Where America's jobs went

In a globalized economy, American corporations are rapidly shifting their workforces abroad

March 18, 2011, at 10:04 AM

An employee in Ford's mexico-based factory works on a car; The U.S. automaker's international expansion has caused a 16 percent drop in it's American-employed workforce. Photo: Corbis

Why aren’t U.S. corporations hiring?
Actually, many of them are. They’re just not hiring Americans. In the two years after the Wall Street meltdown triggered the Great Recession, large American corporations slashed U.S. payrolls by a net of 500,000 jobs. At the same time, they hired 729,000 workers overseas. As globalization transforms the world economy, in fact, many U.S.-based companies are shifting the balance of their workforces overseas. Ford, for example, reported in 1992 that 53 percent of its employees worked in the U.S. and Canada. By 2009, its North American workforce (by then Ford had expanded to Mexico) made up only 37 percent of total payroll. With 53 percent of big U.S. firms implementing offshoring strategies, “there is no job security now,” said Lauren Asplen of the IUE-CWA, an electrical-workers union.

When did offshoring become so prevalent?
The trend began in earnest in the late 1970s at large manufacturers such as General Electric. GE’s then CEO, Jack Welch, who was widely respected by other corporate chieftains, argued that public corporations owe their primary allegiance to stockholders, not employees. Therefore, Welch said, companies should seek to lower costs and maximize profits by moving operations wherever is cheapest. “Ideally,” Welch said, “you’d have every plant you own on a barge to move with currencies and changes in the economy.” Not only did GE offshore much of its manufacturing, so did its parts suppliers, which were instructed at GE-orchestrated “supplier migration seminars” to “migrate or be out of business.”

Is offshoring limited to manufacturing?
It used to be, until the Internet boom of the 1990s made it a white-collar phenomenon, too. As economic globalization gathers speed and technology erases geographic boundaries, firms now have instant access to educated workers all over the planet, allowing enormous service companies and small businesses alike to hire Web designers in Thailand, graphics specialists in India, and seismologists in Pakistan. White-collar workers who once seemed immune to offshoring—lawyers, financial analysts, even local newspaper reporters—are now in peril of seeing their jobs shifted to India, Eastern Europe, or China. In recent years, 13 of every 100 U.S. computer-programming jobs shifted overseas, according to the Bureau of Labor Statistics, making it the most at-risk occupation in America. “Any job you can think of now can be done by someone on the other side of the world for less cost,” said Matt Barrie, CEO of Freelance​.com, which matches employers and freelancers around the world.

Are labor costs the driving factor?
Yes, but they’re only one reason companies prefer to hire foreign workers. By offshoring, firms can also sidestep more-stringent U.S. workplace and environmental regulations, and take advantage of foreign government subsidies designed to lure foreign investment. They can also tap a labor pool that in many cases is better versed in math and science than the U.S. workforce is. Thus, offshoring has evolved from a simple matter of cutting labor costs to “a multidimensional value proposition,” as the Conference Board’s Ton Heijmen puts it. Part of the value is that foreign workers can be required to work under conditions that would be illegal in the U.S. In Shenzhen, China, for example, Foxconn, the subsidiary of a Taiwanese company, employs 250,000 people to assemble iPods and iPhones for Apple, working long, monotonous days with a handful of timed bathroom breaks. Foxconn workers earn an average wage of $292 a month. Last year 18 Foxconn employees at the Shenzhen complex attempted suicide, 14 successfully.

Is the offshoring strategy working?
For employers, absolutely. In the third quarter of 2010, U.S. corporate profits hit an all-time high of $1.659 trillion, despite a U.S. unemployment rate hovering above 9 percent. By no coincidence, in 2009, nearly half—47 percent—of the revenues of the 500 largest U.S. public companies came from outside the U.S. And economic growth rates are much stronger overseas. From 1995 through 2008, the U.S. gross domestic product grew at an annual average of 2.9 percent—a crawl, compared with average annual growth of 9.6 percent in China and 6.9 percent in India. Businesses go where the growth is. “For a lot of American companies, their actual and psychic energy is focused abroad,” said Matthew Slaughter of Dartmouth University’s Tuck School of Business.

Is more offshoring inevitable?
Yes, unless the federal government decides to discourage it. Currently, the U.S. levies no tax on U.S. firms’ overseas earnings as long as those profits remain overseas. That policy essentially encourages companies to reinvest their profits outside the U.S. And to give companies even more incentive to hire overseas, the Internal Revenue Service allows companies that move factories abroad to deduct from their taxable income the cost of closing their U.S. plants. Democrats in the Senate attempted last autumn to close those loopholes and create incentives to repatriate profits and jobs, but pro-business Republicans blocked their proposal. “The whole concept of offshoring,” said Mark Toon of offshoring advisory firm EquaTerra, “is here to stay.”

Training your own replacement
“I’d like my new team to meet my old team,” Myra Bronstein’s boss said, by way of opening the meeting at WatchMark, a Bellevue, Wash., developer of software for cell phone companies. Bronstein and 17 other U.S.-based software testers were meeting the 20 engineers, fresh off the plane from India, who had been hired to replace them. Bronstein and her colleagues were expected to spend the final two months of their WatchMark careers training them. If they refused, WatchMark would withhold their severance payments. “It totally knocked the wind out of me,” Bronstein said. “It was the most difficult situation in the world.” WatchMark managers said they had little choice but to export the jobs. Salaries for U.S.-based software engineers start at $75,000 a year; India-based engineers start at $15,000. Bronstein was left feeling like a sucker. “I never would have gone into the technology field in the first place if I had a crystal ball and knew the bottom was going to drop out. Now they want much more from you for much less.” A lot of Americans know exactly how she feels.

[If anything spells out the need for education to prepare one for employment, this is one story. Proper tax regimes, proper business incentives and a pragmatic govt to see the big picture, are all important.]