Date: Wed, 3 Sep 2008 21:58:15 -0700 From: Norm Matloff To: Norm Matloff Subject: Wharton/NYU study on offshoring To: H-1B/L-1/offshoring e-newsletter An interesting study has just been released, presumably as a working paper, by two researchers at prominent business schools. It's a pioneering attempt to measure what is probably unmeasurable, and definitely worth reading in its original form, at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1259323 Though my fellow critics of offshoring will no doubt eagerly cite this study, as a statistician I see flaws in it. Again, most of the flaws are not the authors' faults, but it does mean that the study's findings need to be viewed in the larger context. Also, there are some problems that the authors could have avoided. The most serious problem is, in my view, the underestimation of job loss due to offshoring that arises when a firm creates a new job abroad that would have been in the U.S. if not for the cost factor. (Note the qualifier; I'm not referring to foreign jobs created to serve local markets.) Such jobs don't count in the authors' data. That's not the authors' fault, and they recognize it, of course, but predictably it doesn't make the press reports, enclosed below. The authors found that 8% of IT jobs have been offshored, a figure they derived from worker interviews. They consider this to be significant, and it is, but again it is likely too low. The problem is that many IT workers whose jobs are offshored do not find other IT jobs and are forced to leave the field. They then do not show up in the authors' data. Statistically, the authors rely too much on "p-values" (observed significance levels in hypothesis tests), which can be misleading, given the large samples they are working with. Also, the pseudo-R-squared values in their regression analyses are generally quite low, calling into question the meaningfulness of some of their findings. (See my posting on NFAP at http://heather.cs.ucdavis.edu/Archive/NFAP2.txt if you are interested.) One finding of high interest to me is that older workers are more vulnerable to having their jobs offshored. This ties in with my point about the H-1B work visa, which is that H-1B is at its core serving as a means for employers to replace older (age 40 or even 35) Americans. The study cites my CACM article, which you can read at http://heather.cs.ucdavis.edu/CACM.pdf Unfortunately I don't think the authors read it. (Yes, one of the dirty little secrets of academia is that some authors don't actually read some of the articles they cite in their bibliographies.) They say, for instance, that I believe offshoring will lead to "long-term unemployment" among American IT workers, when in fact I mention unemployment only once in my entire article, and even then only in a footnote and in a different context from what they authors imply. On the contrary, what is more common is that they are simply forced to leave the field. The authors also failed to pick up what I considered one of the most important points in my article, which was this: # Not to worry, says the [industry lobbying group] ITAA, because the # number of jobs will increase in non-IT categories (such as construction # and finance). But the vast majority of these jobs will not be of the # high-level variety (such as architects and financial market analysts # that have begun to migrate offshore, too). Thus the U.S. would lose IT # and other jobs requiring a more rigorous level of education in exchange # for gaining jobs (such as carpenters and loan officers) requiring a # less-demanding education. You don't have to be a rocket economist to # see that such a trend would be disastrous for the U.S. In this light, I'm enclosing below a Wall Street Journal article that questions whether college is a good career investment these days, compared to blue collar jobs that may pay more. The author said that this trend is new, and he blames it on globalization. This dovetails with my point above. Note too that the Wharton/NYU study found that % ...although offshoring may enable firms to create some new jobs, it does % not appear that they are being allocated to displaced workers within the % firm. The authors might have added, "And many of the jobs that are created are filled with H-1Bs." By the way, the authors recommend that retraining programs focus on improving American workers interpersonal skills. Aside from the points that it's questionable whether they need it and whether much can be done in that direction anyway, the authors are missing the point: The older people are just too expensive, and sending them to a Miss Manners class isn't going to solve that problem. And as I've pointed out before, if the U.S. is pinning its hopes on competing in the global economy through blarney, then we'll lose to Ireland. :-) By the way, HP just announced a major layoff, in which laid-off engineers are being forced to train their replacements. The typical pattern, as we've seen, is that the replacements are either H-1Bs or L-1s, and there is a blog rumor to that effect, but at this point no one really knows. There appears to be something like this going on at Pfizer too. See Rob Sanchez's excellent newsletter on this, at http://www.zazona.com/NewsArchive/2008-09-01%20trouble%20at%20HP%20and%20Pfizer.htm (Rob's entire archive is at http://www.zazona.com/NewsArchive/index.htm). Two articles on the offshoring study are enclosed below, as well as the Wall Street Journal article. Norm http://www.computerworld.com/action/article.do?command=viewArticleBasic&articleId=9113755 Computerworld IT workers hit hardest by offshore outsourcing, survey finds Jobs most at risk for offshore outsourcing are computer programming, development By Patrick Thibodeau August 28, 2008 (Computerworld) As many as 8% of IT workers have been displaced by offshore outsourcing, either through job loss or an involuntary transfer to a new job by their employer, which is twice the rate of workers in other occupations, according to a study based on data collected from some 10,000 people, which may be the largest survey of its kind. The survey, conducted by researchers at the New York University Stern School of Business and the Wharton School of the University of Pennsylvania, also backs up the long-standing view that IT employees in purely technical jobs -- computer programmers and software developers who have little customer interaction -- are at the most risk from offshore outsourcing. The broad conclusions are unlikely to surprise many high-tech workers, but what may make this offshore outsourcing study unique is its breadth: some 6,700 workers across a variety of occupations and more than 3,000 hiring managers and human resources professionals were surveyed. There has been a dearth of data about the impact of offshore outsourcing on U.S. workers, and its authors, Prasanna Tambe of the Stern School and Lorin Hitt of Wharton, said their work is the first to pin down offshore outsourcing's impact by occupation. The job site Careerbuilder.com funded the research, which looked at a spectrum of occupations, including technology, and published initial data from the survey in April. But the 44-page paper, posted this week on the Social Science Research Network (registration required) analyzes what the data is saying about the fate of high-tech workers who have been directly affected by offshore outsourcing. Tambe, an assistant professor of information, operations and management sciences at NYU, said the data isn't a forecast of how extensive offshore outsourcing will be, but instead tries to fill in the gaps of the theoretical work on offshore outsourcing and address the dearth of data on this topic. But the impact of offshore outsourcing on IT jobs may just be a sign of how this trend will unfold across a broad range of occupations. "I think [IT] is definitely ahead of the curve, but I think that gap will probably close in the future," Tambe said. The base rate of offshoring across all industries is just over 15%, but some 40% of all tech and telecommunications companies are doing some type of offshore work, according to the research. By occupation, more than 30% of the survey respondents said they are offshoring computer programming and software development jobs, but only about half, or 15.5%, reported offshoring systems analysts, who typically interact more with others in a business. Among employees, across all occupations, slightly more than 4% of workers were displaced because of offshore outsourcing, half the rate of IT workers. The survey's 8% figure for IT displacement represents the percentage of workers who have ever been affected by offshore outsourcing, a rate that implies an annual offshoring-related displacement of 1% to 2% per year for IT workers, according to the study. Of those displaced by offshore outsourcing, 70% lost their jobs, with older workers more likely to be displaced. The researchers don't predict what future displacement rates may be, but they say that as offshoring grows, tech workers without jobs that don't require interpersonal skills, are being replaced more rapidly. IT workers concerned about displacement "can focus on further developing these interpersonal skills, or may find more robust long-term careers in IT professions that involve significant face-to-face interaction such as those involving cross-organizational process change or hands-on support functions," the report's authors wrote. Since IT workers have been more severely affected than other types of workers, Tambe and Hitt argue that policy-makers could focus on tech workers to provide help, including job training and government compensation to offset wage losses. Educational institutions will have to react as well, with "increased emphasis on the development of interpersonal and management skills within the IT curriculum." http://www.computerworld.com/action/article.do?command=viewArticleBasic&articleId=9113755 http://oascentral.careerbuilder.com/RealMedia/ads/adstream_sx.ads/careerbuilder.com/JobSeeker//home/192200883126@Top?&XE&&XE New Study from The Wharton School and CareerBuilder.com Identifies Jobs at Risk for Offshoring, and Implications and Benefits for the U.S. Job Market CHICAGO and PHILADELPHIA, April 23, 2008 - An economy plagued by uncertainty is refueling debates over the impact of offshoring U.S. jobs. Which jobs are at risk? Are more companies planning to displace American workers? And what are the short-term and long-term effects of sending jobs overseas on the growth and stability of the U.S. job market? CareerBuilder.com and researchers at the Wharton School of the University of Pennsylvania released new research today titled, "Jobs Beyond Borders," based on a survey of more than 3,000 hiring managers and HR professionals and more than 6,700 workers across the U.S. The results of this study as well as related research are available as a series of working papers. "Among employers who offshore, half said they believe offshoring is necessary to compete in a global economy and 15 percent project more than 20 percent of their jobs will eventually be sent overseas," said Matt Ferguson, CEO of CareerBuilder.com. "This does not mean the U.S. will see a reduction in employment levels, however. One-in-four employers who offshore said it has enabled them to create a greater number of better jobs here in the U.S." Amount of Jobs Being Offshored Thirteen percent of employers said their companies outsourced work to third party vendors outside the country in 2007. The same amount said they would do so in 2008. Seven percent of employers offshored job functions to foreign affiliates in 2007; 9 percent plan to do so in 2008. Plans to offshore to third party vendors in 2008 are more prevalent in the Northeast and West at 15 percent compared to 12 percent in the South and 10 percent in the Midwest. Looking forward, among employers who offshore, 44 percent estimate less than 5 percent of their jobs will ultimately be sent overseas while 39 percent project more than 10 percent of their jobs will eventually be offshored. "We're seeing a systematic pattern in the types of positions that are vulnerable to offshoring," said Lorin Hitt, Associate Professor of Operations and Information Management at the Wharton School. "The study indicates that services that can be delivered electronically and don't require much face-to-face interaction are now at higher risk of being displaced." High-Skill Jobs Also at Risk According to respondents who offshore, more firms are offshoring high-wage, high-skill jobs that were once thought to be immune to global competition. Twenty-eight percent of these employers reported more high-skill services positions are being sent overseas to third parties or foreign affiliates in need of management, technology and sales and marketing know-how. The majority of employers who offshore (69 percent) believe high-skill services positions are at equal or more risk of being offshored than low-skill jobs. Examples of jobs companies plan to offshore: * Computer programmers - 32 percent * Software developers - 32 percent * Customer service - 25 percent * Systems analysts - 16 percent * Sales managers - 8 percent * Graphic designers - 8 percent * HR personnel - 7 percent * General managers - 6 percent * Marketing personnel - 5 percent Among industries, technology services, telecommunications, insurance, manufacturing, engineering, banking & finance, oil, travel, utilities and communications all reported higher rates for offshoring. Impact on the U.S. Job Market and Workers The study indicates, of all the respondents, older workers were more susceptible to being displaced than younger workers. Of all workers who reported being displaced by offshoring, one-in-five (21 percent) said they were reassigned within the company. Seventy-one percent were let go. Of those who were reassigned, 76 percent reported it was a lateral move while 7 percent reported they benefited from either a promotion, higher compensation or both. Of those who left the company, 81 percent went to another employer that was not aggressively offshoring. While U.S. workers have lost jobs as a result of offshoring, companies are making the argument that offshoring is ultimately benefiting the American workforce. Twenty-eight percent of employers who offshored jobs said offshoring has already enabled them to create new, better jobs of different types in the U.S. "The adverse impact of offshoring has been somewhat tempered by a shift of displaced workers to firms that are not yet offshoring," said Prasanna Tambe, Doctoral Student at the Wharton School. "Although offshoring has already had a significant impact on some U.S. workers, offshoring-related displacement currently accounts for a relatively small proportion of annual U.S. employment turnover, which can be close to 40 percent per year." Cost-Savings and Other Reasons for Offshoring Cost-savings is the primary motivator for offshoring, according to 64 percent of respondents. Looking at information technology specifically, nearly half (49 percent) say they save over $20,000 per head on average by offshoring. Fifteen percent of employers say they are saving more than $50,000 per head. Twenty-seven percent of respondents cited availability of skills and 19 percent pointed to plans for expansion in a particular market as their main reasons for offshoring. "As part of the Wharton team's research, we have found that firms offshoring for expansion were more likely to be moving sales and support positions overseas, suggesting that part of the offshoring that is occurring is to enable U.S. firms to better serve their overseas customers," said Tambe. Popular Spots for Offshoring Offshoring companies are predominantly drawn to South Asia with 44 percent of employers who offshore stating they sent jobs to India. Others key locations include China (24 percent), Mexico (12 percent), Canada (9 percent), Germany (8 percent), the Philippines (7 percent) and the U.K. (7 percent). Reasons for Not Offshoring When respondents who don't offshore were asked why their companies chose not to, one-in-five (21 percent) said they felt it is important to keep jobs in the U.S. Fourteen percent reported their customers would not respond favorably and 10 percent said they work with sensitive data. Difficulty to build trust across borders, the cost associated with monitoring workers and shipping/materials, and the availability of a skilled labor pool abroad were also cited. To download a copy of the press release with a breakdown of survey results, visit http://www.careerbuilder.com/share/aboutus/pr_main.aspx Survey Methodology This survey was conducted online within the U.S. by Harris Interactive on behalf of CareerBuilder.com among 3,016 hiring managers and human resource professionals (employed full-time; not self-employed; with at least significant involvement in hiring decisions); and 6,704 U.S. employees (employed full-time; not self-employed) ages 18 and over between November 13, and December 3, 2007, respectively (percentages for some questions are based on a subset of respondents, based on their responses to certain questions). With a pure probability sample of 3,016 and 6,704 one could say with a 95 percent probability that the overall results have a sampling error of +/- 1.8 percentage points and +/- 1.2 percentage points, respectively. Sampling error for data from sub-samples is higher and varies. A full methodology is available upon request. About the Wharton School The Wharton School of the University of Pennsylvania -- founded in 1881 as the first collegiate business school -- is recognized globally for intellectual leadership and ongoing innovation across every major discipline of business education. The most comprehensive source of business knowledge in the world, Wharton bridges research and practice through its broad engagement with the global business community. The school has more than 4,600 undergraduate, MBA, executive MBA, and doctoral students; more than 8,000 annual participants in executive education programs; and an alumni network of more than 82,000 graduates. About CareerBuilder.com CareerBuilder.com is the nation's largest online job site with more than 23 million unique visitors and over 1.6 million jobs. Owned by Gannett Co., Inc. (NYSE:GCI), Tribune Company, The McClatchy Company (NYSE:MNI) and Microsoft Corp. (Nasdaq: MSFT), the company offers a vast online and print network to help job seekers connect with employers. CareerBuilder.com powers the career centers for more than 1,600 partners, including 140 newspapers and leading portals such as America Online and MSN. More than 300,000 employers take advantage of CareerBuilder.com's easy job postings, 26 million-plus resumes, Diversity Channel and more. CareerBuilder.com and its subsidiaries operate in the U.S., Europe, Canada and Asia. For more information, visit http://www.careerbuilder.com. http://www.csmonitor.com/2008/0903/p09s02-coop.html Christian Science Monitor College is not a must Mandated college-prep classes inhibit high-schoolers' futures. By Walt Gardner from the September 3, 2008 edition Los Angeles - Fall classes are barely under way and already guidance counselors across the country are conferring with students about the courses they need for their high school diplomas. In the process, more than 90 percent will be steered toward a college-prep curriculum, according to the Alfred P. Sloan Study of Youth and Social Development. This, however, is not as laudable as it seems. The reasons serve as a cautionary tale that the US ignores at its peril. Despite what the public is willing to acknowledge, the importance of a bachelor's degree has been wildly oversold. In 2007, for example, about 67 percent of high school graduates went directly to college, compared with just under half in 1972. The usual argument put forth in defense of a four-year degree is that it contains a decided wage premium. Studies have consistently found that those who have a degree on average earn more than those who don't. But all these studies were conducted before the new global economy fully emerged. Its presence calls into question long-held assumptions. If Alan Blinder, former vice chairman of the Board of Governors of the Federal Reserve System, is correct, the only jobs that will be secure in the next decade will those that cannot be sent abroad electronically. That means plumbers, electricians, and auto mechanics, for example, will be working steadily while many of their degreed classmates will be collecting unemployment checks. Moreover, since wages vary within any occupation, degree holders who are still employed will not necessarily be earning top salaries. The same holds true for non-degree-holders, of course, but at least they will be in far greater demand because their skills cannot be offshored. As a result, they will be in a position to command wages at the top of their respective brackets. The Wall Street Journal reported last month that some unionized craft workers already earn more than the average college graduate - and do so without carrying the heavy burden of student debt. The demand for this skilled labor is expected to intensify in the coming years as more workers retire and the economy revives. All of the preceding assumes, of course, that students in high school actually receive their diplomas. In order to earn them, however, students in many states have no choice but to take a rigidly prescribed sequence of courses that too often are not in line with their needs and interests. At the top of the list is the growing requisite of Algebra 1. California is experiencing the harm done by this requirement. At present, just more than half of the state's eighth-graders are taking Algebra 1 as part of the new policy mandating the course for all within three years. Yet already, the requirement has singularly resulted in an increase in the dropout rate beyond the 24.2 percent in the 2006-07 school year. Superintendent of Public Instruction Jack O'Connell has warned that the requirement sets every school in the state up for failure. For schools serving large numbers of poor and minority students, the results are expected to be disproportionately felt. That's because career and technical education, which has proved instrumental in the past in boosting graduation rates for these students, will lose more funding to accommodate the Algebra 1 mandate. Even if the funding were somehow to materialize, however, tens of thousands of students will not be allowed to enroll in vocational electives in middle school if they haven't mastered Algebra 1. This unintended consequence has become so threatening that the presidents of the California Manufacturers and Technology Association and the State Building and Construction Trades have jointly denounced the requirement. The total damage inflicted on students by the college-is-for-everyone mentality is incalculable. Students who cannot measure up to the demands for a college curriculum are made to feel like failures. Our competitors abroad have long understood and accepted the fact that students can have a productive and gratifying career even when they do not go on to some form of tertiary education. They grant equal respect to these students, rather than regard them as second-class. But their realistic attitude goes against the romantic notion that unfortunately prevails in this country. What Americans ultimately need to learn is that college is merely the most convenient place to learn how to learn. It is not an absolute determinant. o Walt Gardner taught for 28 years in the Los Angeles Unified School District and was a lecturer in the UCLA Graduate School of Education.