The Bear’s Lair: Career advice for the Worthingtons

“Don’t put your daughter on the stage, Mrs. Worthington” caroled Noel Coward in an inspired 1947 piece of career advice. The McKinsey Global Institute study “The Emerging Global Labor Market” presented at the Institute for International Economics Wednesday by the Institute’s Director Diana Farrell leads unquestionably to new advice for the Worthington family (if they are citizens of the United States or another rich country): Don’t put your daughter in engineering school, either.

The McKinsey study examines outsourcing in detail, looking at both the demand for outsourced services and the supply of skilled outsourced labor.  It begins by looking sector by sector at the propensity for the workforce of various service sectors to be outsourced to low wage economies. Thus 44 percent of the Information Technology Services sector’s workforce is could potentially be outsourced overseas, whereas only 3 percent of the retail sector’s workforce could be outsourced overseas. Overall, McKinsey calculate that 160 million jobs, 11 percent of the world’s 1.46 billion service jobs, could in theory be carried out remotely.

As well as the theoretical ability for a sector to be outsourced, the study looked at the percentage of that potential that is in practice being outsourced, which McKinsey believes to be largely a function of the competitiveness of the industry concerned.  In a competitive sector, such as IT services, McKinsey expect around 25 percent of the 2.8 million jobs worldwide that could be outsourced to have been outsourced to low wage economies by 2008 – 11 percent of total world employment in the sector.  Conversely, in a sector such as insurance, where McKinsey views competitive pressure as weak and regulatory barriers as strong, McKinsey expects only 38,000 of the world’s 2.3 million outsourceable jobs to have been outsourced by 2008 – 1.6 percent of the sector’s outsourceable jobs and a mere 0.3 percent of the sector’s world total employment.

McKinsey views the trend towards outsourcing as positive, and would welcome the removals of barriers to it in sectors such as insurance.  Clearly, outsourcing reduces costs and increases profits in the sector concerned; equally, McKinsey expects wage levels for young professionals (university graduates with less than 7 years) in heavily outsourced sectors in countries to which outsourcing takes place to increase rapidly, to around 30-40 percent of the U.S. level in the poorest countries (such as India and notably the Philippines) to which outsourcing is a viable possibility.  McKinsey does not expect outsourcing to have an appreciable negative effect on wage levels in rich countries, since the number of jobs outsourced is a small proportion of total employment, and sector employees in rich countries can divert their labor to other sectors.

The belief that outsourcing has no negative effect on rich country workers is highly debatable, because of the sectoral concentration of outsourcing potential, and the rigidity of any individual’s supply of labor.  As the outsourcing of manufacturing jobs from the United States has demonstrated, while the overall supply of labor in a particular sector is flexible, for any individual worker it is far less so.  We are only young once; those of us who acquire a college education or extensive job training mostly acquire it only at the beginning of our careers, and hence if the sector in which we are employed shrinks radically when we are 40, we may have few alternatives available.  If we retrain at that stage, we will suffer a long period with no earnings while still incurring outgoings to support our family, and our retraining will probably be substantially inferior in quality to that obtainable in youth.  The innumerable stories of automobile workers who were forced to accept unskilled work at wages far below their previous level when plants closed indicates this all too clearly.

The implications for young Ms. Worthington are clear.  Even if outsourcing is beneficial to the world and U.S. economies, if she graduates in a discipline that is heavily subject to outsourcing, she may find herself without a profession in mid-career, at which point her alternatives will be limited and unattractive.  The beneficial effects of outsourcing on the U.S. economy and on her contemporaries will be little consolation to her if her own choice of profession has doomed her to mid-career redundancy.  Thus the search for a profession that will still contain attractive jobs in 40 years time, the last decade of her working life, should be Ms. Worthington’s top priority.

Sectors subject to heavy outsourcing are particularly unattractive career choices for those in rich countries.  Not only will wages in such sectors be subject to heavy downward pressure, but jobs in them will continually be threatened by outsourcing to low wage countries.  It is folly to enter at 20 a sector in which a third or even half the jobs are to disappear to low wage countries over the next few decades. If Ms. Worthington trains in an outsourcing-prone sector, at some future point, if she does not wish to go and live in Hyderabad, she may not have the option even of low wage work in her chosen sector, but only of expensive retraining and lifestyle disruption. 

That’s why for a young Westerner choosing a career, engineering should be avoided, as should packaged software and IT services.  According to McKinsey, engineering has the highest propensity of any profession to outsourcing with no less than 52 percent of its jobs able to be performed remotely, while the packaged software and IT services sectors both have ratios above 40 percent.  Further, all three sectors are highly competitive, and the theoretical maximum level of outsourcing appears to McKinsey likely to be approached quite rapidly. 

This is good for the world economy; it increases efficiency. In order not to focus the discussion entirely on the well heeled emerging yuppie Ms. Worthington, I give a counter-example from close to home: while outsourcing in engineering may be bad news for my 13 year old U.S.-raised son (though at that age he has many alternatives) it is excellent news for his 40 year old Bulgarian uncle, engineering graduate of the University of Sofia and living in that city.  Provided he keeps up the language lessons (for an engineer in Bulgaria German is more important than English) he has the chance to raise his living standards at least modestly towards Western levels, and to emerge from the impoverishment of his early adulthood, battered as it was by the last years of Communism and the enormously painful transition to a market economy.  One thus rejoices for the world as a whole, even as one hesitates in advising the Worthingtons.

For Mrs. Worthington, seeking advice for her daughter’s career, one can outline three alternatives. One is to seek a sector where outsourcing is theoretically possible, but competitive pressure is low and legal barriers high, so it is likely to take place only slowly.  Insurance, for example is a business that changes only with glacial speed; most of the large companies in the sector have been around for a century or more, and a network of local restrictions makes outsourcing very difficult.  McKinsey, apostles of globalization as they are, will advise that this is extremely inefficient. However it is in the interests of pretty well all insurance sector workers and management in rich countries to ignore their advice.  Since it is very difficult indeed for newcomers to break into the insurance business, consumer power to affect this is very limited. Thus insurance sector outsourcing will proceed only at glacial speed, and Ms. Worthington, if she wishes, can expect a reasonably secure career there.  Indians and Bulgarians wishing to work in insurance are less fortunate; their employers will mostly continue to serve only their small local markets. 

A second alternative for young Ms. Worthington is to work for the government.  According to Farrell, very few government services have been outsourced to low wage countries, even when those services are theoretically easily outsourceable. Governments notoriously face fewer incentives to efficiency than private companies, and outsourcing any substantial number of jobs is always politically unpopular; hence outsourcing in the public sector is likely to remain very limited and jobs in the public sector will remain secure.  The implications of this for Western societies’ overall welfare and for tax levels are highly disturbing.

Finally, Ms. Worthington can work in a sector where even if managers wished to outsource large numbers of jobs to low wage countries, they couldn’t.  Two such sectors are retail (including restaurants), where McKinsey calculates the outsourcing potential as 3 percent of total jobs, and healthcare, where it is 8 percent.  Both these sectors involve consumer services that are performed locally, and the trajectory of Internet commerce since the late 1990s (Pets.com never made it!) suggests that the essentially local nature of the great bulk of these services is not about to change in the next few decades.

At the unskilled level, retail sector jobs are threatened by a different feature of globalization: high immigration.  The barber, the McDonalds server and the WalMart employee are subject to intense low wage competition from immigrants, and large employers of low skilled labor are correspondingly active in lobbying for free immigration. The argument they use for this, the need to battle foreign competition, is spurious. If a service sector such as software is subject to heavy foreign competition, it can be outsourced; if like retailing it cannot be outsourced, it is also not subject to heavy foreign competition.  Allowing high immigration thus does not protect U.S. industry significantly from foreign competition, it simply drives down wages at the bottom of the scale, so that the McDonalds server or the WalMart employee cannot make a decent living.

Since politicians are elected to represent those who have votes, and not immigrants or potential immigrants who do not have them, their duty is thus clearly to favor tight immigration controls. Such controls tend to raise wages at the low-skill end of sectors such as retailing that are not subject to significant foreign competition, without materially harming the interests of the retailers themselves.

Ms. Worthington however expects to become skilled, and for her the retailing and healthcare sectors offer excellent job opportunities that are relatively immune from outsourcing, with good prospects for stability over a 40 year career.

One’s advice to young Ms. Worthington is thus that traditionally given by Jewish mothers throughout history: Become a doctor!

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long ‘90s boom, the proportion of “sell” recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
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Martin Hutchinson is the author of “Great Conservatives” (Academica Press, 2005)—details can be found on the Web site greatconservatives.com.

Posted by karlmagnus on Monday, July 18, 2005 at 09:42 AM in Economics & Finance,  Immigration,  U.S. Politics
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