Offshoring Knowledge Worker Jobs-
Boom or Burst for the US Economy?
Balaji Janamanchi
Texas Tech University
Rawls College of Business Administration
ISQS area, P.O.Box 42101
Lubbock, Texas 79409-2101
(806)742-2397 Fax-(806)742-3193
Dr James R. Burns, Ph.D.
Texas Tech University
Rawls College of Business Administration
ISQS area, P.O.Box 42101
Lubbock, Texas 79409-2101
(806)742-1547 Fax-(806)742-3193
Abstract
This paper takes a system dynamics perspective of the contemporary trend of
“Offshoring Knowledge Worker jobs from USA” to gain a better and deeper understanding
of the results and implications of the trend, its impact on the jobs and workforce dynamics.
The results not only support the viewpoint of economists that offshoring is beneficial to the
economy, but also highlight another impending phenomena just round the corner, namely
the slow rate of growth of workforce. Net U.S. workforce growth is slowing because
seventy-one million baby boomers are beginning to retire. In this context, model outputs
suggest that offshoring is postponing the undesirable state of U.S. jobs outstripping the
U.S. workforce by nearly five years. Thereby, policy-makers have longer to find effective
solutions to tackle the impending shortage of workforce in decades to follow. The model
suggests that offshoring could not have come at a better time for the US economy.
1.0 Introduction
Often termed as, ‘Mega-Trend’, ‘New Wave’, ‘An Economic Imperative’, or ‘A
Short Term Solution,’ offshore outsourcing has taken the global economy by storm. The
mind boggling advances in the information and Internet technology coupled with rapid
reduction in communication costs have opened floodgates for a plethora of possibilities in
global business practices; have opened doors for new business alliances and outsourcing
opportunities that were hitherto considered not feasible or uneconomical. The new
practices include offshoring knowledge-worker jobs. Corporations that have successfully
offshored knowledge-worker jobs include Microsoft, Intel, Oracle, Cisco, Texas
Instruments, GE, and IBM, to name a few (Trends, 2004a pp 36).
Offshoring Jobs: a raging controversy
Consider the following excerpts from think-tanks as well as the mainstream media,
as they tell a revealing story. “IBM to export highly paid jobs to India, China” (WSJ,
2003). This story contained a detailed report about, “IBM’s plan of moving the work of as
many as 4,730 programmers to India, China, and elsewhere.” “McKinsey Global
Institute estimates that, the volume of offshore outsourcing will increase by 30 to 40
percent a year for the next five years,” (Drezner, 2004; McKinsey Global Institute, 2003).
Forrester Research estimates that 3.3 million white collar jobs will move overseas by 2015
and Gartner Research firm estimated that by the end of this year (2005), one out of every
ten IT jobs will be outsourced overseas (Drezner, 2004). These and many other similar
news reports (USA Today, 2004: The Hill, March 3, 2004) have caused considerable
concern for the workers, economists, as well as policy makers, about the possible effects of
offshoring.
At the same time, there have also appeared other reports in news that sought to
alley the fears raised by above reports and accounts, by sharply contradicting some of the
opinions expressed in the reports referred above. Consider the following: “Outsourcing is
just a new way of doing international trade,” said Prof Gregory N. Mankiw, Chairman of
the President’s Council of Economic Advisors (Drezner, 2004, Detroit News, 2004), and
his statement caused a firestorm of reaction in the US senate. “Researchers estimate that
outsourcing has cost the U.S. just 300,000 jobs in 3 years. By contrast, one percent
productivity growth eliminates about 1.3 million jobs,” (Business Week, March 994.
2004). For “Every dollar spent on a business process that is offshored to India, the U.S.
economy gains at least $1.12. The largest chunk—58 cents—goes back to the original
employer:” finding from a study by McKinsey Global institute (Trends, April 2004a, pp
38; McKinsey Global Institute, 2003; Fortune, Feb 2004). “For every dollar’s worth of
work shipped abroad, $1.30 to $1.45 is reinvested into the U.S.,” a finding from a study by
Evalueserve, a market research firm (Trends, April 2004a, pp 38; McKinsey Global
Institute, 2003). “...Offshoring is inevitable, often makes good business sense, and can be
beneficial to the overall health of our economy in the long run” (Trends, April 2004a, pp
38).
However, there is now a general apprehension in the air that, the offshoring trend,
if allowed to continue unabated, may end with disastrous results on the US economy in
terms of not only the short-term loss of jobs but a general fall in the long-term growth of
knowledge workers and their skill sets. Dependence on external economies for
knowledge-worker positions may turn out to be a permanent dependence. Moreover, the
loss of jobs results in a loss of tax revenue, leading to possible erosion of the U.S. Gov.
and state governments tax bases. Similar statements can be made for a U.S. knowledge
worker who loses job to offshoring and then takes another job at less salary.
A good part of the controversy arises from the fact that, the problem of offshoring
is a complex feedback system problem comprised of many factors/variables interacting
with each other. It is not easy to get a quick grasp of the ‘behavior over time’ of the major
variables, given the complexity of feedbacks. For example, firms indulge in offshore
outsourcing, motivated largely by the cost savings. Reduced costs lead to increased profits
for the firms, which in turn, leads to higher investment by the firms and thereby increased
jobs in the economy. Will the increases overshadow the initial losses in jobs? Will the
GDP of the offshoring economy experience a surge, because of expanded workforce (both
onshore and offshore workers combined) contributions? Only a study of the whole system
as a feedback system will lead to a correct understanding of the problem.
Systems Thinking and System Dynamics
“Systems thinking is a conceptual framework, a body of knowledge and tools that
has been developed over the past fifty years, to make the full patterns clearer, and to help
us see how to change them effectively” (Senge, 1990, pp 7). “System dynamics is a
methodology for studying and managing complex feedback systems, such as one finds in
business and other social systems” (System Dynamics Society, 2005).
Typically, under traditional analytical approach, a problem is studied by dividing it
into its component parts. But this is a clear case of a problem that needs to be studied as a
whole rather than in parts. Therefore, the offshoring problem needs to be studied
holistically using system dynamics rather than by following traditional analytical approach
Purpose of the study and questions to be answered
The purpose of this study is to take a system dynamics perspective of the problem
of offshoring knowledge worker jobs from USA, and thereby, seek answers to the
following questions,
e Is, offshoring knowledge worker jobs, good or bad for the U.S. economy?
e Is, offshoring knowledge worker jobs, inevitable? Alternatively, is it possible
to eliminate it or slow it down?
e¢ What are logical outcomes of this trend in the short run? In the long run?
e What are the factors having significant affect on the outcomes and how may
they be controlled? (a.k.a. identifying leverage points)
e What can the U.S. government do to take control of the situation and protect the
workforce and the economy, in terms of policy regulation?
e What should the workforce do to prepare itself for the short run and the long
run?
¢ What is the relationship between jobs and workers?
Some researchers up to this time have provided reasonably convincing answers for some of
these questions. However, we need further confirmation.
The rest of the paper is organized as follows; In section 2, literature review that
provides basis for the assumption of the dynamical model are discussed. Then the model
development in Vensim is explained in section 3. Two policy alternatives are simulated-
a) where offshoring is banned b) where offshoring is allowed (to a certain extent), in
section 4; and the results obtained under the two alternatives are discussed. Finally, in
section 5, contributions and limitations of the study are discussed.
2.0 Literature review
Outsourcing and Offshoring differentiated
Outsourcing is not a new idea. In fact, outsourcing has been in vogue for over half
a century (Trends, 2004b pp 24). “In manufacturing, purchased items and services account
for 60 to 70 of the cost of goods sold,” (Chase et al., 1998). Outsourcing is defined as
“allotting work to suppliers and distributors to provide needed services and materials and
to perform those processes that the organization does not perform itself’ (Lee, K.J., and
Larry, R.P., 2005). The reasons for outsourcing and risks of outsourcing have long since
been known and discussed in the operations management literature. Some of the
motivating factors in support of outsourcing are, cost reduction, head count reduction,
focus on core competencies, improve efficiency, move toward leanness, innovate and re-
engineer processes, etc. On the other hand, there are risks associated with outsourcing
such as, loss of control, higher exit barriers, exposure to supplier risk, slow
implementation, poor quality, increased cycle or lead time, etc., (Chase et al., 1998).
“Offshoring can be defined as performing work for customers in one country in a
different country.” The offshored unit can be either “captive” (owned by the same firm
that did the work onshore) or outsourced (Matters, et al., 2005). Both forms of offshoring
of knowledge worker jobs are the focus of this study.
Preliminary assumptions and Starting Points
From the economics literature on job outsourcing, a few basic assumptions emerge.
The assumptions are,
1) Outsourcing jobs saves money for the firms (Mann, 2003, pp 3, 6; Pint E.M. and
Baldwin, L.H., 1997, summary- pp vii: Trends, 2004b pp 24)
2) Outsourcing jobs displaces workers (Mann, 2003, pp 6, while arguing that job
losses will likely be made up by creation of new jobs).
3) Outsourcing helps in focusing on core competencies of the firm (Pint E.M. and
Baldwin, L.H., 1997, summary- pp viii).
4) Firms are rational in their choices and reinvest their profits if they have
opportunities to earn further profits, (Bhagwati, J., et al., 2004, pp 13).
5) Reinvestment of profits from offshoring activity by the firms causes generation
of additional jobs in the economy, (Bhagwati, J., et al., 2004, pp 13; Mann, 2003, pp 6 and
pp 9).
6) Displaced workers behave rationally and accept alternate jobs at the first
opportunity.
7) Outsourcing results in improved productivity (Mann, 2003).
These are the underlying causal assumptions for the causal loop diagram development and
the subsequent model development.
3.0 Dynamical Model Development
Level of abstraction
Determination of level of abstraction is one of the preliminary steps in model
building, (Sage, A.P., 1977). Aggregation and requirements detail have to be balanced.
To study, ‘offshoring knowledge worker jobs’ problem, which is a behavioral complexity
issue and a macro level issue at that, we have to adapt to a fairly high level of aggregation.
Incidentally, some advantages of a highly aggregated model are, a) fewer data required for
validation, b) simulation is fast, and c) formulation is inexpensive (Sage, A.P., 1977).
Causal Loop Diagram
A simplified Causal Loop Diagram derived for this problem is depicted in
Appendix A. We can clearly identify two main sectors of the model as, 1) Jobs sector, and
2) Workforce sector. Jobs sector represents the demand for labor and workers sector
represents the supply of labor. We include Blue-Collar Jobs and Blue Collar Workers as
well as White-Collar Jobs and High-value Knowledge Workers in our model to facilitate a
systemic view of the problem. Typically, knowledge workers earn higher wages than their
counterparts in blue-collar jobs, although the distinction is blurring. Since the focus of
study is High Value Knowledge Worker Jobs, all other jobs have been ‘lumped’ into Blue
Collar Jobs in this model. Hence, at the start of the simulation the sum total of ‘initial’
stock of High Value Knowledge Worker Jobs and ‘initial’ stock of Blue Collar Worker
Jobs equals the ‘initial’ total civilian workforce - (less) the initial unemployed.
Cost savings is the major driver of offshoring
Not withstanding the differences in other aspects, most of the reports on offshoring
concur in their finding that; cost savings is the major driver of the current trend of
offshoring. (Trends, April 2004a- pp32 and pp36; Drezner, 2004 pp 30; McKinsey, 2003
pp 5). Considering the wide disparities that exist between the GDP of USA and the
outsourcee nations, there really is no fear that those economies will advance so far as to
eliminate the wage differential that exists now, within a foreseeable future. For these
reasons, in the proposed model its assumed that every job that is offshored contributes to
increase profitability of the firm offshoring, and that these benefits continue for the entire
term of simulation, say next 25 years.
Listed in Table below are the major variables and parameters that comprise the
simplified model presented here.
Table Listing of Variables and Parameters
In the Jobs sector
High Value Knowledge Worker Jobs (HVKWJ) -in U.S.
HVKWJ creation rate (annual rate of increase in HVKW Jobs)
HVKWJ offshoring rate (current annual rate of offshoring HVKW Jobs)
Offshored HVKWJ (accumulated stock of HVKWJ offshored over years)
HVKWJ automation rate (annual rate of jobs rendered obsolete by technological
advances)
Blue Collar Jobs (BCJ) (all jobs in economy other than HVKWJ)
BCJ creation rate (the annual rate of increase in BC Jobs)
BCJ offshoring rate (current annual rate of offshoring BC Jobs)
Offshored BCJ (accumulated stock of BCJ offshored over years)
BCJ automation rate (annual rate of jobs rendered obsolete by technological
advances)
Corporate Tax normal (Income tax rate levied on firms on their profits)
Interest rate normal (Federal Funds rate-manipulated to stimulate job creation)
Profitability (of firms employing workforce-impacts new investment)
New Investment (by firms-directly impacts job creation)
In the Workforce sector
High Value Knowledge Workers (HVKW) - in US
HVKW growth rate (annual rate of increase in HVKW workforce)
HVKW retire rate (annual rate of retirement from HVKW workforce)
HVKW to BCW transition rate (annual rate of movement; voluntary or otherwise)
Blue Collar Workers (BCW) (Civilian workforce filling the BC jobs)
(Initial BCW stock= Total Civilian workforce-HVKW workforce)
BCW growth rate (annual rate of increase in BCW workforce)
BCW retire rate (annual rate of retirement from BCW workforce)
BCW to HVKW transition rate (annual rate of movement- typically, self
motivated)
Combined retiree stock (retired from civilian workforce)
Death rate Normal (annual death rate of retirees, based on life expectancy)
Common variables
HVKWJ to HVKW ratio (HVKW jobs to workforce ratio-identifies
unemployment/shortage of workforce)
BCJ to BCW ratio (BCJ to workforce rate-identifies unemployment/shortage of
workforce)
Constants: In the Jobs sector
HVKWJ creation normal (fraction of jobs per year in relation to existing HVKW
jobs)
Rate of automation of HVKWJ (fraction of jobs per year in relation to existing
HVKW jobs)
BCJ creation normal (fraction of jobs per year in relation to existing BC jobs)
Rate of automation of BCJ (fraction of jobs per year in relation to existing BC jobs)
Constants: In the Workforce sector
HVKW growth normal (fraction of workers/year in relation to existing workers)
HVKW retirement normal (fraction of workers/year retiring, based on working life-
40 years)
HVKWJ offshoring normal (fraction of jobs/year in relation to existing HVKW
jobs offshored)
HVKW to BCW transition normal (fraction of workers/year making such
transition)
BCW growth normal (fraction of workers/year added to existing BC workers)
BCW retirement normal (fraction of workers/year retiring, based on working life-
40 years)
BCJ off shoring normal (fraction of jobs/year in relation to existing BC jobs
offshored)
BCW to HVKW transition normal (fraction of workers/year making such
transition)
Causal Loop Diagram (CLD) explained
Typical of any job market, the current stocks of jobs are affected by the ‘annual job
creation rate,’ which is influenced by various factors such as ‘interest rate,’ ‘new
investment,’ and ‘automation rate.’ Similarly, the jobs are also affected by the ‘offshoring
rate’ and ‘automation rate.’ The automation rate may represent the loss of jobs on account
of other events like ‘mergers’ and ‘takeovers’ as well.
In the workers sector, stocks of workforce are affected by the ‘growth rate,’
‘current stock of work force,’ some inter-transition between types of workforce, and the
‘retirement rate’ from the workforce. The ratio of ‘available jobs to available workers’
prompts government to manipulate the interest rate in the economy to encourage new job
creation or otherwise, depending upon whether a need to give further boost to job creation
exists or not. If the ratio of jobs to workers is greater than one, the Fed will likely increase
interest rates whereas if the ratio is less than one the Fed would reduce the interest rate and
a jobs-to-workers ratio would imply no need to change the current interest rate. This same
logic is stored in the jobs-to-workers ratio table lookup in respect of both types of work
force in which both ratios (HVKWJ ratio and Blue-collar ratio)are averaged, each with
equal weight to create a single ratio. A CLD capturing the causalities discussed above is
enclosed as ‘Appendix A.’ Feedback loops may easily be spotted in the CLD.
10
Model Development-Stock and Flow Diagram (SFD)
Converting CLDs to SFDs becomes simple if we follow the principles of
‘Consistency’ and ‘Robust loops’ in analyzing the CLDs (Burns, 2001). Using Vensim
PLE (Ventana, 2005) we can quickly develop the SFD from our CLD. A simplified Stock
and Flow Diagram (SFD) developed following the above process and implementing
necessary assumptions (discussed in the following) appears in Appendix B. In order to
simulate the SFD though, one needs to continue with the further steps of entering the
‘units’ for all quantities and the equations of the rates and stocks. For example, in the
proposed model, the HVKWJ (High-Value Knowledge-Worker Job) is a stock and
represents ‘jobs’ so the unit for this stock is ‘job’. The HVKWJ creation rate is the
number of HVKW jobs created per year; so the unit for this rate is ‘job per year.” HVKWJ
Creation Normal is the numerical value of job creation expressed as a fraction of HVKWJ
and the unit for HVKWJ creation normal would be 1/year. The model needs initial values
for all the quantities before it may be simulated. Details of data used are discussed in the
section, ‘Data values.’
Redefining variables - additional assumptions
While units of measurement for jobs, workforce, offshored jobs and some other
variables and stocks are quite obvious and easy to figure out, a few of the other variables
need some careful consideration and handling. Profitability arising on account of
offshored Knowledge Worker Jobs and Blue Collar Jobs is not easy to define. What is
easy to assume though is that, the initial profitability of employers is unity i.e. 1 (after
Tax). It then follows, based on the various economists’ / independent research agencies’
11
reports (Drezner, 2004; Mankiw, G.N., 2004; Business Week, March 2004; and The
Economist, 2003), that an increase in outsourcing is motivated by the cost savings.
Therefore, it stands to reason that an increase in the offshored job numbers must result in
an increase of profitability for the firms offshoring these jobs. On a conservative basis,
profitability is defined as initial profitability + (plus) a small fraction of the increase in the
offshored jobs taken in proportion to the initially offshored job numbers. This modest
estimate of profitability is then allowed to impact the growth in further jobs creation as the
practice of ‘Plowing back the profits’. Considering the level of aggregation adopted in the
model, all employers are assumed to be of the same category and only one income tax rate,
termed corporate taxation rate, is modeled. Other economic factors such as inflation and
government spending that would otherwise have an impact on interest rate normal, are
assumed to remain unchanged through out the period of simulation and hence have not
been included in the model.
Data values
Since we are studying this problem in a deterministic simulation model, we need
some initial data values and reasonable parameters for use over period the period of
interest—25 years. The data values adopted in the model,
1. Total Civilian workforce as of Jan 2004 is the basis for the calculations. (We
have to have a starting point and since the problem manifested itself during this year, data
at the beginning of this year is consider a logical starting point)
2. 10 Millions workforce is assumed in HVKW workforce (Trends, 2004a pp 38)
12
3. The balance work force is BCW ( all other jobs lumped into BC jobs to support
the systemic view)
4. 6% unemployment rate is adopted (DOL-BLS, 2004)
5. Both categories of jobs are shown at 6% short of respective workforce.
6. Currently 10% of HVKW jobs and BC jobs are shown as already offshored (no
distinction is made between ‘captive’ offshoring and ‘outsourced’ offshoring, both forms
of offshoring are combined and considered as ‘offshoring’ for the purpose of this model).
7. Job creation rate norm of 2% for HVKW and 2% for BCW jobs are assumed.
8. Job automation rate is assumed at 2% p.a.
9. Interest rate adjusted to show how government would manipulate the same to
stimulate job creation based on jobs to workers ratio.
10. Initial Interest rate of 4% is adopted (Bank rate.com). This rate is supposed to
boost the employment, so an interest table-look-up gives a multiplier for interest rate of
4%, multiplier changes to | at interest rate of 6%)
11. Cross transition between workforces is assumed to account for rate of change of
technology and BCW improving their skill sets.
The Rand Corporation in its research report entitled, “The 21° Century at Work”
reported a very disturbing trend of a rather slow rate of growth in U.S. Workforce over the
next few decades. To begin with, in contrast to a healthy 2.6 percentage per annum growth
of 1970s, U.S. Workforce grew at disappointing 1.1 percentage per annum during the
1990s. Further, in the coming decades the growth rate is projected at, 1.1 percentage per
annum for the decade of 2000-2010, but a much lower 0.4 percentage per annum for the
13
period 2010-2020, followed by an even lower 0.3 percentage per annum for the decade of
2020-2030, (Rand, 2004). All of these estimates and their effects are amenable for use
and testing in the dynamical model under this study and have been used appropriately.
4.0 Simulation-Findings and results
Under the given assumptions, we are able to obtain the results in terms of graphs
of major variables showing their behavior over time, and these graphs appear to be
consistent with the known patterns of behavior of the respective variables. We are
simulating two alternate policies:
Policy-1: Total ban on offshoring of jobs of either category.
Policy-2: Offshoring allowed as at present, with a restraint that not over 2% of jobs
be offshored per year.
We could also consider a third, Policy-3 where offshoring is allowed at 3% per
annum of existing jobs. For gaining meaningful insights into the relative behavior of
variables, the first two alternatives will suffice.
We can see from Fig-1 that, if jobs are not offshored, the HVKWJ will exceed the
available workforce by about the year 2008. Similarly, from Fig-2 it may be seen that BCJ
are also poised to exceed the available workforce by the end of the year 2009. However,
the scenario becomes better; under Policy-2 with restrained offshoring, and HVKWJ
exceed the workforce in the year 2013 (Fig-3). Similarly, BCJs take longer to outrun the
supply of workforce, at about year 2015 (Fig-4). What happens if we offshore jobs at a
rate higher than 2%? A run with offshoring normal at 3% shows that a shortage of
HVKWJ and BCJ take much longer to surpass their respective supplies of workforce, that
happening in the years 2016 and 2020, respectively.
14
Figure 1: KWjobs vs KW Workforce
20M
17M
14M
11M
8M
2004 2009 2014 2019 2024 2029
Time (year)
"H.V.K.W.J." : vsplt#—+—+-—__+—__+—_+—_+—_ +—_+—_+—+— Job
HVKW in US: vS5pl-2 22 2 Job
Figure 2: BCJ vs BC Workforce
200 M
175M
150M
2004 2009 2014 2019 2024 2029
Time (year)
"B.C.J." : vSp1 Job
BCW in US: v5p1 2 2 2 Job
15
Figure 3: KWjobs vs KW Workforce
20M
17M
14M
11M
8M
2004 2009 2014 2019 2024 2029
Time (year)
‘HV KW "spss TO
HVKW in US : vSp2-2—2 a ae 2—2—2- Job
Figure 4: BCJ vs BC Workforce
200 M
175M
150M
125M
100 M
2004 2009 2014 2019 2024 2029
Time (year)
"B.C.J." : vSp2+ + + t + + + +t + + t t— Job
BCW in US : vSp2—2—2 oe
16
Further increases in the offshoring rate normal, delays the impending occurrence of
jobs outstripping workforce; but the increases also exhibit a rise in short term
unemployment to a much higher level than at start, and higher than under policy 1 and 2..
Figure 5: total HVKW Jobs
20M
17.5M
15M
12.5M
10M
2004 2009 2014 2019 2024 2029
Time (year)
total HVKW Jobs : vsp2+—+—+>—__+—__+—_+>—_+—_ +—_+—+— Job
total HVKW Jobs : vSpt 2—2— 2 2—2z—z Job
17
Figure 6: total BCW jobs
400 M
325M
250M
175M
100 M
2004 2009 2014 2019 2024 2029
Time (year)
total BCW jobs : v5p2 + + + + + + + + + + Job
total BCW jobs : v5p1 = 2 2 =—z Job
Fig-5 and Fig-6 show the total jobs (onshore plus offshore) contributing to the
production of goods and services for US economy. While policy-1 has the immediate
benefit of quickly reducing the unemployment, it does also show a lower level of labor
contribution to the GDP of US economy. On the other hand, policy 2 shows a very high
level of labor contribution, albeit with some slow reduction in initial unemployment.
18
Figure 7: unemployment under the two policies
0.08
-0.04
-0.16
-0.28
-0.4
2004 2009 2014 2019 2024 2029
Time (year)
hu : vSptt + +t +t t + t + +t + Dmnl
bu : vSpl—? 2 = = = = 2 2— Dmal
hu : vSp: 3 3 3 > 3 = 3 > + > Dmnl
bu : vSp2 + + + + + 3 + Dmnl
Figure 7 depicts the U.S. unemployment rate for the policies under consideration.
Curves | and 2 depict the trends in unemployment for high-value and blue-collar workers
under policy 1. Curves 3 and 4 depict the trends in unemployment for high-value and
blue-collar workers under policy 2. Starting at 6% in 2004, Fig -7 shows that
unemployment drops or remains as it is, for the first 2 to 3 years but then declines steadily
thereafter. Discussion
Let us revisit the questions we raised in section | and try to address each one. Is
offshoring knowledge-worker jobs good or bad for the economy? The model results,
though tentative, appear to endorse the view that offshoring is good and makes good
business sense, notwithstanding some initial job losses in the economy. However, some
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restraint on the rate of offshoring may be advisable, unless off course, the firms offshoring
the jobs do not displace any of their current employees.
Is, offshoring knowledge worker jobs, inevitable? Alternatively, is it possible to
eliminate it or slow it down? The answer to the first part of the question is in the
affirmative. We do not really need to refer to our model results to answer this question.
When the market leaders in the global market are benefiting from offshoring, be it captive
offshoring or outsourced offshoring, there is enormous pressure on the medium and small
firms to fall in line or face the risk of total elimination from the supply chain (in the
absence of a viable alternative policy). As for the second part of the question, one can only
speculate that improvements in the productivity (perhaps by technological advances) may
obviate the need for human labor to a great extent, thereby reducing the need for offshoring
in the same proportion as the reduction in local employment. But the other drivers of
offshoring, namely, the opportunity to focus on core competencies, convenience of
maintaining a round-the-clock customer service (with time zone differences), and the
benefits of global networking will continue to keep offshoring alive for a long time to
come.
What are logical outcomes of this trend in the short run? In the long run?
Unrestrained offshoring will lead to a sharp increase in unemployment in the short run. If
the profits are not reinvested (resulting in the generation of new jobs in the U.S.), the job
market may not revive soon enough to compensate for the jobs sent offshore.
What are the factors having significant affect on the outcomes and how may they be
controlled? What leverages exist? We cannot honestly answer this question at this stage
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with the current model. However, by developing an index of performance based on a
predefined value system and the use of sensitivity and optimization techniques we shall
identify such leverage points (Burns, J.R., and Malone, D.W., 1974).
What can the government do to take control of the situation and protect the
workforce and the economy, in terms of policy regulation? From all the evidence we have
from literature as well as our model results, we can safely conclude that a ‘total ban on
offshoring’ is detrimental to the long term benefits of the economy. This view is further
reinforced by the projections of slow rate of workforce growth by RAND Corporation
(RAND, 2004). Since there is evidence to the effect that new jobs will emerge as the result
of offshoring benefits, the U.S. government should provide facilities to workforce to train /
retrain workers to take up those new jobs.
What should the workforce do to prepare itself for the short run and the long run?
Wherever possible, employees should negotiate with employers to provide insurance
coverage for loss of jobs. Obviously, all jobs that create (an information product of) value
which can be transmitted over the Internet, can be performed from remote locations thus
are candidates for offshoring (Drezner, 2004 pp-25). For the long run protection, workers
need to train themselves for specialist jobs and be prepared to work longer and make their
service worth the employer’s money.
What is the relationship between jobs and workers? Limiting our discussion to
knowledge worker jobs, we can say that, offshoring has now shown that job growth need
not necessarily be curtailed by the availability of workforce in the local economy. So also,
jobs need not necessarily remain in the economy just because there is workforce available
21
to perform. In an open market free trade environment, firms will not hesitate to offshore
the jobs as long as there are other profitable options.
Possible additional insights
What additional insights may be gained with the help of this kind of model? The
answer is, we can simulate several different parameter settings and the likely results. Here
are a couple of scenarios and the ways to simulate them.
Scenario 1: Technological developments and productivity gains eliminate a higher
rate of jobs than at present — we may alter the HVKWJ automation rate and BCJ
automation rate suitably (say 3% p.a.) on a continuous basis or alternatively consider a
‘one-time’ job elimination of a suitable percentage( say 5% to 10%) in a given year and
run the model
Scenario 2: Current and future workforce is willing to work longer (before retiring)
than their peers to make up for the slow rate of growth in workforce — we may increase the
parameters ‘HVKW working lifetime’ and ‘BCW working life time’ suitably to study the
effects.
Scenario 3: Companies do not re-invest their profits stemming from offshoring, in
additional U.S. jobs, such profits being short-lived anyway. We can set the HVKW
projects investment rate and the BCJ projects investment rate to 0 and re-run the model, to
represent such behavior.
22
A Word of Caution
First, we have to remind ourselves that the parameters values we used are subject to
some error or uncertainty. Hence, the results we obtained have to be interpreted subject to
the inherent errors in parameter values, stock initial values and model structure. A more
serious practitioner is advised to refer to, “Error Analysis of Nonlinear Simulations:
Applications to World Dynamics” (Burns, 1975). Notwithstanding that, the results may
not be accurate in terms of numerical values, in terms of actual number of jobs (HVKW or
BC) or the exact year when jobs outnumber the workforce, we still have useful insights
that we obtain from the model in terms of the behavior of the variables.
5.0 Contributions and Limitations of the paper
Contributions
The study has provided simple and easy to grasp explanations for some of the
complex questions raised in the introduction section by capturing the structure and
dynamics of the jobs, workforce and the related variables in Causal Loop Diagrams, Stock
and Flow Diagrams, and ‘behavior over time’ graphs. We have tested the RAND
Corporation’s estimates of civilian workforce growth over next 25 years and found them to
be reliable, assuming a top-heavy workforce that has many workers nearing retirement.
But there are other aspects of workforce dynamics that make offshoring appear to be a
“blessing in disguise.”
23
Short run symptoms often do not tell the entire story. Typical system dynamics
problems are better understood under a systemic study rather than symptomatic analysis of
individual symptoms. Sometimes, seemingly opposing results are possible simultaneously,
like in this case, the simultaneous growth in offshored jobs as well as total jobs within the
US economy.
It is very important to note that the workforce stock should be built up sufficiently
in advance to meet the demand when the demand does start building up. If the workforces
get disappointed with the initial trend, and do not prepare themselves to meet the demand
when it arises, the economy could face a serious shortage of skilled workforce. In such
eventuality, policy makers may have very little options; either to resort to a greater level of
off shoring or to allow additional temporary workforce into US economy.
Limitations
As discussed under section ‘level of abstraction’ this problem is best studied at
macro level with a high level of aggregation. Therefore, the model lacks sufficient detail
to explain regional job market dynamics within U.S.! between different categories of jobs.
Similarly, the results/outputs of the model are to be understood and interpreted subject to
the assumptions made in developing the model. In the current model, job-creation is
allowed to go on, despite backlog in filling existing jobs. We have not addressed this issue
in this model to emphasize the trend of economy’s ability to create more jobs. One might
also contemplate the situation of offshoring at higher rates starting the year where jobs
' Some demographers expect a net loss of jobs in the northern U.S., but a net gain in the southern U.S.
24
surpass the workforce. However, in reality job creation takes a hit if available jobs are not
filled for over six months/a year.
In this context, any student of system dynamics will surely remember Jay W
Forrester’s comments, “Computer models of social systems and laboratory tests do not
guarantee against failure, but they do identify many weaknesses which can be corrected
before they usually cause full-scale failure,” (Forrester, J.W., 1971). In addition, as
Forrester states (Forrester, J.W., 1971, preface viii) “all models are tentative. New insights
will continue to appear,” so the proposed model may need to be revised to accommodate
some new dynamic factors or significant events that affect the assumptions of the model.
It is also important to remember that, the primary objective of this paper is to gain a
better and deeper understanding of the problem of offshoring and its effects on the U.S.
economy. Accordingly, the proposed model’s results are to be interpreted primarily for
understanding the complex behavior of the variables/factors involved.
25
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-000-
28
Appendix A
CLD: Offshoring
Knowledge Worker
Jobs
HVKWJ creation BC J creation
normal normal
BCI creation rate
HVKWI profitability BC Jobs
automation rate automation rate
BCI lost to
( ‘— automation rate
—
HVKWJ lost to HVKWI
automation rate
HVKWI to BCI to
workforce ratio workforce ratio
HVKWJ offshore HVKWJ BCI pa ee BCJ offshore
normal fo, rate 7 nojfn rate normal
eat to BOW
HVKW x HVKW ERROR BCW oo». rate
me + sew to HVKW
i Ea
HVKW growth aiid lee BCW to Mew -, seth BCW growth rate
rate normal normal normal
Retiree geo
death rate normal Retirees death rate
29
Appendix B
‘System Dynamics Perspective of Offshoring Knowledge Worker Jobs from USA
HVKW) GROWTH INTEREST RATE BCI GROWTH
RATE NORMAL. NORMAL RATE NORMAL.
CORPORATE
TAXATION BCI AUTOMATION
fOACS creation rte RATE NORMAL
NORMAL,
HVKW)
AUTOMATION RATE
NORMAL.
HWVKWI
interest rate nuk
ab
AVKW projects
Desi ate BCI projec
HWVKWI
{otal BCW jobs
Suerest Me BC Iproftbiy
we. HVKWI
profaabilty
BCI OFFSHORING
NORMAL
wal VEW 35 yyy
OFFSHORING
NOW
1WKW
UAL OFFSHORED | Guta ‘NAL
awh scr Yorker OFFSHORE
Peo Wnn Ri A eer
ee Zi = oa
KW @ ECW
TRANSITION
= NORMAL 83 w W at
q table look
HVKWI 0 W ta —
im vats sowints
new wii sew brown
"mason AATESORMAL
TAENOWIA SOMA
pe] Retire stock | CW GROWTH
HVKW GROWTH HVKW EU poe, RATE NORMAL2
RATE NORMAL? retirement rate nl
HVKW working
ie ine ie
death rte ee
<1IVKW in US>—
DEATH RATE,
NORMAL
-000-
30
