How to Ease the Pain of Globalization

Not a week goes by without an article in the press about the offshoring of information technology—whether it’s the production of hardware, call center and programming jobs, or even research and development activities. Media pundits and politicians have seized on these reports as auguries of America’s demise. But are things really that bad? Is there nothing positive about moving some of America’s IT activities abroad? More importantly, what specific strategies can U.S. policymakers implement to maximize the gain and minimize the pain associated with these rapid changes?

U.S. companies use IT to produce higher-quality products at home, using computer-controlled machine tools to produce specialized valves, for instance. They also use IT to offshore manufacturing and production, which reduces the price of the products we buy, such as DVD players. There is no doubt that globalization would move more slowly without IT. Indeed, globalization and technological change build on each other to quicken the pace of globalization overall and intensify its effect on the United States. This is particularly true when globalization reduces the price of IT, in the guise of lower-priced computers and software. That’s because an increasing number of nontechnology companies use the cheaper IT to redefine their business strategies, create new products and expand their markets. Local producers can sell into a national and even global market using a computer, software and the Internet. Banks and stock brokerages can reach new customers, and individuals can check their bank balances and make stock transactions if they have these technology tools and know how to use them.

A comprehensive economic analysis done by my institute and other researchers indicates that the globalization of IT accelerates productivity growth, creates new jobs, lowers inflation and furthers innovation—in the United States and worldwide. However, this expansion and deepening of America’s global engagement makes appropriate policy response more urgent. As a result of these changes, some businesses will go bankrupt and some workers will lose their jobs. Sluggishness in new business creation and lengthy layoffs for workers detract from the gains to IT and globalization. A policy environment that encourages a flexible response to change, supports new business creation and contributes to worker skill development maximizes the gains from IT and globalization. While some elements of this environment are in place, there is much more we can do.

Research finds that lower IT prices lead to more investment in IT, and that the price effect is quite strong—a 10 percent drop in IT prices leads to more than a 10 percent increase in IT investment. For IT hardware, where global production and outsourcing have been around for decades, prices are substantially lower than they would have been had all production been done at home. These lower prices yield a widespread diffusion of IT to businesses throughout the whole economy.

The widespread IT investment means higher potential growth for the U.S. economy. Altogether, the ’90s boom in IT accounted for more than half of the acceleration of productivity growth of that decade, which supported higher GDP growth (4 percent), lower unemployment (at 3.9 percent) and low inflation (one percentage point lower than otherwise would have been the case).

These gains will continue with further diffusion of IT throughout our economy because there are still many sectors of the economy that have not yet invested much in IT. Some sectors, such as wholesale trade, telecommunications and financial institutions, have already done so. Others, such as health services and construction, lag in the uptake of IT because these sectors have a disproportionate number of smaller enterprises as well as complex business interrelationships For example, in the health sector, managing the information needed by doctors, hospitals, insurance companies and pharmacies is a real challenge. The health-care sector also faces more regulatory hurdles, all of which constrain the cost reductions and gains that come from using IT. In construction (as well as in the economy overall) there are many small businesses for which IT has been too expensive and not oriented to their specific needs. But with the globalization of IT software and services, the more customized IT products required by these industries will decline in price, leading to more investment in IT by these lagging sectors. With more and more sectors in the U.S. economy investing in IT, we are seeing productivity in the United States continue to surge.

Data on international trade affirms the dominance of U.S. providers in IT services (such as database and information services) and for global industries that are IT-intensive, such as financial services and business and professional services. Moreover, econometric analysis shows that the more money foreign economies have to invest, the more they want to buy the very services in which the United States dominates.

With this growing investment in information technology comes more IT jobs. While there is no doubt that some IT jobs have moved abroad, such as those at technology companies (including IBM, Microsoft and Oracle), more than two-thirds of workers with IT jobs do not work for high-tech companies. They design, modify, integrate and run the IT inside nontech companies, everything from hotels and hospitals to agribusiness and apparel. These IT jobs are growing. Between 1999 and November 2004 (the latest available detailed data), the number of U.S. jobs for workers with IT skills increased some 400,000, at a growth rate about seven times that for jobs in the overall economy during this same time period.

The Pain of Change

Higher productivity growth and lower inflation do not, however, mean that everyone who wants a job can get the one they want or keep the one they have. For IT jobs that used to have relatively stable employment and low unemployment rates, the new environment is quite volatile. This is because IT changes rapidly and requires new software and new skills. More generally, productivity gains in the overall economy seem to generate a more volatile environment with greater job uncertainty. For example, the increased use of IT by business coincides with demands for new and different job skills. Companies are often reluctant to train older workers in these new skills, and laid-off workers don’t always have the wherewithal to learn these skills, so they find it harder to get the new jobs.

Moreover, as more and more activities can be done via remote telecommunications connections, an increasing fraction of the overall U.S. workforce is exposed to job uncertainty as a result of this technology-enhanced globalization. Research at my institute suggests that about 14 percent of the jobs in U.S. service industries and about 12 percent of workers in the manufacturing sector may be affected in one way or another by globalization: Some jobs will be cut and others expanded. Since services overall employ nearly 80 percent of the labor force, many more white-collar workers may soon face a change in the demand for their skills.

Consider IT jobs, for example. Demand has increased for workers with the IT skills necessary to design, customize and utilize IT applications, but it has fallen for commoditized IT skills (such as programming). Between 1999 and November 2004 (last detailed data available), the number of programming jobs, earning on average $66,000, fell by some 130,000. In addition, U.S. jobs that could be replaced by technology or by globally enabled technology (call centers, for instance) fell dramatically by almost 30 percent over this time period—a total of some 700,000 jobs! On the other hand, jobs held by applications and systems software engineers, network and systems analysts and administrators, and computer hardware engineers, earning on average $83,000, increased by 380,000.

Thus, technological change and global sourcing of software and services, even as it increases the number of IT jobs overall, changes the skills needed. What can be done to help the call-center workers and less-highly trained IT staff to match the new job demands?

On the domestic side, two complementary strategies could mitigate the pain of globalization. For workers whose jobs have been eliminated, extended unemployment benefits (which provide more time for adjustment), training assistance, wage insurance and portable health insurance are all effective strategies to help workers move to a new job and new career.

For workers with IT skills who need more advanced training and to ensure a pipeline of skilled IT workers coming up through the ranks from school, I suggest a “human-capital investment tax credit.” This investment tax credit recognizes two realities: First, companies that spend time training their own workers worry that competitors who don’t train will poach their workers. So most companies don’t do much training. Second, the first job of the IT-related career ladder for workers just coming out of school may no longer be a job done in the United States. An internship credit for college students would keep entry-level IT workers in the pipeline for more advanced IT jobs.

If this strategy were implemented, companies that engage in incumbent training and internships would receive a tax credit when the training or internship is complete, thereby alleviating concerns that they might lose the return on their investment should a newly trained worker leave. Such tax credits are routinely used for physical capital investment and research and development, with a budgeted amount of more than $60 billion over five years. This extension of a well-established policy recognizes that in today’s “knowledge economy,” the most important asset is people.