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 Zhijun Tan 1
Agenda 1. Offshoring Phenomenon 2. 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 Domestic Production Offshoring using affiliate Outsourced Domestic Outsourcing Offshore Outsourcing Using subcontractor 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
Example of Finance Sector Firm Functions Outsourced over the past 2 years, or are to be Outsourced over the next 1-2 years 19% 17% 22% 34% 32% 39% 45% 43% 54% 70% 74% 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 Source: Management Barometer Survey on Outsourcing of Financial Function- US Findings, PricewaterhouseCoopers, August 2004 6
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 995,000 2001-2004 Economy.com 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 14.1 million UC-Berkeley (Services only) Deloitte Research 850,000 (financial services only) Source: Compiled by Authors Vulnerable jobs Vulnerable jobs 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 2004 9
Offshoring by Numbers Domestic Offshore In House Domestic Production 3.4% Offshoring using affiliate 1.2% Outsourced Domestic Outsourcing 0.8% Offshore Outsourcing Using subcontractor 0.7% Source: Bureau of Labor Statistics, Mass Layoff Survey (MLS) First Quarter 2004 10
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 All other and misc. legal and related services 18,366 20,863 14% 3% 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 11
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 Securities, commodity contracts, and other financial investments and related activities 518 523 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
Job Approach 1. Loss in Jobs 2. Loss in Wages 3. Increase in Productivity for Firms 4. Savings in Production Cost for the Firms 5. Increased Demand for Exports of Goods and Services to offshore Locations 6. Investment of repatriated earnings by subsidiaries of US companies providing offshored services in offshore locations Source: The Offshoring Team Exogenous Change REMI Variables Used Labor and Capital Demand Block - Employment Industry Employment (Industry Sales/Int l Exports) (amount) Wage, Price and Profit Block - Wage Wage bill (amount) Labor and Capital Demand Block - Productivity Labor Productivity (share) Wage, Price and Profit Block - Production Cost Production Cost (amount) Market Shares Block - Exports to Rest of World (amount) Output Block - Investment Spending Investment Spending (amount) 14
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 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
Variables Source Exogenous Change Source Assumptions 1. Jobs 2. Wages 3. Productivity for firms 4. Production cost 5. Exports of goods and services to offshore locations 6. Repatriated earnings 7. Imports Source: The Offshoring Team Forrester Research Forrester Research Authors Authors Bardhan and Kroll Authors Wall Street Journal McKinsey McKinsey Amiti-Wei IMF Boston industries similar to US national figures Boston industries similar to US national figures To nullify the effect of loss in employment on productivity Offshoring location is Bangalore National Forecast are used For every $ offshored expenditures, 5cents extra exports For every $ offshored expenditures, 4cents repatriated outsourcing intensity of services (OSS) for each industry as the 16 share of service inputs imported
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% Total # of Jobs( Thous) 4% 3% 2% 1% 0% -1% -2% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: REMI Policy Insight 2004 Simulations for Suffolk County by Authors Tota l GRP (Bil Fixed 96$) Real Di sp Pers Inc (Bil Fixed 96$) Output (Bil Fixed 96$) Exports to Rest of World (Bil Fixed 96$) Population (Thous) Labor Force 19
Results: Job App. Number of jobs by industry 1,500 Differences in Units over the Baseline Values 1,000 500 - (500) (1,000) year (1,500) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Trade Manufacturing Transp, Infor and Finan Services Source: REMI Policy Insight 2004 Simulations for Suffolk County by Authors 20
Results: Job App. Output Economic structure 2004-2016 Other Services (excl Gov) Accom, Food Services Arts, Enter, Rec Health Care, Social Asst 1% 3% 1% 8% 2004 2016 Educational Services Admin, Waste Services Mngmt of Co, Enter Profess, Tech Services Real Estate, Rental, Leasing Finance, Insurance Information 2% 2% 3% 6% 10% 15% 16% 29% 28% Transp, Warehousing Retail Trade Wholesale Trade Manufacturing Construction 3% 2% 3% 2% 9% 8% Utilities 1% 0% 5% 10% 15% 20% 25% 30% Source: REMI Policy Insight 2004 Simulations for Suffolk County 21
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 2.5% Total Emp (Thous) 2.0% Total GRP ( Bil Fixed 96$) 1.5% 1.0% Real Disp Pers Inc (Bil Fixed 96$) Demand (Bil Fixed 96$) Output ( Bil Fixed 96$) 0.5% 0.0% -0.5% 2002 2004 2006 2008 2010 2012 2014 2016 Exports to Rest of World ( Bil Fixed 96$) Population (Thous) Labor Force 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