offshoring of jobs from suffolk...

Offshoring of Jobs from Suffolk County

Socioeconomic impact analysis Presented to:

The Boston Redevelopment Authority

12.8.2004

By Alexandre Bartolin Nai Jia Lee Xin Li Moshahida Sultana

1Zhijun Tan

Agenda

1. Offshoring Phenomenon2. Evaluation of socioeconomic impacts of offshoring on

Suffolk County using REMI® 3. Policy recommendation 4. Framework for future research

Scope of the Project

Sector focus: Services Industries Suffolk County Time frame: 2002-2016

2

1. Offshoring / Outsourcing

Domestic Offshore

In House

Outsourced Domestic

Outsourcing

Offshore

Outsourcing

Using subcontractor

Domestic

Production Offshoring

using affiliate

3

Why Offshoring?

Short term: – To reduce costs – 24/7 operation – To use onshore human resource for high value-added

occupations – To focus on core business – To access a highly qualified workforce

Long term: – To enter new markets

Long term perspectives: – Reducing costs for existing business that create

opportunities for new business

4

What Functions to Offshore

• Labor intensive • Information-based • Codifiable processes • Standardized processes

Limitation: • No face-to-face relationship with customer

5

Risks…

• Capability of offshored suppliers • Productivity • Data protection / Intellectual Property / …

• Loss of expertise

7

Offshoring by Numbers

Estimations Based on US National Data for US employment

Source Gross Job loss Period Goldman Sachs 300,000 – 500,000 2001-2004 Business Week 400,000 – 500,000 2001-2004 Mark Zandi Economy.com

995,000 2001-2004

Gartner Inc. 500,000 (IT only) By the end of 2004 Forrester Research 3.3 million (Services only) Over the next 15 years Goldman and Sachs 6 million Over the next 10 years Bardhan & Kroll UC-Berkeley

14.1 million (Services only)

Vulnerable jobs

Deloitte Research 850,000 (financial services only)

Vulnerable jobs

Source: Compiled by Authors 8


Mass Layoff Events, National Data, First Quarter 2004

Reason reported to survey Separation (No. of jobs lost)

% total separation

Total with movement of work 16,021 6.7%

Overseas relocations 4,633 1.9%

Affiliate Offshore 2,976 1.2%

Outsourced Offshore 1,657 0.7%

Domestic Relocation 9,985 4.2%

Affiliate Onshore 8,191 3.4%

Outsourced Onshore 1,794 0.8%

Total Private non farm sector 239,361 100%

Source: Bureau of Labor Statistics, Mass Layoff Survey (MLS) First Quarter 20049


Domestic Offshore

In House

Outsourced

Domestic

Outsourcing

0.8%

Offshore

Outsourcing

Using subcontractor

0.7%

Domestic

Production

3.4%

Offshoring using affiliate

1.2%

Source: Bureau of Labor Statistics, Mass Layoff Survey (MLS) First Quarter 2004 10

11

Potential Affecting Jobs in Suffolk County

Occupation # of Job in 1995

# of Job in 2000

% of Change

1995-2000

% of total jobs in Suffolk

County (2000)

Secretaries, administrative assistant 60,575 64,538 6% 9%

Financial clerks 20,364 21,836 7% 3%

Information and record clerks 32,307 36,526 13% 5%

Healthcare support occupations 18,366 20,863 14% 3%

All other and misc. legal and related services 4,043 4,552 12% 1%

Sub Total 135,655 148,315 9% 21%

Computer specialists 13,479 18,557 38% 2%

Financial specialists 17,881 21,564 21% 3%

Total Job in Suffolk County 637,218 713.618 12% 100%

Source: REMI 5.4 historical data

2. REMI Simulation

12

Selection of Industries

Industry NAICS Code

Professional, scientific, and technical services 54

Internet service providers, web search portals, and data processing services 518

Securities, commodity contracts, and other financial investments and related activities 523

Insurance carriers and related activities 524

Administrative and support services 561

Ambulatory health care services 621

Hospitals, private 622

Note: North American Industrial Classification System 13

14

Job Approach

Output Block -¾ Investment Spending (amount)offshored services in offshore locations

Market Shares Block -

Wage, Price and Profit Block -¾ Production Cost (amount)

Labor and Capital Demand Block

¾

Wage, Price and Profit Block

¾ Wage bill (amount)

2. Loss in Wages

Labor and Capital Demand Block -¾

Sales/Int’l Exports) (amount)

1. Loss in Jobs

Investment Spending 6. Investment of repatriated earnings by

subsidiaries of US companies providing

Exports to Rest of World (amount) 5. Increased Demand for Exports of Goods

and Services to offshore Locations

Production Cost 4. Savings in Production Cost for the Firms

- Productivity Labor Productivity (share)

3. Increase in Productivity for Firms

- Wage

Employment Industry Employment (Industry

REMI Variables Used Exogenous Change

Source: The Offshoring Team

Trade Approach

Exogenous Change REMI Variables Used

1. Increased Demand for Exports of Market Shares Block Goods and Services to offshore - Exports to Rest of World (amount) Locations

2. Investment of repatriated earnings Output Block by subsidiaries of US companies - Investment Spending providing offshored services in the ¾ Investment Spending (amount) offshore locations

3. Import of Services Market Shares Block - Imports from of the Rest of World

(amount)

Source: The Offshoring Team 15

16

Variables Source

outsourcing intensity of servicesAmiti-Wei IMF

McKinsey

i

Bardhan and Kroll Authors

Authors

Forrester Research Authors

Forrester Research

Source

6. Repatriated earnings

National Forecast are used5. Exports of goods and services to offshore locations

Offshoring location is Bangalore4. Production cost

To nullify the effect of loss in employment on productivity

Boston industries similar to US national figures

2. Wages

Boston industries similar to US national figures

1. Jobs

Source: The Offshoring Team (OSS) for each industry as the share of service inputs imported

7. Imports

Wall Street Journal McK nsey

For every $ offshored expenditures, 4cents repatriated

For every $ offshored expenditures, 5cents extra exports

3. Productivity for firms

Assumptions Exogenous Change

Methodology

• Generate a base-case scenario based on Employment Approach

• Do sensitivity analysis using alternative scenarios

17

Results: Job App.

Percentage change over REMI baseline values

Variable 2004 2005 2006 2010 2015 2016

Total Jobs -0.14 -0.11 -0.14 -0.05 0.05 0.13

Total GRP 0.11 0.19 0.26 0.80 1.92 2.23 Real Disposal Personal

Income 0.06 0.10 0.13 0.39 0.85 0.99

Output 0.14 0.23 0.32 0.96 2.29 2.67

Exports to Rest of World 0.29 0.41 0.57 1.46 3.57 4.13

Population -0.08 -0.10 -0.13 -0.22 -0.34 -0.35

Labor Force -0.14 -0.17 -0.21 -0.35 -0.57 -0.59

Total Migrants -6.72 -5.51 -7.46 -4.27 -4.56 -2.40

Source: REMI Policy Insight 2004 Simulations for Suffolk County by Authors 18

Results: Job App.


5%

4%

3%

2%

1%

0%

-1%

-2%

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Total ( )

l (Bil96$)

i I il Fi

(Bil Fi

ld (Bil Fi

ion (Thous)

# of Jobs Thous

Tota GRP Fixed

Real D sp Pers nc (Bxed 96$)

Output xed 96$)

Exports to Rest of Wor xed 96$)

Populat

Labor Force

Source: REMI Policy Insight 2004 Simulations for Suffolk County by Authors

19

Results: Job App.D

iffer

ence

s in

Uni

ts o

ver t

he

Bas

elin

e Va

lues

Number of jobs by industry 1,500

1,000

500

-

(500)

(1,000)

(1,500) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

year

ing Inf i iTrade Manufactur Transp, or and F nan Serv ces

Source: REMI Policy Insight 2004 Simulations for Suffolk County by Authors

20

Results: Job App.Output Economic structure 2004-2016

21

1%

2%

3% 2%

3%

6%

10%

3% 2%

2%

8%

1%

3%

1%

8%

28%

16%

9%

29% 15%

0% 5% 10% 15% 20% 30%

2004

2016

25%

Utilities

Construction

Manufacturing

Wholesale Trade

Retail Trade

Transp, Warehousing

Information

Finance, Insurance

Real Estate, Rental, Leasing

Profess, Tech Services

Mngmt of Co, Enter

Admin, Waste Services

Educational Services

Health Care, Social Asst

Arts, Enter, Rec

Accom, Food Services

Other Services (excl Gov)

Source: REMI Policy Insight 2004 Simulations for Suffolk County

Results: Job App.

Sensitivity Analysis: • Canada (Higher cost) as offshore location:

– Generate similar trends as in our Baseline case

– The amplitude of negative effects is larger:• loss of jobs is higher than Baseline case

– The amplitude of positive effects is smaller:• Increase of Outputs is lower than Baseline case

22

Results: Trade Approach

• Offshoring measured as import of offshored services – Shows offshoring improves the performance

of selected variables for all years – Offshoring is shown to be more favorable to

the economy than Employment Approach

– Critical variable is exports

23

Results: Trade Approach


2002

2004

2006

2008

2010

2012

2014

2016

(

(

(

-0.5%

Total Emp (Thous)

Total GRP Bil Fixed 96$)

Real Disp Pers Inc (Bil Fixed 96$) Demand (Bil Fixed 96$)

Output Bil Fixed 96$)

Exports to Rest of World Bil Fixed 96$)

Population (Thous)

Labor Force

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

Source: REMI Policy Insight 2004 Simulations for Suffolk County 24

Value Added to Last Year Study

• Two different Approaches

• Look at alternative offshoring destinations (ex: Canada)

• Different method to evaluate Import variables (Amiti and Wei 2004)

• Different sources to evaluate Export variables

25

Limitations of REMI

• Consistency between Boston and offshored locations definitions of sectors and occupations

• Difficulty to ascertain some of the indirect and induced effects, e.g., reemployment, retraining, extra exports

• Is a regional model appropriate to simulate international trade and competition among countries?

26

3. Policy Recommendations

• Short-term negative impacts on employment– Train workers with skills that cannot be easily

replaced with offshoring – Develop other sectors that require face-to-face

contact, e.g. tourism, services for customers

– Encourage innovation

– Ensure competitiveness of exports to create new opportunities for workers

• Offshoring has long term positive impacts on economy and helps sustain the economic competitiveness of the region – Avoid policies that discourage offshoring 27

4. Framework for Future Research

28

Data Needed

• Theoretical: – Insourcing – Exports – Social aspects

• Data and Methodology – Conduct surveys using two dimensions:

– Industry – Occupation

– Measure jobs lost – Evaluate Benefits from Offshoring

29

Future…

• “There is always likely to be anxiety about the jobs of the future, because in the long run most of them will involve producing goods and services that have not yet been invented.”

Alan Greenspan

30

To:Boston Redevelopment Authority (BRA)Greg Perkins, Dominic Modicamore, at

the BRA;

And especially to:Professor Karen R. Polenske and

Teaching Assistant in the DUSP at MIT

Thank you ! 31

Any Questions ? Comments ?

Insights ?

32

References used to build variable input

•Jones Lang Lasalle Global Report 2004

•Colliers International Quarterly Office Update, 2004

•McKinsey Global Institute. August 2003. Offshoring: Is It a Win-Win Game? San Francisco: McKinsey Global Institute

•REMI Policy Insight 6.0

•Forrester Report 2003

•Schroeder, Michael. April 2004. Can Outsourcing Actually Create Jobs in the U.S.? In The Wall Street Journal Online.

•Mary Amiti, Shang-Jin Wei. May 2004. Service Outsourcing, Productivity and Employment: Evidence from the US. Washington D.C.: International Monetary Fund. 33

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