A Fairer Deal for America's Workers in a New Era of Offshoring

Public anxiety has surged over a new wave of offshoring that for the first time puts white-collar jobs at risk from competition with low-wage foreign providers. White-collar offshoring burst into the public consciousness in the middle of a peculiarly unbalanced recovery. The 2001–03 recovery stands out on two counts: the unusually low rate of job creation relative to job destruction, as highlighted by Erica Groshen and Simon Potter (2003), and the "decline in the proportion of that national income going to compensation of employees," as emphasized by Federal Reserve Chairman Alan Greenspan (2004).

Critics were quick to point to the new wave of white-collar offshoring as a major contributor to the poor performance of the U.S. labor market, although the importance of offshoring relative to productivity growth, the bursting of the IT bubble, and other forces remains murky owing to incomplete data.¹ Much more can and should be done to help safeguard the livelihoods of American workers in the face of structural shifts of whatever form—while preserving the benefits of an open economy.

Whether lauded for its remarkable fluidity or lamented for its heartless insecurity, one of the most striking characteristics of the American job market is high job churning. As our colleague Charles Schultze has pointed out, apart from cyclical ups and downs, roughly 15 million new jobs are created each year, while another 13 million are destroyed (Schultze 2004). No other OECD economy comes close (see OECD 1994). This high turnover rate reflects the vigorous forces of competition in the economy, the creation and death of firms, the growth of some, and the decline of others. The latest wave of white-collar offshoring is the most recent in a longer list of drivers, which includes shifts in consumer tastes, innovation that creates new products and services and makes it possible to produce more with less, new opportunities to outsource elements of the business system domestically and overseas, competition from imports, and job opportunities associated with rising exports.

To a greater degree than many other advanced economies, the United States is characterized by the process of "creative destruction" so memorably described by the late, great Harvard economist Joseph Schumpeter. The term succinctly captures the two faces of a market economy. Living standards will not grow, according to Schumpeter and a long line of economists who have made similar arguments since, unless change is not only tolerated but actively nurtured. Indeed, alongside high job turnover, the U.S. economy has enjoyed a surge of productivity growth over the past decade. Productivity has increased at a roughly 3 percent annual pace since 1995, more than double the anemic 1.4 percent pace of the preceding two decades. But as Schumpeter's term also acknowledges, the downside of market-driven dynamism is "destruction." Firms that do not pass the market test shrink or go out of business, destroying the livelihoods of employees and owners alike.

Since the Great Depression, America has recognized some collective responsibility to help those who, through no fault of their own, have been thrown of out a job. The main instrument is federally mandated unemployment insurance (UI), which replaces a portion of an unemployed worker's previous wage for up to twenty-six weeks. Since 1962 the social contract has also included special protections for those displaced by trade, including extended unemployment insurance and retraining benefits. The Trade Adjustment Assistance (TAA) program was intended to partially offset the distributive consequences of trade liberalization, which exposes workers in import-competing sectors to job loss and often permanent reductions in lifetime earnings, even as it delivers benefits to consumers as well as workers and businesses in export sectors.

For too many, however, the nation's safety net has more holes than netting. For example, the main UI program has so many restrictions that today only about 40 percent of all unemployed workers actually receive benefits. Meanwhile, it has long been difficult, time-consuming, and expensive for workers to prove they are entitled to extended unemployment benefits under TAA...