Louis Ludwig, a Russian Jewish immigrant, started Eagle Electric in
1920. For the next eighty years, the family-owned company made sockets,
fuses, and plugs, first on the Lower East Side and then in Long Island
City. By 1999, it employed 2,500 employees nationwide, 1,500 of them in
three factories in Queens.
But in 1999, Houston-based Cooper Industries bought Eagle, and soon
decided it would be cheaper to produce its switches and circuit breakers
in Mexico and China. Two of its New York factories have already closed; all of its manufacturing jobs will leave the city by next fall.
"These large structures that once provided good paying jobs to
hundreds of dedicated hardworking men and women now stand silent," John Viol, a Cooper employee and a representative of the local United
Auto Workers, testified at a recent City Council hearing. "These empty structures
are the result of corporate greed, and a true testimony of the effects
Outsourcing - the process by which companies send jobs overseas - is
a polarizing topic, and a frequent campaign issue, including in the recently-completed campaign for president. Like the word globalization in the 1990s, it is
regularly attached to stories like Electric Eagle's, with harmful local
effects that are difficult to deny. In recent years, the jobs going overseas are not just from factories, but also higher-skilled, better-paid office positions, causing increasing anxiety among a wide range of Americans about their job security.
But not everyone thinks that outsourcing is a bad thing. The benefits, many say, outweigh the drawbacks, even if they are not
as immediately apparent.
"There are job losses in a gross sense, which is to say some people
lose their jobs," said Clive Crook, deputy editor of the
Economist, at a recent debate. "But new jobs come to replace
them. In 10 or 15 years of intense globalization, there has been no net
loss in jobs."
Public officials on the federal, state and local levels of government
have taken notice. They are, however, far from a consensus on the nature
of the problem, let alone a solution.
"The first step is to begin an honest debate about where our economy
really is and where we are headed as a nation," wrote Senator Charles
Schumer in a New York
Times article he co-authored with economist Paul Craig Roberts.
"Old-fashioned protectionist measures are not the answer, but the new
era will demand new thinking and new solutions."
Americans have long cast a wary eye on Japan, China, Mexico and
Malaysia - seeing unfair competition; hearing, as former presidential candidate Ross Perot
did, a "giant sucking sound," and looking to the US government for job
Many businesses, meanwhile, have seen an opportunity overseas in the
process that in the 1990s became known as globalization.
For businesses, globalization meant the breaking down of national
borders so that a company - or certain parts of a company - could be
located in whichever country was the most profitable.
In many cases, it is cheaper to manufacture in developing nations.
Improved technology made it easier for companies to set up in more
remote locations. Free trade agreements - whereby groups of countries
removed political barriers such as protective tariffs - further
encouraged this process.
The result was a flow of manufacturing jobs from the United States
and Europe towards Latin America and Asia. Between 1994, when the North
American Free Trade Agreement (or NAFTA) between Mexico, the United
States, and Canada was enacted, and 2003, the total number of
manufacturing jobs in the United States dropped by 2.5 million,
according to the Bureau of Labor Statistics.
Some praised what they described as progress. Others said that
companies that were moving offshore were exploiting the lack of labor
and environmental standards in developing countries, harming all
As the jobs leaving the United States shifted from blue-collar to
white-collar, the debate over globalization has shifted into a debate
OUTSOURCING: GLOBALIZATION BY ANOTHER NAME?
The word outsourcing was initially a synonym for subcontracting -
when one company hires another to carry out one of its business functions.
Today, its most common usage is to refer to the process by which
companies move jobs overseas, whether they hire a foreign company to do
some of their work or establish their own presence in another country.
Several factors have made it easier to move white-collar jobs
overseas in recent years. Constant improvements in technology have made
it possible for a worker in India to keep in contact with a company in Manhattan, while countries like India have been increasingly
successful in creating a workforce that can reliably do jobs requiring
high levels of education and training.
The first test for Indian outsourcing was the Y2K scare, when Indian
workers were deployed en mass to help assuage the millennial fears of
American businesses. Since then, the number of jobs and the types of
jobs that can be outsourced has increased.
Companies outsource jobs for several reasons, but the main logic to
open an office in Bangalore, India is the same as building a factory along the
Mexican border: Indians and Mexicans will work for less than
Both proponents and critics of outsourcing agree that American jobs
are going overseas in increasing numbers. But while those who oppose the
trend describe the numbers as a serious chunk of the American economy,
others believe it is much more limited.
The trend is a difficult one to measure, and projections from one
side of the debate are regularly disputed by the other. Interestingly,
however, the opposing sides also occasionally use the
exact same numbers to prove their point.
The numbers most often cited were generated by Forrester
research, which this year predicted that both the raw number of jobs and
the types of functions that can be outsourced (in pdf format) are on the rise. Forrester
estimates that in 2005, there will be 240,000 services jobs - in sectors
like information technology - that will go overseas. By 2015, 3.3
million jobs will have moved overseas.
IS OUTSOURCING GOOD OR BAD?
When discussing whether outsourcing is good or bad, the debate hinges
not only on the specific numbers, but on disputes over economic theory.
The two sides have different ideas about what creates attractive
Those who believe that outsourcing is good for both the American and
the world economies invoke the principle of free trade. By allowing
businesses to look for the best ways to produce their products and
allowing customers to buy from the businesses that are producing the
best goods, free trade makes the world economy more efficient. This
efficient economy will produce more jobs.
In this system, each country is able to produce certain goods and
services better than other goods and services. The United States, for
example, is very efficient at producing high-level scientific research,
but less efficient at producing agricultural products. Therefore, it
should focus its efforts on scientific research. Developing nations are
more efficient at producing agricultural products than scientific
research, on the other hand: they should produce these and sell them to
the United States.
According to this line of thinking, more American jobs will be
created by focusing on whatever industries the country is most efficient
in while relying on other countries to produce what they do best.
Those who subscribe to this view of outsourcing claim to have most
economists on their side, and describe their opponents' claims as either
superficial or flat-out wrong economically.
"Because the economy - and especially job growth - is sluggish at the
moment, commentators are attempting to draw a connection between
offshore outsourcing and high unemployment," wrote Daniel Drezner, an economist who often
writes about outsourcing in his blog,
in Foreign affairs magazine. "But believing that offshore outsourcing
causes unemployment is the economic equivalent of believing the sun
revolves around the earth: intuitively compelling but clearly
But if proponents of outsourcing say that the other side of the
debate ignores basic economics, they are accused of ignoring the recent
history of globalization.
When manufacturing jobs began to leave the United States in
significant numbers, the free traders argued that these would be
replaced by jobs in the "New Economy" - a U.S. economy that would be
driven by technology. But now, well-paying white-collar jobs are flowing
overseas. To some, this indicates that the logic behind globalization
needs to be rethought.
"The very jobs we were told were the jobs of the future are now
disappearing ..." said Lori Wallach of Public Citizen, at a recent debate. "What's going now are
the high end jobs, the ones that pay $80,000 a year."
Greater numbers of jobs are now becoming vulnerable to outsourcing -
Wallach cites a University of Berkeley study which found that 14 million jobs with an
average salary of $40,000 a year are at risk (in pdf format).
But even for those jobs that stay in the United States, the threat of
overseas competition pushes wages down.
This pressure causes several problems, the most important of which is
increasing inequality. Besides the social problems that accompany a
widening gap between rich and poor, inequality can cause the weakening
of demand for products in American markets, as many people cannot afford
to buy as much.
According to David Kallick of the Fiscal Policy Institute, a New York
City-based economic policy organization, outsourcing presents both
challenges and opportunities. Whether it ends up being a good or a bad
thing depends on why it is happening - and how the United States
"If [jobs] really [are] going somewhere else because people are
better trained, then that pushes us in a good direction to make
ourselves be sure that we have better trained people," he said. "But if
it's going there just because of lower wages, then it pushes down wages,
which I think is not a good direction."
HOW OUTSOURCING AFFECTS NEW YORK CITY
While there has been much attention focused on how outsourcing
affects the United States as a whole, there has been practically no
research done on the specific impact on New York City.
"There's nothing analogous [to the national numbers used to generate
outsourcing data] on the local level," said Partnership for New York
City economist Jonathan Schwabish, who took a cursory look at
outsourcing in the city but stopped there for lack of information.
"It's really hard to do," he admitted, "so we got really frustrated."
Outsourcing is not the only issue that New York faces in its efforts
to hold onto jobs, and different industries seem to see outsourcing in
While the draw of Mexico and China may have been pulling Cooper
Industries from Long Island City, there was a push as well.
"Look at that space now, it's right across the street from a big bank
building," said John Breed, a company spokesman, of Cooper's remaining
New York factory; the five-story building is located in an area that is
shifting from a district just for large factories towards one with a mix
of residential, commercial, and lighter industrial uses. "If Eagle
hadn't been around, and that was just a vacant lot, would you build a
manufacturing plant there today?"
The limited amount of
space in New York makes land too expensive for large-scale manufacturing
uses - most of the bigger factories have moved out of the city. This has
meant a serious decline in the number of manufacturing jobs for New
Yorkers; it also means that those manufacturers that do remain are those
least vulnerable to New York's challenges, and best suited to tap into
Those manufacturers that are thriving in the city benefit from
proximity to others in their industry - important in fields like
high-end clothing and customized furniture. For many, the main concern
is finding sufficient space in New York. [see Giving the Garment Industry a Place of Their Own, a related article by
"The jobs that are left here are not jobs at risk of going to
overseas sweatshops because they provide niche market services," Maura
Keaney of garment industry union UNITE HERE told Ciy Council. "Indeed, designers and manufacturers very much want
production in New York."
Information Technology/Financial Services
In the information technology and financial services fields where the
newer wave of outsourcing is taking place, there is much more
uncertainty - and disagreement - about what outsourcing means for
businesses based in New York.
Ernie Nounou, a founding partner of software company Catalytic says
he lost between $1 million and $1.5 million in contracts with existing
clients who outsourced between late 2002 and mid 2003. He was forced
both to lay off employees and reduce his own compensation.
"There's no guarantee about the future," he said, "whereas several
years ago, based on the world as it was then, the sky was the limit."
However, while some companies in the field have been hurt by
competition from abroad, others in the field are the ones who are
benefiting from the lower prices of outsourced services. Currently, it
is mainly the larger financial firms that can take advantage of
outsourcing, but that may soon change.
"The larger companies get the economies of scale by going offshore,
that's pretty substantial," said Howard Rubin, a City University of New
York professor who recently
surveyed New York City companies (in pdf format) about outsourcing in a
study commissioned by New Jobs for New York. "There will be offshore
opportunities coming up that will allow small companies to tap in and
pool their resources and all sorts of good stuff, so the future is
Rubin's study found that of the largest 100 companies with publicly
traded stock based in New York City, over half already outsource overseas, and
90 percent plan to do so soon. But he also found that outsourcing does
not provide miraculous savings once additional costs like travel,
technology, and additional management are added in.
Rubin found that the cost savings from offshore outsourcing were
roughly comparable to those that could be realized by moving certain
operations to Syracuse or Rochester. With additional attention paid to
creating incentives through public policy, it may become more efficient
to keep these jobs closer to home.
HOW SHOULD PUBLIC OFFICIALS ADDRESS OUTSOURCING?
When campaigning, public officials have found ways to confront
outsourcing rhetorically. In the presidential campaign, for example,
Democratic candidate John Kerry lashed out at Benedict Arnold CEOs, and
criticized President George Bush for outsourcing the job of catching
Osama bin Laden to Afghan warlords, thus forcing the United States to
accept an inherently inferior product. Bush responded by saying he
opposed isolationist and protectionist policies.
But when placed in their roles as policymakers, public officials act
with much less clarity. No major policy has been passed at the federal
level to limit or regulate outsourcing -- indeed, the trade agreements that the United States
has signed may prohibit such limitations. Many states, though, have at least
proposed bills to address the issue.
At the city level, policymakers have little power over the overall
issue of outsourcing, which is essentially a matter of international
trade. What New York City can do is create incentive programs for
Federal and State Levels
Various bills have been proposed at the federal and state level to
limit outsourcing. These have followed several paths:
- Requiring companies to disclose their outsourcing activities
- Increasing privacy standards so that foreign workers cannot handle sensitive financial or medical records
- Prohibiting government contracts from going to companies that outsource.
In Albany, there was a flurry of activity earlier this year, in which
bills of all three types were proposed. None have yet passed; the one
that has moved farthest would simply require the Department of Labor to
conduct a study examining the effect of outsourcing on the state's job
Business groups warn against passing restrictions on outsourcing by
limiting government contracts or increasing privacy violations; if one
state will not allow these cost saving measures, they say, it is easy
for businesses to move to one that does.
As an alternative to keeping companies from outsourcing, federal and
state governments could increase the safety net for those who do lose
their jobs to overseas competition - by expanding programs like the Trade Adjustment Assistance program - and by
improving training and education to help American workers compete with
City Government and Outsourcing
"If the issue is that we're losing jobs overseas, and they're in
particular areas that New York City is big in ... there's only so much
that New York City can do, as a fiscal entity or a municipality," said
Schwabish of the Partnership for New York City.
What the city can do is
give incentives to the industries that are important to its economy.
An unlikely example of an industry that has looked to the city for relief
from outsourcing is the film industry. The words outsourcing and
globalization are more likely to evoke images of factory jobs flowing
south to Mexico than of film crews heading north to Canada. But workers
in the movies claim that they can be affected as well.
create low-rent version of New York City back-lots to stand in for the
real thing," John Amman of the International Alliance of Theatrical
Stage Employees told City Council. "Our industry has referred to this
practice as 'runaway production,' however it could easily be classified
as 'outsourcing' since it is identical to the transfer of jobs overseas
in other US industries."
In order to retain film industry jobs, the city and the state created tax credits for
productions that are filmed largely in the city. The mayor created an
Office of Film, Theater and Broadcasting, and the efforts have been seen
in a positive light.
Of course, such strategies have not been created particularly to
confront outsourcing: the tools that New York City has at its disposal
to keep jobs from going to India are the same ones it has long used to
try to keep jobs from going to New Jersey.
â€˘ Forrester: Outsourcing Facts
â€˘ South Asian Journalists Association Roundup: Outsourcing
â€˘ Public Citizen Global Trade Watch
â€˘ Network World Fusion: Outsourcing
â€˘ Outsourcing Conversations
â€˘ Daniel W. Drezner Blog
â€˘ CNET News.com: Outsourcing
Articles and Reports on Outsourcing:
â€˘ Second Thoughts on Outsourcing by Charles Schumer and Paul Craig Roberts (New York Times)
â€˘ Near-Term Growth of Offshoring Accelerating by John C. McCarthy (Forrester Research) (pdf file)
â€˘ Giving Thanks for Offshoring by Christopher Farrell (Business Week)
â€˘ The Outsourcing Bogeyman by Daniel Drezner (Foreign Affairs)
â€˘ The New Wave of Outsourcing by Ashok Deo Bardhan and Cynthia A. Kroll (University of California, Berkeley) (pdf file)
â€˘ Outsourcing: An Analysis of the Current State of Offshore Outsourcing in New York City based companies by Howard Rubin (New Jobs for New York) (pdf file)
â€˘ Addressing the Regulatory Vacuum: Policy Considerations Regarding Public and Private Sector Service Job Offshoring (Public Citizens Global Trade Watch) (pdf file)
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