State, National Labor Force Projections Fail to Take Proper Account of Offshoring of Service-Sector Work
by Robin Elsham

Offshoring, the practice of outsourcing business functions to service providers abroad, often ultra-low-income countries like India and the Philippines, is wreaking havoc with attempts to project job growth here and nationwide.
The fundamental problem, according to government statisticians, is there's not a single source of comprehensive information about the current extent of offshoring. No government department or agency so far collects information showing the number of U.S. jobs lost to offshoring. At this point, neither the U.S. government nor Minnesota state government has any way of determining what industries or occupations are being affected, or the impact on employment levels or wages.

"The statistical system -- or what they produce that bares on offshoring -- is woefully inadequate from our perspective," Norman Saunders, the former chief economist of the projections team at the U.S. Bureau of Labor Statistics (BLS) says.

In a recent interview in Washington with four members of the BLS projections team, Saunders also indicated it would take at least a decade to remedy the situation.

"The bureau has been looking for the past two years at what they can do in setting up a new survey that would capture" the missing information, said Saunders. "I know there's been some work done...but I don't think it's going anywhere fast" because of the complexity of the task and cost.

Knowing the impact so far of offshoring is essential because in updating its 10-year forecasts for changes in the U.S. labor force, the BLS relies heavily on current trends. But where offshoring is concerned, the BLS not only can't be certain what impact offshoring already has had on any industry or occupation, it can only guess at what types of jobs are affected.

The most recent BLS and Minnesota 10-year labor market forecasts (for the period 2004-2014) were the first in which an attempt was made to identify in a systematic way the occupations most affected by offshoring. But the methodology used clearly under-estimated the actual number of occupations affected, rendering suspect the projections produced.

Only 40 job categories were classified as "susceptible to offshoring," out of the 754 occupations for which projections were issued.

This matter is of vital importance because of the huge significance of the U.S. service sector. Nearly eight in 10 labor force participants in Minnesota and throughout the country now work in service-sector occupations. And over the 10 years to 2014, service employment in Minnesota is forecast to grow 16.0 percent or by 348,943 jobs to 2.53 million, while manufacturing employment is projected to increase just 1.0 percent or by merely 3,553 jobs to only 346,347. In other words, nearly all job growth over the 10-year period is expected to occur in the service sector.

But how credible are those projections? And consider the consequences if the projections for many occupations prove well off the mark due to the failure to properly account for the impact of offshoring.

The BLS 10-year projections are published in the Occupational Outlook Handbook, the top-selling government publication because it's purchased by virtually every high school, vocational and technical school, college and university in the country for use in career guidance. The information is also used for planning education and training programs, and to guide workforce development efforts in the private and public sectors.

The two-step process followed by the BLS in attempting to identify work being offshored is explained in "Accounting for Offshoring in Occupational Employment Projections," available on the web at http://www.bis.gov/emp/optd/optd002.pdf

Guesstimating the Extent of Offshoring

The BLS began by defining the sort of work most susceptible to offshoring as "...can be digitally transmitted, is Internet enabled, includes repetitive tasks, has clear requirements with few nuances, has little face-to-face interaction with end users or clients, is not particularly time sensitive, and is not multidisciplinary."

Conversely, it defined work least likely to be offshored as "crosses many disciplines, requires considerable interaction, includes much uncertainty about specifications, involves nuances or a deep cultural understanding, and depends on creativity and innovation."

The BLS then developed eight questions (see box) to use to determine whether an occupation was at risk from offshoring. The list was later pared to five criteria after three questions (Nos. 3, 7 and 8) were determined to be unreliable indicators.

"The scoring identified about 90 occupations with a high enough level that we thought it was reasonable to assume that they were at risk of offshoring," says Saunders.

The projections team then searched newspapers, magazines and business journals for confirmation that work in those areas was indeed being offshored.
"So in addition to our scoring criteria identifying them as susceptible, we needed anecdotal information that offshoring was occurring, and 40 (occupations) met those two criteria," says Sadie Blanchard, another BLS projections team member. (See box for list of those 40 occupations)

The Minnesota state goverment in turn uses the BLS data to project labor force changes here.

"A lot of the stuff I just take from the BLS," says Dave Senf, the Department of Employment and Economic Development (DEED) economist who almost single-handedly produces the 10-year state labor force projections. "There's no way I'm going to have all the information and know about all the occupation trends that the BLS might have," says Senf, speaking of the process he follows every two years in producing a revised 10-year forecast of demand for about 750 job categories.

In a summary of his 2002-2012 projections, Senf described that procedure. "
Minnesota's long-term employment projections are based, to a large degree, on national projections developed by the Bureau of Labor Statistics (BLS). Minnesota...customizes national projections to reflect the state's unique industrial and occupational mixes."

That means, however, if the BLS under-estimates the impact of offshoring on service-sector employment, the same pattern of under-estimating changes by occupation will be just as evident in the state labor force projections. And that is almost certainly what happened with the 2004-2014 projections, which clearly missed entire clusters of service-sector occupations already impacted by offshoring.

Case in point: the 40 occupations deemed affected by offshoring include none related to HR administration. Yet HR is reported to be the fastest growing segment of the business process outsourcing (BPO) industry in India, itself the largest BPO service provider in the world with more than half the global market. In a recently issued report, the business practice consultancy IDC estimated 37 percent of HR outsourcing by U.S. companies in 2004 was spend on BPO services.

News Blackout
The BLS missed occupations affected by offshoring by including only those mentioned in media reports. Yet media reporting on offshoring has plummeted over recent years as virtually every company doing it imposed news blackouts on their offshoring operations.

Companies clammed up after offshoring became such a hot political issue during the 2004 presidential campaign. Ever since, U.S. companies engaged in offshoring service work have stopped announcing new deals, prohibited service providers from identifying them as clients, and often threatened to punish employees or business partners who break the embargo on discussing offshoring.

Yet a tremendous amount of evidence points to the fact that far from slowing down much less coming to a halt since 2004, offshoring by U.S. companies has accelerated greatly. Indian service providers are struggling to cope with rampant wage inflation and staff turnover rates as high as 100 percent in some areas, because the volume of new business has triggered a hiring frenzy there.
More significantly, offshoring in recent years has begun to expand beyond the ranks of Fortune 1000 companies with global operations already, and to include fast growing numbers of mid-sized and even small companies with purely domestic and even entirely local operations.

"All size businesses are doing this," says Bob Isaacson, the DEED director of analysis and evaluation. "When you look at percentages, there is a higher percentage of multinationals or large companies doing this. But when you look at the numbers, there are more small-size companies than large companies doing this."

And the number of affected occupations keeps expanding as foreign service providers offer ever more sophisticated services, moving into fields collectively known as "knowledge process outsourcing" or KPO work. Examples include legal support services, financial research, high-end business consulting, and many types of engineering services.

Because U.S. companies have become so secretive about their offshoring activities, these newest developments are not yet reflected in the labor force projections churned out by either the BLS or Minnesota state government.
Simple fact is: nobody knows the current extent of offshoring, making projecting changes in many service-sector occupations a peril-fraught exercise.

About the writer: Robin Elsham is writing a book about the rapid growth of the global business process outsourcing or BPO industry. He is a business/finance journalist who worked the past 16 years in Asia, including a recent two-year stint running corporate news coverage in India for Reuters. He can be contacted at ergastra@yahoo.com