Due to Offshoring, U.S. Productivity Gains May Not Be as High as Thought

Ann All

Despite perennial concerns over the loss of U.S. jobs to offshoring, much of the outcry over the practice has died down, with some economists even insisting that offshoring has boosted both productivity and wages at U.S. firms.


Yet it turns out such impressions may be erroneous due to productivity statistics based on flawed data from the Bureau of Labor Statistics. The problem, reports BusinessWeek, is that gains in domestic manufacturing have been overstated -- a problem it calls "phantom GDP."


It estimates that offshoring may have created about $66 billion in phantom GDP gains over the past four years. Accounting for this "phantom" GDP would reduce actual GDP today by about half of 1 percent.


It's "a real problem," says an MIT economist quoted in the article. The scary thing is, no one seems to know just how big of a problem. Another economist mentions "potentially big implications" and says, "I worry about how pervasive this is."


Rather than the 1.8 percent gains in productivity that have been reported over the past three years, BusinessWeek believes the percentage is closer to 1.6 percent, a similar rate to the 1980s. A managing partner at Accenture thinks that as much as half of U.S. productivity gains are due to globalization, though he says he knows of no company or industry that has attempted to calculate a figure.


This would explain, says the article, why American salaries have remained relatively stagnant -- other than those of chief executives, who are rewarded for cost cutting that occurs when work is sent offshore. It also doesn't bode well for the nation's trade imbalance and long-term sustainable growth rate.


One of the economists in the article doesn't think it's a serious issue -- provided that R&D of products and services still occurs in the U.S. before production moves offshore. More companies, however, are exploring sending R&D to other countries.


Despite the confusion over the exact numbers, BusinessWeek points out that the traditional methods that America employs to measure its economic performance have not kept up with the flattening world. It's clear that they need to be re-evaluated.

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Add Comment      Leave a comment on this blog post
Jun 25, 2007 10:30 AM Helena Helena  says:
Im a foreigner working in India (and not as an expat) because i just cannot find work in my country because everyone is moving it's IT operations to "offshore" and expecting you be competitive in salary as "offshore" people. I think this is bad. You may have all kind of statistics and studies whether is good or not in terms or revenues or losses or productivity or whatever. But... what about the people? It just send you to a deep depression state making you wonder "am i so useless here? in my own country?" and then just to find out that your position has been sent to "offshore" and to realise that what you could do alone for a decent salary, has been outsourced to be done inneffectively by 30 people, half cost. And then, you have to go to the place where the work is. Reply
Jun 25, 2007 1:44 PM Laurence Laurence  says:
Off-shoring is a cancer. Companies that do it are fooling themselves because they can only cut costs so far before the effect plateaus and by then they have lost their identities and credibility. What value is put on intellectual property? Send the work away and after a while be left with no-one with company knowledge capable of doing it in your own country. That's when the off-shore price will rise and you'll be stuck between a rock and a hard place. Of course, the chief execs don't care because they've already feathered their nests and will leave the company which will be bought by an off-shore mogul who'll then put his own countrymen on the job. This is known as "white-anting". Reply
Jun 25, 2007 4:22 PM Mike S Mike S  says:
Well it is unfortunate that CEOs and board of directors only see the bottom line, "cost savings". Offshore is not a cost saving! As some one post earlier you may have twice as many people working in a position that one ONshore person workin but they are only working at half the capacity. By that I mean the offshore people are new and inexperience and don't know what they are doing. It could take up to a year for them to know exactly what they are doing. Most of the time they email their onshore manager on what to do. I know I get those emails, so I loose time explaining to them what to do who to contact or even how to fix a problem. Next is the language barrier let's face it Americans are stubborn, we don't want to learn another language. Just look at the way a lot of us don't want to have a second language of Spanish. So others, offshore, need to learn to speak and talk English as well as write, no easy feat! But still I have problems talking to offshore people and understanding them. Again after several "what did you say?" questions Ihave them email me the problem. Again time wasted, a minute here .. a minute there and it adds up.Now there is security. Now talk about a can of worms. At least in my company the offshore people cannot have direct access to Windows servers. Now if any one that reads this says okay use Citrix andwe do but we have a Tivoli admin that is offshore and he needs direct access to Windows servers to do his job. So he can't do his job on Windows servers and guess who has to do it ... me or a Windows Admin. Some times it may take a day to get something fixed or setup so now we have at least one person maybe more that are onshore doing his job. Just wasted time and personnel.My company got rid of all the QA testers onshore and went offshore. Another big mistake, becasue they found out that they can't do the job properly and now are bring the offshore QA testers to onshore.And one last thing, these offshore people move around it seems because we never have the same Offshore people for more than a year. So now we have new personnel again and retraining them again.In my eyes offshore help is over rated and most and I say MOST of them are very new to the field and have minimal knowledge. So a cost savings is more red ink in eality.Offshore is just for Directors, VPs, CIOs and CEOs to say it works so they can get their huge bonuses. Reply

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