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181 IRET Congressional Advisory 1 (2004)

handle is hein.taxfoundation/iretcgadv0178 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies thait will promote growth and efficient operation of the market economy. November 4, 2004 Advisory No. 181 U.S. ECONOMIC STRENGTH BELIES OUTSOURCING CONCERNS Introduction The apparent slowness of job growth in the initial stages of the economic recovery has led to concerns about job outsourcing. There has been intense publicity over jobs shifted by major multinational companies from domestic to foreign plants. These jobs have included many in the high- tech end of the service sector, most notably software and information technology, as well as jobs in the older manufacturing industries. Outsourcing is now the principal scapegoat for job losses and the perception that fewer high-value-added, high-paying jobs are being generated in the United States. The fears about outsourcing are related to a rising fear of trade and the widening U.S. trade deficit, the long-term decline in manufacturing employment, and the opening of the service sector to intense foreign competition. How important are these concerns? What is the real impact of outsourcing on our labor markets and economy as a whole? What, if anything, can and should be done? This paper will try to put some of these concerns about outsourcing into perspective by examining economic trends at home and abroad. The paper will look at the position of U.S. employment and output in the global economy, the current and historical state of the U.S. manufacturing sector in an international perspective, and the U.S. global trade in services. Cyclical Events and Secular Trends in Employment and Production The outsourcing concern, if it is to mean anything, ought to relate to the permanent shifting of jobs abroad. It should not be confused with employment shifts that are due to the business cycle and, therefore, are temporary in nature. The United States has just been through a cyclical downturn, which affected much of the developed world. Part of the job losses in manufacturing and key services over the last three years was due to the recent recession, and some of these jobs are being restored as the recovery proceeds. Employment is a lagging indicator, and concerns about job creation often linger after a recession into the beginning stages of a recovery. The current recovery displayed weak job growth until early 2004, with big increases in productivity possibly slowing recovery of employment. However, job growth has been much stronger in the last several months, and as investment recovers from the recession, the problem will ease in intensity and duration. The U.S. unemployment rate peaked at 6.3 percent in June 2003, but had dropped to 5.4 percent by September 2004. The September rate is below the average unemployment rate of 5.5 percent experienced in the booming 1990s, and well below the averages of the 1970s and 1980s. There may also have been some significant measurement problems in this last cycle. An unusually large gap has developed between the Labor Department's establishment survey (a survey of a sample of businesses), which shows slow job growth during the recovery, and the household survey (a telephone sample of residences), which indicates more rapid job growth. Some researchers believe that the establishment survey understates A * * gg~ 8 ~gg

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