Stephen H. Unger
August 4, 2007

American workers, at all levels, are the objects of a two-front attack. On one front their jobs are being outsourced to foreign countries where pay scales are very low, and, on the other front, people are being brought here from low-pay countries to do their work for less money. With respect to factory workers, the outsourcing process has been going on for several decades and has reached the point where it is unusual to find a made-in-USA consumer item. The jobs of many other manual workers, such as agricultural laborers and workers in meat packing plants, are going to workers coming in, often illegally, from poorer countries to the South.

At the higher end of the employment scale, jobs, particularly those of programmers and engineers, are being contracted out by US companies to companies in other countries with much lower pay scales. The second front is also a factor, as people are being imported under special temporary visa programs, mainly H-1B and L1, to work harder for less pay. (For a thoro study of the H-1B program with respect to programmers, see this article by Norman Matloff, the leading expert on this subject. On the Need for Reform of the H-1B Nonimmigrant Work Visa in Computer-Related Occupations)

In addition, many US companies are establishing satellite operations abroad to do manufacturing, design, and research. The two fronts neatly complement one another. People are often brought here under the H-1B or L1 programs to acquire special expertise, and then returned to their home countries to work on outsourced projects. At the same time, companies seeking to justify the H-1B and L-1 programs argue that, if they are not allowed to use these mechanisms, they will outsource more work.

Conventional economists (CE's) see nothing wrong with this situation. They regard what is happening as the proper, inevitable operation of a free market and free trade. Americans, they say, benefit from lower prices. Of course the overseas workers doing the outsourced work are benefiting, and the H-1B workers are earning much more than they would in their home countries. They often send home part of their earnings, which helps their families and also benefits their home countries in that they acquire more dollars. The money spent on goods manufactured overseas adds further to the dollar resources of the countries involved, and these dollars can be spent to purchase US products. Hey, this sounds great! What's the problem?

One obvious problem is the jobs no longer available to Americans. (By Americans, I mean US citizens of all categories and those with permanent resident status, regardless of birthplace.) The response of the CE's when asked about the price paid by US workers is generally a statement about the naturalness of competition for jobs, the claim that Americans don't really want the jobs no longer available to them, and often some vague statement about re-education for new jobs and compensation for those whose jobs vanish. They argue that those displaced by this process will find better, higher paying jobs. Suggestions that laws might be passed to protect the jobs of American workers by imposing restrictions on outsourcing, or the importing of workers, are rejected with horror as unacceptable interference with the "free market". The CE's look at the big picture, the great benefits to our economy. The collateral damage to American workers is a minor issue in their view. In what follows, I will show that the consequences of outsourcing and the importing of workers has far worse consequences, both to individuals and to the economy, than are shown in the rosy picture painted by the CE's.

Not Enough Americans?

Bill Gates has been going around the country bemoaning the fact that Microsoft (and, presumably, other companies) can't find enough American programmers. This, he says, is why it is essential that limits on the number of H-1B workers should be raised sharply--or, preferably, eliminated. Gates and other company executives point out that student enrollment in CS programs has fallen in the last few years. They argue that our educational system is failing to teach children what they need to know to be successful in technical fields. Let's take a look at the actual situation.

CE's and business executives are fond of talking about how the market sets appropriate prices for everything and flexibly adjusts to solve all problems. If there is a widget shortage, the price goes up, more widgets are made and the shortage is gone. If there are too many widgets, then prices fall, causing production to fall. Elementary! They treat employment the same way, in some situations. If, for whatever reason, there is less demand for widget operators, then there will be unemployed widget operators and their pay rates will fall. Little sympathy is shown for the widget operators. Its their responsibility to find other work. They should have anticipated the problem and acquired other skills.

Now let's play with this idea a bit. If there is a shortage of widget operators, what would you expect to happen to widget operator salaries? Did I hear someone say they will go up? Right! Now, can we apply this to computer programmers? If there is really a shortage of computer programmers, then presumably the invisible hand will push up their pay. By an elementary rule of logic, we can then deduce that if the pay of computer programmers has not gone up, then there is no shortage. And that is indeed the situation. In real dollars, there has been no significant increase in pay (adjusted for inflation) for computer programmers in the US for many years. In fact, with respect to engineers as a whole, there has never been a time when engineering salaries really soared. Graduating engineering students were never given the royal treatment routinely meted out to law students, and, with the exception of the brief period of the dot com boom, they never received starting salaries comparable to those given to lawyers.

This is consistent with numerous accounts of competent, well educated, experienced computer programmers being unable to find work, to the point where many are now employed as real estate agents, retail clerks, etc. It is also consistent with the fact, reported in the Wall Street Journal, that a few years ago, Microsoft received 100,000 resumes from graduating CS students, interviewed 3500, and hired 1000. An interesting article by a former CEO in Business Week about the engineering shortage confirms this view. [Engineering Gap? Fact and Fiction, Vivek Wadhwa]

The situation for engineers, particularly EE's, is similar. Experienced engineers and programmers generally have a great deal of trouble finding employment. A common problem is that employers specify job qualifications in great detail. Those not meeting these specs are not considered. Companies expect to be able to hire people who can start producing before they have adjusted the chair heights at their new desks. This attitude often leads to the rejection of experienced engineers, ostensibly on the grounds that they lack knowledge of some particular design tool, even tho they could acquire that knowledge in a few weeks.

This devaluation of experience contrasts sharply with the way leading companies behaved in the past. Bell Labs, for example, treated its engineers as valuable, long term assets. Newly hired graduates were sent to grad school, sometimes full time, with full salaries and tuition paid. Engineers were expected to maintain their expertise by attending technical conferences and in-house tutorial sessions. When knowledge of some new development became important, for example a new computer language, engineers in need of this knowledge were given time to acquire it. This is in sharp contrast to present practices, where a company embarking on some new project, hires people with the necessary expertise on a contract basis, dispensing with them upon completion of that project.

Altho most employers deny this, the real motivation for hiring H-1B's is that they can be paid less and, secondarily, due to the circumstances of their employment, they can be worked harder. Estimates are that an H-1B can be hired for roughly 25% less than the going rate for similarly qualified Americans. There is a shortage of technical people only in the sense that it might be hard to find people with very specific skill sets who are willing to work for a low salary.

Its Been Done Before

Driving down worker wages by importing new workers is an old tactic. It was commonly used in the nineteenth century against textile workers, railroad construction workers, and miners, for example. This tactic became important as a weapon against unions, particularly early in the twentieth century. The difference was that, in some cases, there may have been real shortages of workers, and the imported workers were expected to, and usually did, remain permanently.

Exporting jobs, i.e., outsourcing, was first used when New England textile workers began forming unions. The importing of workers proved to be unsuccessful as the immigrants eventually joined--or even helped organize--unions. The mill owners responded by moving the mills to Southern states, where there seemed to be no limits to the violence that could be used by companies, police, and even the National Guard, against workers to crush unions . (Violence was also used in the North--but there was more opposition to such methods, so the levels were lower.)

What is new in recent years is the outsourcing of the work of middle class people such as engineers, and the systematic import of people to do this kind of work. But first, let's look at the plight of unskilled workers.

Taking Away the Ladder

In the past, poorly educated people born into poor families could get low-level jobs in factories, perhaps as sweepers. They could then progress to assembly line work, and, if they did well, rise to higher level positions, perhaps becoming foremen. Some attended night classes while working and became engineers. A variety of upward paths were available. Factories served as ladders for people to use in getting to higher economic positions. So reducing the number of factory jobs in the US hurts such people directly. One way in which the number of factory jobs has been reduced is by automation.

Automation reduces the number of jobs per unit of output. But the effect on the total number of jobs would not necessarily be great if the lower costs that it implies leads to increasing total output. (This might be undesirable for environmental reasons, but that is another argument.)

More drastic reductions of factory jobs result when American factories are shut down and replaced by factories in other countries where people are paid much less. This has been done to a large extent and the process continues. Fewer than 10% of US jobs are now categorized as factory work.

The jobs remaining for low-skilled people include agricultural labor, hotel and hospital service, restaurant service, retail sales, and yard maintenance. While it is not impossible to use such jobs as ladders, they tend to be much less effective for this purpose. An additional problem is that a large portion of these jobs are now being taken by people brought in from, or illegally coming here from, low-pay countries. A consequence of this is that wages for people in these occupations at the bottom of the economic heap, have fallen even further. The importing of poverty stricken people has contributed significantly to unemployment among unskilled Americans, which, in turn, is a key factor in many of the social problems that our country faces. A related point is that the influx of masses of people willing to work for very little facilitated the breaking of the unions that previously made life more tolerable for employees in places such as meat-packing and poultry-processing plants.

It is often argued that Americans benefit greatly from the lower prices made possible by paying low wages either here or in some other country. One obvious response to this is that the same argument can be used to justify slavery. But it is also the case that even a drastic cut in wages often has only a small impact on price. For example, Chinese workers producing a pair of sneakers may receive only a few dollars per pair, while the price here is likely to exceed $60. Furthermore, when people who are already poor lose their jobs or have already low pay cut further, there are associated societal costs to taxpayers, such as welfare costs spurred by increased unemployment, public assistance necessitated by failing health, and increased insurance rates and other costs linked to increased crime. This is apart from the non-monetary costs such as having to live among unhappy, poverty stricken people.

Another important consequence of outsourcing is that the annual US trade deficit has been mounting year by year. In 2006, it exceeded $850 billion, which is 6.5% of the gross domestic product [Record US trade deficit in 2006]. For some reason, conventional economists don't seem too concerned about this, nor about huge federal budget deficits, nor about the fact that the net average savings rate for Americans is now negative. What does this lack of concern say about the credibility of CE's?

The argument is often made that the "guest workers" and illegal immigrants are doing work that Americans don't want to do. This is true to the extent that Americans would prefer not to do that work under the conditions and for the pay levels accepted by workers from poor countries. Many poor Americans who are willing to take such jobs are crowded out by the influx of workers from outside our borders.

Suppose there were strictly enforced laws that completely eliminated the possibility of bringing in poor people from other countries. Would our crops rot in the fields, our unslaughtered cattle die of starvation, our hotels close as rooms were cluttered with unwashed laundry? Not likely. Employers would have to re-assess the various jobs involved and figure out how to get them done by less docile workers. Obviously pay rates would have to go up. Working conditions would have to be improved. In some cases, added labor costs would justify the use of more sophisticated labor-saving equipment. My bet is that the overall result would benefit all of us, despite modest increases in the costs of various goods and services.

US Companies Abandoning Americans

Let's get back to the plight of US programmers and engineers. Those supporting the idea of bringing in H-1B's and L1's to do technical work often argued that, by having these people do "routine" work, Americans would be freed up to take on higher level assignments. That is not exactly how things are working out. Often the same companies that are hiring H-1B's to work in their US facilities, are contracting out other programming and engineering work to the same low-pay countries supplying the H-1Bs. Furthermore, many US companies, including IBM, Microsoft, and Intel, have established satellite R&D laboratories or silicon foundries abroad, thus exporting the highest level technical jobs. One variation of this process is illustrated by the fact that my "American" camera (Kodak) was, I learned after purchase, designed in Japan and manufactured in China.

The effect of all this is, as indicated above, to "free up" American engineers and programmers to take jobs in Radio Shack stores or to sell real estate. It is also important that most people doing high level programming or engineering work started out by doing low level work. So those screened out of the entry level jobs are much less likely to be able to obtain high level work.

Incidentally, both via worker importing and job exporting, engineers and programmers are not the only middle class victims. The work of accountants, architects, radiologists, and even lawyers is being outsourced. I look forward to seeing economists added to this list.

There are situations where people may lose their jobs because their employers lost out in competition with other companies (domestic or foreign), or simply went under due to any of a number of reasons. Too bad when that happens; those affected have to find jobs with other companies, and may even have to move to other cities. What we are discussing now is a very different process. Currently profitable American companies, in order to increase profits further (at least in the short term), are abandoning American engineers and programmers, and often employees in many other occupations, by bringing in replacements from abroad, or moving their facilities abroad.

An illustration of the attitudes of employers came to light recently in a Youtube video of a lecture by a partner in a major law firm specializing in immigration law. Addressing other lawyers about certifying green card holders for jobs, he explained carefully how they could operate, within the law, to exclude American workers. At one point he said, "...our goal is clearly, not to find a qualified and interested U.S. worker. And you know in a sense that sounds funny, but it's what we're trying to do here." In an article published in 2000, another immigration lawyer, wrote, "When employers feel the need to legalize aliens, it may be due to a shortage of suitable U.S. workers, but even in a depressed economy, employers who favor aliens have an arsenal of legal means to reject all U.S. workers who apply." [Legal Rejection of U.S. Workers by Joel Stewart, Esq].


As one aspect of globalization, the jobs of all Americans are being put at risk. Any manufactured item can be made in another country where labor costs are lower, and perhaps where environmental laws are more lax, and shipped here. Same for agricultural products. Many services, such as writing computer programs, answering telephones, interpreting X-rays, designing most things, can also be outsourced. We even see patients now going to other countries for surgery. Jobs, e.g., nursing or physiotherapy or fire-fighting, that require personal contact, or on-site presence, can be done by people brought in via the H-1B program. Right now, military functions are being outsourced to private companies. Why not to private companies outside our borders?

The loss of US jobs to globalization has been going on for several decades, but is still at an early stage. I doubt that it will get to the point where we are all drawing unemployment checks. So what is likely to happen? First, it should be clear that the problem is not with the people coming here, legally or illegally, to work, or with workers in other countries doing jobs previously done by Americans. They are mostly just ordinary people trying to get along in the world. For the most part, corporate managements are in control, often acting thru governments beholden to them.

One plausible outcome is that the process will continue until the great majority of Americans see their incomes cut to close to what is now considered the poverty level, the middle class is reduced to a fraction of its present size, perhaps with incomes not too different from current current middle class income, and the upper class becomes a small elite group of extremely wealthy people. This picture would resemble that in many third world countries. Principal US products might be the outputs of mines and factory farms, with a much smaller manufacturing base operated by workers earning third world wages.

Is this inevitable? One strong possibility is that at some point before the culmination, there will be a massive economic crash that would lead to chaos, with no way to predict the outcome. There is no natural law that impels us along the path we are following. So there is no reason in principle that we could not stop what is happening. It is only in the last three or four decades that foreign trade played any great role in the US economy. If our borders were suddenly hermetically sealed, there would be some transient problems, but it would not take very long before we would adjust to produce what we needed and there is no reason why life would not be able to go on without any drastic changes. There would probably be an economic boom as new businesses would be started to manufacture goods that we now import.

I am not suggesting that we attempt to achieve such isolation, but rather that we could set whatever terms we felt best for foreign trade without feeling any desperate need for materials or products from the outside. We should stop talking in terms of slogans about "free trade" and set up appropriate constraints that would block the import of goods produced by grossly underpaid (by our standards) people. Companies that wish to be considered as US companies (not subject to special taxation) could be constrained to operate within our borders. Programs such as H-1B would be terminated so that only particularly talented people would be granted work visas (such a category already exists). We would not have any guest worker programs. There are many implications for foreign policy, which I won't attempt to discuss here except to say that we should aim at helping to improve the lives of poor people in other countries, both via reasonable positive aid programs, and by changing policies that do them harm. This is only a rough sketch. I am confident that other people could improve it and fill in the details.

How could such an approach be put into effect? Ahh, that is the big problem. It would take a lot of concerted grass roots political action by people in all work categories. They would be up against powerful forces. Both major parties are firmly controlled by corporate interests. I don't see any likelihood of success prior to a major crash as mentioned above. Following such a crash, there is no way to predict whether things would get better or worse.

See two follow-up articles on the same general topic:

"How to INsource American Jobs"


"Are Americans Obsolete?"

Comments can be sent to me at unger(at)cs(dot)columbia(dot)edu

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