specific service jobs that  previously was not  cost-effective. In particular, low communications costs make it possible to outsource many high-skill jobs as well as low-skill ones. Thus, medical radiographs taken in the United States are routinely  transmitted digitally to radiologists  in India to be read for U.S. hospitals.

Candidate Jobs

Recent estimates  are that  as many as 11 percent  of U.S. jobs are at risk of off-shoring, based solely on industries  in which some off-shoring is already taking place. Which jobs can be off-shored depends on a wide range of factors. India shares both English and a common law legal heritage with the United States. As a result, some routine legal work is also already being off-shored from the United States to India, highlighting the importance  of cultural factors in making off-shoring possible. Some jobs, of course, require  a physical presence, and these jobs are less vulnerable to off-shoring. But even jobs traditionally performed in person sometimes can be performed virtually. Security firms are already off-shoring the monitoring of security cameras, for example.

On  the  other  hand,  the  ability to  off-shore  jobs has important limits. Although some countries  offer significantly lower wages for particular  occupations, labor costs must be compared on a productivity adjusted basis. (Unit labor costs statistics provide productivity-adjusted  wages.) When  these  adjustments are made, the cost advantage of the low-wage country often is significantly less than it initially appeared. Moreover, off-shoring is driving up labor costs in the low-wage economies.  Wages  in the  computer  programming  industry  in  India  have  been  rising  at  a rate of almost 15 percent per year recently, reflecting the high demand for skilled labor due to off-shoring. Such rapid increases erode the cost advantage of the off-shoring operation.

Policy Issues

Off-shoring   raises  three   important  policy  issues. First, if off-shoring continues  to expand, groups that previously did not view themselves as vulnerable to international competition  will experience disruption and insecurity. If the gains from trade are worth these costs, an important policy question  is whether  and how to compensate  individuals and firms that suffer dislocation  costs  as a result  of off-shoring  through transition  assistance, retraining, and other programs.

Second, the  expansion  of economic  vulnerability due to off-shoring threatens the political coalition supporting  free trade  in some rich countries.  Although the  consensus  among  economists  is that  the  gains from increasing the scope of trade to include service sector jobs are large enough to outweigh, in the aggregate, the costs of the resulting disruptions,  this situation could lead to a change in the post–World War II worldwide trend toward trade liberalization.

Third, some people argue that particular jobs produce benefits for the countries where they are located. In particular, research and development work is widely thought  to produce  significant benefits through  the creation  of innovation  clusters like Silicon Valley in California.


  1. Ashok Deo Bardhan and Dwight Jaffee, Innovation, R&D and Offshoring (University of California, Berkeley, Fisher Center for Real Estate and Urban Economics Research Report, 2005);
  2. Alan E. Blinder, “Offshoring: The Next  Industrial   Revolution?”  Foreign  Affairs  (v.85, 2006);
  3. Francesco Daveri and Cecilia Jona-Lasinio, Off-Shoring and Productivity Growth in the Italian Manufacturing Industries (CESifo, 2008);
  4. Thomas L. Friedman, The World is Flat: A Brief History of the Twenty-First Century (Farrar, Straus & Giroux, 2005);
  5. Douglas A. Irwin, Free Trade Under Fire, 2nd ed. (Princeton, 2005);
  6. Harbhajan S. Kehal and Varinder  Singh, Outsourcing and Offshoring in the 21st Century: A Socio-Economic Perspective (Idea Group Publishing, 2006);
  7. National Academy of Public Administration, Off-Shoring: An Elusive Phenomenon (National Academy of Public Administration, 2006);
  8. National Academy of Public Administration, Off-Shoring: How Big Is It? (National Academy of Public Administration, 2006);
  9. New Jersey, Final Report [of Assembly Outsourcing and Off-Shoring Commission] (New Jersey Office of Legislative Services, Public Information Office, Hearing  Unit, 2008);
  10. Frédéric Robert-Nicoud and  Bernard    Hoekman,  Off-Shoring of Business Services and  Deindustrialization:  Threat  or Opportunity—and for Whom? (Centre for Economic Policy Research, 2006).

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