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Outsourcing and New York City

by Joshua Brustein, Nov 29, 2004
 
 

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 of outsourcing."

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."

GLOBALIZATION

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 security.

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 countries involved.

As the jobs leaving the United States shifted from blue-collar to white-collar, the debate over globalization has shifted into a debate over outsourcing.

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 Americans.

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 jobs.

It's Good!

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 wrong."

It's Bad!

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.

It Depends...

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 responds.

"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 varying lights.

Manufacturing

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 its advantages.

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 Gary Pang].

"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 there."

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 particular industries.

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 market.

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 global competition.

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.

"Other countries 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.

Related Links:

Outsourcing Websites:
• Forrester: Outsourcing Facts
• South Asian Journalists Association Roundup: Outsourcing
• OutsourceOutrage.com
• Public Citizen Global Trade Watch

Outsourcing Blogs:
• Network World Fusion: Outsourcing
• Outsourcing Conversations
• Daniel W. Drezner Blog
• CNET News.com: Outsourcing

Articles and Reports on Outsourcing:
• Second Thoughts on Outsourcing by Charles Schumer and Paul Craig Roberts (New York Times)
• Near-Term Growth of Offshoring Accelerating by John C. McCarthy (Forrester Research) (pdf file)
• Giving Thanks for Offshoring by Christopher Farrell (Business Week)
• The Outsourcing Bogeyman by Daniel Drezner (Foreign Affairs)
•
The New Wave of Outsourcing by Ashok Deo Bardhan and Cynthia A. Kroll (University of California, Berkeley) (pdf file)
• 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)
• 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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