 Global Economy > The Changing Geography of Cheap Labor
Outsourcing and the California economy
While evidence from the recession of the early 1990s suggests that a major benefit of globalization has been the growth in high-tech services employment that accompanied the outsourcing of manufacturing production, it is not clear how the US economy will adjust to the present burst of services outsourcing.
At least four different outcomes are possible. One possible scenario is that services job outsourcing proves more costly to the economy than the earlier round of manufacturing outsourcing. As centers of skilled high-tech professionals build up in other parts of the world, the United States and California may no longer dominate the next wave of innovations, and we would observe slower growth of high-wage jobs within the US and California. In this extreme situation, economic adjustment, in the absence of continuing innovation originating in the US, first might take the form of prolonged unemployment. Then, workers losing their jobs to outsourcing would finally be absorbed in lesser-paying services jobs. Alternatively, there could be a downward adjustment of salaries and wages, making the outsourced occupations internationally competitive again. Under this worst-case scenario, the impact on the demand for office space would initially be reflected in lower rents and prices, and higher vacancy rates. In the long run, with increasing employment in other jobs and occupations, rents and prices would settle on a lower growth path trajectory with vacancy rates returning to their long-run equilibrium.
As an alternative to this troubling scenario, a backlash against globalization could occur, both worldwide and within the US, slowing down the process of business-services outsourcing. Opponents of globalization are already discussing protectionist measures and regulatory roadblocks in the form of restricting the kind of jobs that can be outsourced. If successful, this kind of protectionism, although inefficient from the point of view of the economy, may result in the retention of some of the outsourceable jobs. In the short run, this would moderate the negative impact on the real-estate sector.
A third possibility is that industry shrinkage...may come in part from domestic outsourcing, indicating a redistribution of jobs within the US rather than a net loss.
This could involve vertical disintegration—the shifting of jobs from large employers to smaller firms in support sectors—as well as the ongoing process of domestic outsourcing from high-cost regions such as California to relatively low-cost regions elsewhere in the United States. This process would mitigate the differences in prices and rents among different regions within the nation and would leave the nationwide vacancy and absorption rates relatively unaffected. Rents in some of the higher priced markets could continue to remain depressed, even with expanding employment nationwide. Finally, the most positive scenario is that the US and California economies continue to fashion their outsourcing activities in light of the new production paradigm, keeping the “cream” of the new development at home, while the more routine activities are outsourced. Under this scenario, innovation would lead to a continuing stream of new service and manufacturing activities, and hence new jobs and occupations, while competition and the need for lower-cost supply would force more mature services operations overseas. Depending on their education and skills, individual workers might still find it difficult to find replacement employment at similar wages, but overall, the jobs lost to outsourcing would be replaced by higher-wage jobs in the new subsectors brought about by innovation. Increasing wages, incomes and company profits would then impact the real estate sector positively through a recovery and eventual increases in prices, rents and occupancy rates.
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