Job Displacement
Some U.S. workers will lose their jobs as their work is shifted to overseas locations. In July, for example, Wachovia Corporation announced plans to move many of its information technology (IT) jobs to India and told its 3,000 U.S. IT workers to prepare for lay-offs. The assumption is that these about-to-be displaced workers will be reemployed rapidly, and at substantially the same wages, as they "adjust," as economists say, to structural changes in the economy.

In reality, the adjustment process\ufffdworkers seeking and finding opportunities at other companies, in other geographic regions, and/or in other occupations\ufffdis difficult. The data on reemployment outcomes are limited, but we can get an indication from the Bureau of Labor Statistics Displaced Workers Survey (2004). The survey shows that, of workers who were displaced between 2001 and 2003, 35 percent were still unemployed in January 2004, and, of the 65 percent who were employed, only 43 percent earned as much as they did before displacement. Thus, the empirical data show that displaced workers are not reemployed rapidly (one in three remains unemployed) or at the same or higher wages (three in five took pay cuts).

These outcomes are largely consistent with results of surveys of displaced workers conducted since 1979. Significant numbers of displaced workers are likely to remain unemployed for extended periods of time, and many of those who find work take substantial pay cuts.

Macroeconomic job creation is an important factor in the rate and quality of reemployment. If many new jobs are being created, a worker's chances of successful reemployment increase. Unfortunately, levels of job creation in the most recent economic expansion of the U.S. economy have been unusually low. Although most macroeconomic indicators, such as robust expansion of the gross domestic product (GDP), have been favorable, job creation has been far weaker than during any other recent recovery from recession.

There are a few good explanations for why the economic expansion has not generated jobs up to historical norms. In the 44 months since the recession ended in November 2001, the economy has created 2.907 million new jobs, or an average of 793,000 jobs per year. Job creation for the 44 months after the previous recession, which ended in July 1991, was 8.575 million jobs, an average of 2.339 million per year. Just to keep up with new entrants in the labor force from demographic changes, the economy must create about 1.8 million jobs per year. Therefore, adjustment is more difficult than usual for displaced workers trying to find employment in their own or other occupations.

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Mix of U.S. Occupations
The second effect of offshoring predicted by economists is a change in the mix of U.S. occupations, as some jobs migrate to more efficient (lower cost) overseas locations. As some sectors are lost, the United States will specialize in sectors in which it has a comparative advantage. However, there is no guarantee that the new mix of U.S. occupations will be better. In fact, economists cannot predict what types of new jobs will be created. This is a key policy question that no one can answer at this point. It is also a practical question. At every IEEE meeting I attend, I am invariably asked, "What new jobs should I be training for? What new skill sets will I need?"

Educators are grappling with the same questions. Engineering educators want to adjust curricula to help immunize their students against offshoring. But because most companies are reluctant to reveal their plans for offshoring, and because the government is not collecting data, we are all left to speculate about what kinds of jobs will go and what kinds will stay.

If the United States relinquishes many engineering and technology jobs, will we be able to replace them with better jobs? If the replacements are nontechnology jobs, how will that affect our ability to drive technological innovation? Conventional economic theories do not explicitly account for the impacts of offshoring on technological innovation and national security.

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Observable Trends in Offshoring
The types of jobs moving offshore do not follow a simple pattern, such as tasks requiring lower education levels moving offshore and higher level tasks remaining in the United States. Clearly, at least some high-level engineering design tasks are being moved offshore, and the primary driver is lower wages. Many top technology firms, such as Microsoft, General Electric, Google, and others, are building research and development centers in low-cost countries, and job openings posted on the websites of technology companies indicate that overseas engineering hires often require advanced degrees and experience. And the trend is not limited to established or mature companies. Many venture capital firms now require that the start-up firms they fund have offshoring plans.

IT services is the first-mover sector in the current, nonmanufacturing wave of offshoring. Thus, IT may be an indicator of things to come for other sectors. Because many of the larger IT firms are publicly traded, we can understand how offshoring is unfolding in IT services by examining their financial reports. Table 1 shows comparative basic financial data for the largest IT services firms with traditional business models and for firms that started with an offshore outsourcing model. As you can see from the table, two of the major offshore outsourcing companies, Infosys and Wipro (both based in India), have higher market valuations than their U.S.-based competitors, Electronic Data Systems (EDS), Computer Sciences Corporation (CSC), and Affiliated Computer Services (ACS). In 2004, for example, EDS had $21 billion in revenue and a $10.3 billion market valuation; Infosys, with only $1.6 billion in sales, had a $20.5 billion market valuation. In other words, Infosys has twice the market capitalization of EDS with one-twelfth the sales.

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The key difference between the new and old debates on competitiveness is that workers today are much more likely than companies to be adversely affected. This difference means that the practical and politically acceptable solutions that were used in the past will not work this time, and I suspect this will make it much more difficult to move forward. Many companies will be able to adapt to the new competitiveness challenge by substituting foreign for U.S. labor. Thus, they may succeed against their competition, but without U.S. workers.

The current competitiveness challenge has companies pitting U.S. workers against foreign workers, and companies are taking the latest technology and capital to the lowest cost labor, thereby eliminating a traditional advantage for U.S. engineers. This creates a practical problem because most of our established policy mechanisms are designed primarily to help companies. For example, increased government spending on R&D may lead to breakthroughs in nanotechnology in the United States, but the bulk of the jobs created from the design, development, and production of the resultant products may be overseas, as companies quickly or virtually transfer the latest tools, technologies, and techniques to low-cost overseas engineers.

Therefore, policy responses proposed by some business groups, such as doubling the number of U.S. engineering graduates, are not likely to be effective unless they are accompanied by substantive changes in engineering education to provide different skills than those of foreign engineers. We need different, not more, scientists and engineers. Achieving this will be much more difficult than most people realize, but it is time we begin to talk about the best ways to respond to offshoring.