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Reverse Offshoring? Or Yet More Evidence of Corporate America's Squeeze on Workers?

The global economy is shifting and developing countries are catching up.
 
 
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It's a tempting narrative for a lazy trend piece: Indian companies, buoyed by a booming economy and facing demands for higher wages at home, are now “offshoring” their work to the U.S., where they can take advantage of our high unemployment rate to grab American labor on the cheap.

“As Indian companies grow in the U.S., outsourcing comes home,” read a recent headline in the Washington Post. “Is this a taste of the future? Outsourcing goes full circle as Indian firms look to the U.S. for cheap labour,” was how the Daily Mail, a British tabloid, put it. It's not a new narrative – “Bangalore wages spur reverse offshoring,” claimed a headline in the Financial Times back in 2007.

Only the first headline is accurate, as outsourcing and offshoring are two different things. The Post story is about Indian firms with clients in the U.S. hiring more American workers to service them rather than shipping Indians to the U.S. That's different from what most people think of when they hear "offshoring," with U.S. firms sending jobs abroad to service their customers here at home or produce goods for the U.S. market.

To some degree, the trend is related to our high levels of unemployment – there are lots of excess workers in this country -- but there's also a policy component; the feds are cracking down on the use of H1-B visas, which were intended to attract high-tech talent to our shores, but are widely abused by corporate America. The Post notes that a 2008 government study found that one in five such applications were plagued by “fraud and technical violations,” and adds that the number of H1-B visas issued this year has declined by 43 percent since the same period last year.

But there is a larger story here. The global economy is shifting and developing countries are catching up. The wage differential isn't as great as it once was – after all, our working-class wages have stagnated for years. The first wave of offshoring – with U.S. firms shedding huge amounts of relatively high-paying manufacturing jobs, many of them union gigs – may be slowing, but a second wave appears to be gaining speed, with U.S. multinationals expanding their operations overseas because that's where a growing number of customers are to be found.

Consider this much-disseminated graphic for a moment:

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At first blush, it appears to confirm Ross Perot's “giant sucking sound” of American manufacturers moving abroad. But it's important to look past the headline numbers and see what kinds of jobs U.S. multinationals are creating here at home and abroad.

Researchers at the Federal Reserve Bank of Atlanta did just that. They found that while American multinationals lost over 1.9 million manufacturing jobs here at home, they created only 243,000 new jobs overseas. 

It's true that the decline in American manufacturing jobs is a long-term trend:

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But what began with big companies opening up factories overseas to produce goods to sell here at home is now largely a result of dramatic increases in productivity in the manufacturing sector – the amount of goods that can be created by one worker – over the past decade.

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So, what kinds of jobs are these U.S. multinationals creating abroad these days? About 70 percent of them are in retail sales, management and administration, accommodations and food services, real estate, health care and “miscellaneous services.” So, rather than just shipping jobs overseas to fulfill affluent Americans' demand at home (while pocketing the difference in labor costs as profits), these firms are shifting services and retail operations overseas.

What does this all mean? At the risk of oversimplifying some complex dynamics, it means we're getting an answer to the question of how far working Americans can be squeezed before we reach a point where domestic demand can no longer sustain our middle class.

Consumer spending typically accounts for around 70 percent of our economic activity. The simple, common-sense truth that seems so elusive in Washington is that demand, rather than giving rich people tax cuts, is what creates jobs. And although we have seen a rebound in consumer demand since the depths of the recession, we are still well below the trend-line of where we should be, compared to past recessions.

In 2007, the Center for Budget and Policy priorities noted that just “51.6 percent of total national income went to wages and salaries in 2006,” a “lower share than in any of the 77 previous years for which these data are available.” And in 2009-2010, labor costs – the value of wages and benefits – saw their steepest decline since 1962-'63. According to the latest data, wages and salaries have now dropped to just 49.8 percent of our income.

And while corporate profits are at a (nominal) all-time high, that doesn't mean they're being pocketed by Americans to pour back into the domestic economy – anyone, anywhere in the world can buy shares in U.S. multinationals.

Sadly, as I noted in April, the squeeze continues apace. According to research conducted by the National Employment Law Project (NELP), the recovery “has been disproportionately driven by industries that pay median wages below $15.00 an hour.” Three out of four jobs the economy added last year were in the bottom 40 percent of the wage scale, while only one in 20 were in the top 40 percent.

In March, House Republicans laid out a perverse plan to lower working Americans' wages, supposedly in a bid to get employers to hire more of them (PDF). They called for “decreasing the number and compensation of government workers,” which they said would spur job creation because “a smaller government workforce increases the available supply of educated, skilled workers for private firms, thus lowering labor costs.”

“Labor costs,” of course mean “wages and benefits” – Americans' paychecks and health care. We're in a deep hole, and our elites appear quite happy to blithely keep digging.

Ultimately, it's good news that people in erstwhile developing countries like India are getting higher wages and seeing the growth of a domestic middle class. But people in rich countries need jobs too, and the only way we can remain a wealthy country is to stop the upward redistribution of wealth achieved by union-busting, outsourcing – both domestically and overseas – and distortions of the tax code.

Consumers need to have money in their pockets if we're to maintain decent-paying jobs. While profits are easily sent anywhere, the jobs will always follow the consumers with money in their pockets.  

 
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