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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
6
Example of Finance Sector
17%
19%
22%
32%
39%
43%
45%
54%
70%
74%
34%
Paroll/billing/accounts payable
Benefits/claims administration
Tax services
IT/systems support
Finance-related legal services
Advisory compliance services
Internal auditing
Risk management
Accounting services
Human resources/hiring
Asset management
Firm Functions Outsourced over the past 2 years, or are to be Outsourced over the next 1-2 years
Source: Management Barometer Survey on Outsourcing of Financial Function- US Findings, PricewaterhouseCoopers, August 2004
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
Offshoring by Numbers
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
Offshoring by Numbers
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
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.
Percentage change over REMI baseline values
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
Percentage change over REMI baseline values
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
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
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