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The debate over the impact of global outsourcing continues to rage, with Nobel Prize winner Paul Samuelson and Columbia professor Jagdish Bhagwati coming down on opposite sides of the issue.

These two "mega" economists disagree whether short-term job losses brought on by outsourcing are mitigated in the long run by gains to American workers from free trade and consumption growth in low-wage countries.

Samuelson, still going strong at 89, argues that the loss of competitive advantage to low-wage countries such as China and India is permanent. He maintains that the American economy and worker lose forever.

On the other hand, Bhagwati and colleagues acknowledge some temporary dislocation in low-skill jobs because of outsourcing but assert that the practice offers substantial gains to the US economy through cheaper imports and stronger markets for exports.

On jobs, Bhagwati sees minuscule effects. Service jobs - retail, catering, personal care, and certain professional roles - cannot be outsourced because of inherent personal interactions between deliverer and consumer. Because the service sector encompasses some 70 to 80 percent of the US economy, outsourcing can only impact a sliver of US employment.

Data from Forrester Research, a leading IT consulting organization, lends support to Bhagwati's findings with estimates that 400,000 US jobs had moved abroad by 2003 and that the total would hit 3.3 million by 2015.

That's just over 200,000 jobs lost each year to global outsourcing, a trivial problem in the context of the normal churn of the US economy, where about 7 million jobs were gained and lost in each of the last four quarters.

So who benefits from outsourcing?

Certainly US shareholders, investors and American consumers derive benefits, although sometimes at the expense of American wage earners.

A report from the McKinsey Global Institute estimates that global outsourcing returns 45 to 55 percent in net savings to corporations, with added profits from the sale of American products (especially IT) to run the offshore operations.
 
Outsourcing also results in cheaper imports. Catherine Mann of the Institute of International Economics concludes that the price of personal computers dropped in the early '90s because US chip manufacturers moved offshore and reduced chip prices by about 10 to 30 percent.

However, these data are incomplete and provide too narrow a view of outsourcing. There is other evidence in line with Samuelson's findings to suggest that jobs are lost, and lost forever, especially at the low end of the food chain.

Lori Kletzer of the University of California - Santa Cruz examined manufacturing job losses between 1979 and 1999 in labor-intensive industries such as clothing, footwear, leather and textiles.

About one-third of displaced workers failed to find reemployment within a three-year period, and among those who did, about half experienced a substantial wage cut of at least 15 percent.

A recent BusinessWeek report adds that it's not just manufacturing workers who are at risk, but a substantial portion of the 57 million US white-collar and professional employees who face real global competition as a portion of these jobs can be readily outsourced.

Proponents of free trade assert that jobs lost will be replaced in an economy that is dynamic and constantly innovating.

Bhagwati points to the example of displaced radiologists who move to other in-demand medical professions such as plastic surgery, or displaced professionals who shift focus to become computer software applications engineers.

How realistic is it to expect professionals to morph into something else midway through their careers?

Pretty unrealistic unless there's a fundamental shift in our support of education and retraining.

The news is not good on that front.

The federal government is cutting back on Pell grants, the primary college program that provides financial aid for college students; there is only limited state support for worker retraining or reeducation; and there has been a decline in the number of students attending science and technology programs at major US universities, largely because of falling foreign enrollments.

Lest we reach the erroneous conclusion that we are training foreign students to go back to their home countries and steal jobs from American workers, the fact is that 38 percent of PhD holders in sciences and engineering are foreign born, and they remain in this country to fuel our research and development engines.

We should also remind ourselves that we're still in the midst of the dislocations and transitions resulting from global outsourcing, so it's premature to judge long-term results.

What seems evident so far?

Yes, corporate earnings and investors are benefiting.

Yes, American consumers are benefiting from cheaper prices because of global outsourcing.

Yes, American workers are dislocated - perhaps permanently in the manufacturing sector and significantly among professional and white-collar employees whose jobs won't return unless the country invests substantially in their retraining and education.

Although it will be a while until we can determine the "right" answer to the outsourcing debate, there should be little disagreement on at least one point: Education and reeducation is an investment we can't afford to outsource.

Judy Olian is Dean of the Smeal College of Business at Pennsylvania State University.

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''Give it a Break''

Business Standard of New Delhi, 12/22/08