Offshore Outsourcing Finds Fans at Fed Forum
JACKSON HOLE, Wyo. -- Globalization, the conventional wisdom goes, has downsides: It hurts the wages of the lesser skilled. It leads to large and possibly dangerous trade imbalances. It can threaten economic stability through financial-market volatility.</br></br>But academics, investment bankers and government officials at the Federal Reserve's annual symposium here heard a much more upbeat vision of a globally integrated world. For example, it is usually said that outsourcing work from a high-wage country, such as the U.S., to lower-wage ones -- also dubbed "offshoring" -- makes workers in the richer country's affected industries worse off, but the country as a whole better off, because consumers enjoy lower prices on the products made overseas. But Gene Grossman and Esteban Rossi-Hansberg of Princeton University argued that offshoring can lead to higher wages for unskilled U.S. workers.</br></br>"Things may be better than they would have been had there been no offshoring," Mr. Grossman said. When a company offshores some work, its remaining workers become more productive. It can thus expand, hire more workers -- perhaps even some of those whose work was offshored -- to do jobs that can't be offshored, and it can pay at least some of them more.</br></br>The proof is that wages of unskilled, blue-collar workers didn't do worse than they actually did between 1997 and 2004, given two strong, offsetting economic forces: the surge in productivity, or output per hour of work, which should have lifted their wages, and the decline in prices of imports, which should have pushed down their wages by lowering the prices of the competing goods these workers made.</br></br>Anthony Venables of the London School of Economics argued that when an industry in a rich country starts trading with a poor country, the wages in the rich country may actually pull further away from those in the poor country, instead of converging down to the lower level as standard economic theory predicts. The reason? The industry in the rich country may rely on many local inputs that its competitors in a new foreign market don't have -- access to specialized workers, for example, or daily face-to-face contact with competitors and customers.