Ron Hira is author of Outsourcing America (AMACOM 2005), assistant professor of public policy at Rochester Institute of Technology, and vice president for career activities for IEEE-USA. This article reflects his own opinions.

Many companies are transferring tasks and jobs traditionally done by American engineers to lower cost countries, where engineers earn as little as 10 percent of the salaries Americans earn. Company managers, making rational decisions, hope to save up to 70 percent in net costs by offshoring work. Although no government organization has reliable figures on exactly how many engineering tasks and jobs have been moved to low-cost countries in recent years, observable trends indicate that offshoring is accelerating in scale and scope. The types of jobs moving offshore are increasingly sophisticated, some requiring advanced degrees and experience in engineering. No doubt these changes have important implications for American engineers and the U.S. national innovation system; but engineers have little objective information to help them adapt to these changes, and, in spite of widespread media attention, policy makers have so far chosen to do nothing in response to these structural changes to our innovation system. A flurry of legislation has been introduced in 2006 but because of the way it is designed - focusing on increasing basic research spending - its potential impact for American engineers will be limited.

On the macroeconomic level, economists are debating whether offshoring is good for America. In an August 2004 article in the Journal of Economic Perspectives, for example, Nobel laureate Paul Samuelson describes some very plausible scenarios in which offshoring would actually leave America worse off. Ralph Gomory and William Baumol (2001) demonstrate that standard trade theory shows multiple outcomes for trading partners: in some outcomes, both partners benefit; in others, one country gains and the other loses.

The net effects of offshoring on the U.S. economy are uncertain, but engineers and the engineering community can begin adapting if they understand the anticipated impacts on the labor market and begin tracking observable trends. This information can also help policy makers explore feasible policy responses.

Most economists believe that offshoring will have little or no long-term impact on the overall number of jobs or the unemployment rates in the United States. According to their models, the total number of jobs in the United States is a function of the size of the labor force (primarily influenced by population and labor force participation), and the unemployment rate is a function of monetary and fiscal policies. They argue that individual jobs may indeed disappear at the microeconomic level as they are moved overseas, but the displaced workers will find jobs elsewhere in the economy as new opportunities arise or are created. In the short term, offshoring is expected to have the following impacts on employment: (1) job displacement for U.S. workers; (2) a change in the mix of U.S. occupations; and (3) downward pressures on wages for jobs that are newly tradable across borders.

Some U.S. workers will lose their jobs as their work is shifted to overseas locations. In July 2005, 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-workers seeking and finding opportunities at other companies, in other geographic regions, and/or in other occupations-is difficult. The data on reemployment outcomes are limited, but we can get an indication from the Bureau of Labor Statistics Displaced Workers Survey. The latest survey, in January 2004, 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 had 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 displaced worker surveys 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.

For displaced engineers, the adjustment process depends on the robustness of engineering job creation. As Figure 1 shows, U.S. electrical and electronics engineers and computer scientists experienced higher levels of unemployment in the past four years than during any other four-year period since 1972. In 2003, for the first time, the unemployment rate for electrical and electronics engineers (6.2 percent) exceeded the national unemployment rate (6 percent). To put this in historical perspective, throughout the whole decade of the 1980s, unemployment among electrical and electronics engineering never rose above 2 percent, despite national unemployment rates that peaked at 9.7 percent.

In addition, because of the slack labor market, wages of those who are employed fell slightly. For the first time in the 31 years that IEEE-USA has been surveying its members, median compensation declined in 2003. Although unemployment rates improved markedly among electrical and electronics engineering in 2004, this was partly due to increased hiring and partly due to engineers dropping out of the profession and looking for work in other occupations.

Many factors, such as the telecommunications bust, have contributed to the slack market for electrical and electronics engineers. But, understandably, they have expressed greater concerns about offshoring than some other professionals, such as accountants, who have benefited from high demand generated by the Sarbanes-Oxley regulations. In addition, engineers who are unemployed for an extended period of time may face higher burdens than the average U.S. worker. If it's true that "the half-life of an engineer is three to five years," engineers who are out of work for a year or more risk losing cutting-edge skills much more rapidly than displaced workers in other occupations.

Figure 1 Unemployment rates for U.S. electrical and electronics engineers. Source: IEEE-USA from Bureau of Labor Statistics

Based on conversations with many IEEE members, my sense is that the job market has improved substantially in 2005 and 2006, but it is still far from robust. The improved job market seems to be due to two factors: increases in defense spending and a cyclic upturn in the semiconductor industry. These factors mean that the economy has been able to better absorb the lost jobs and opportunities due to offshoring. However, we should keep in mind that we are really at the very beginning of the offshoring of engineering functions. Figure 2 shows my notional sense of where we currently are on the saturation curve for offshoring. For example, Intel, Cisco and Microsoft each recently announced investments in India of more than $1 billion. What is striking about these announcements is that it isn't to build facilities in India, but to hire engineers and to fund start-ups through venture capital funds. As the hiring kicks in over the next couple of years there will be some impact on U.S. engineers.

Figure 2 Offshoring Saturation: Just the Beginning

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 careers 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.

The third predicted effect on employment is wage suppression in jobs that are newly tradable across borders. Workers in these occupations are suddenly facing much more competition, which means they have less bargaining power. As some try to shift into nontradable tasks in the same or new occupations, competition for these jobs will also increase. Some observers believe that wage suppression, rather than job loss per se, will be the most important effect of offshoring on U.S. employment.

It is clear that offshoring will have a major impact on many engineers and the engineering profession. Engineers need to be diligent about tracking these trends so that they can adapt to them and ensure they have durable careers. It is unlikely the government will help, and some of the proposals promoted by companies, such as doubling the number of American engineering graduates may actually hurt. For the working engineer, it is ever more important to network with others in your profession and to take charge of managing your career.

Bureau of Labor Statistics. 2004. Displaced Workers Survey. Washington, D.C.: U.S. Department of Labor. A summary of the survey is available online at: http://www.bls.gov/news.release/disp.nr0.htm.

Gomory, R.E., and W.J. Baumol. 2001. Global Trade and Conflicting National Interests. Cambridge, Mass.: MIT Press.

Samuelson, P.A. 2004. Where Ricardo and Mill rebut and confirm arguments of mainstream economists supporting globalization. Journal of Economic Perspectives 18(3): 135-146.

1. For more information on the subjects discussed here, see Outsourcing America: What's Behind Our National Crisis and How We Can Reclaim American Jobs by Ron Hira and Anil Hira (AMACOM, 2005).
2. The term offshoring as used in this paper encompasses offshore outsourcing.

Ron Hira
Assistant Professor, Public Policy, Rochester Institute of Technology

Dr. Hira specializes in engineering workforce issues and technology policy. He is the author of Outsourcing America, has testified before the U.S. Congress on the implications of offshore outsourcing, and has given more than 70 invited talks on this subject. Dr. Hira is a licensed professional engineer and is vice president of Career Activities of IEEE-USA. In 2004, he was awarded the Citation of Honor from IEEE-USA for his work on behalf of the engineering profession.