Economic Restructuring and Outsourcing
in the North Central Region

by Cornelia Butler Flora

Globalization means that capital is free to go where it can make the most profit. The result has been tremendous changes in the international division of labor—what goods and services are produced in which nations. Although international treaties such as the North American Free Trade Agreement and the end of the Multifiber Arrangement aided this trend in 2004, the shift in what is done where would have occurred regardless.

While some see the restructuring as advantageous to the United States (Kane et al. 2004), most scholars acknowledge that there are shifts that will continue into the future. Thomas Friedman discusses these trends and their implications in his new book, The World is Flat.

The first stage of outsourcing was industry-based, as light manufacturing moved to locations with lower wages and less stringent labor and environmental law enforcement. These industries—including furniture, textiles and clothing, and other wood products—were particularly prevalent in rural areas. We document the process of outsourcing of shoes in Flora, et al. 2004. With the termination of the Multifiber Arrangement in 2004, these industries have almost totally left industrialized countries, moving primarily to China. But recently, other industries have been affected as well, including electronics and components, computer equipment and fabricated metal products.

The U.S. government has instituted the Trade Adjustment Assistance Program that helps individuals who have become unemployed as a result of competition from foreign trade. States in the North Central region that have used this certification program the most include Illinois, Michigan, Ohio and Wisconsin.

Current Outsourcing Related to Occupation Rather than Industry

Now outsourcing is more related to occupation than to industry, aided particularly by declines in the costs of transportation and communication. Outsourcing studies often cite a study by Forester Research that said there have been at least 540,000 U.S. jobs shipped overseas during the last couple of years. A study by Deloitte Research said 850,000 financial jobs could be heading overseas by 2010.

Forrester Research (http://www.forrester.com/my/1,,1-0,FF.html) has identified occupational categories that they feel are at risk of outsourcing (Table 1). Many of these occupations are located in urban areas. We calculated the percentage of all occupations in those categories for the nation as a whole, and divided that distribution into quartiles. We calculated the percent of all occupations in the “at risk” categories by county for the region and assigned each county to the national at risk quartile. Those results are shown in Figure 1.

Occupational Characteristics that are Favorable to Performance Off Shore

The Farm Foundation and the Economic Research Service recently sponsored a conference on Globalization and Restructuring in Rural America. (Presentations are available at
http://www.farmfoundation.org/projects/05-22RestructuringofruralAmerica.htm.)

Chester Levine and Jon Sargent of the Bureau of Labor Statistics summarized occupational characteristics that are favorable to performance off shore:

• Little face-to-face interaction with end-users or clients.
• Digital, Internet-enabled.
• Clear requirements with little nuance.
• Repetitive tasks.
• Rule based decision-making and problem solving.
• Less time sensitive with longer transition times.

However, the last criteria may become less important, as some fast food drive throughs have the orders taken by an individual in Asia and the food delivered by an on-site individual. The new Taylorism breaks tasks down into those requiring proximity and those that do not. Interestingly, this puts many middle management functions in the “at-risk” category.

Using data from the U.S. Office of Technology Policy, they found certain characteristics favorable to performance in the United States.

• Work that requires a high degree of face-to-face interaction with end-users and clients.
• Work in which there is uncertainty about what the customer wants or what the
  specifications should be.
• Work involving nuances or deep cultural understanding.
• Work that crosses many disciplines.
• High levels of creativity, innovation, insight and “thinking outside the box.”
• Analytical tasks, leading-edge research, and non-rule based decision-making.

Martin Kenney of UC Davis and Rafiq Dossani of Stanford further analyzed the off-shoring of service occupations. They first noted the move to rural areas of the United State of call centers during the 1980s and early 1990s. At that time, rural areas had the advantages of cultural and linguistic affinity, lower costs than urban areas, lower drug use by workers, proximity in moving physical items, and the lowered costs of telecommunications. However, even then they had disadvantages, including smaller labor pools, lower educational levels which limited upgrading, and fewer ancillary services. By 2005, the competitive source of workers was not urban United States, but urban Asia, particularly India. The rural U.S. still has cultural and linguistic affinity to the customers and is closer to the home office, but its disadvantages have increased. Drugs, particularly methamphetamines, are ubiquitous in U.S. rural areas as in urban ones, decreasing worker reliability. U.S. medical costs are high, labor costs are much higher than in India, and the Indian labor force has a higher level of education and higher availability of ancillary services.

Options to Outsourcing Focus on “Making Better Things”

What are the options for rural America to attract the capital it needs to create good jobs? Jack Wheelan of The Hartman Group, Inc., suggests:

Rather than look at the outsourcing of jobs to Asia as a loss, look at it as an opportunity to develop new businesses that gets beyond functionality and meets needs that cannot be met by well-trained technicians, who in a flat world can do what they do anywhere in cyberspace.

Stewart Rosenfeld of Regional Technology Strategies, Inc. makes the same point as he describes how things have changed. In the 1960s and 1970s, the mantra was “making things cheaper.” The advantage was cost, with increased division of labor and mass production. In the 1980s and 1990s, the mantra shifted to “making things better,” where advantages came from quality and speed. Key technology and management changes allowed this to happen, including total quality management, just in time production, flexible specialization and automation. In the 21st century, the mantra is “making better things.” Aesthetics and authenticity give advantages, with emphasis on design, innovation and uniqueness. Rosenfeld highlights the work of the Appalachian Center for Economic Networks (http://www.acenetworks.org), based in Athens, Ohio, as an example of building aesthetics and authenticity as it works with artisans to create high value agriculture-based growth by using art, design and stories to give their products a special identity.

Occupational outsourcing is not an immediate threat to most of the North Central region. But the restructuring trend suggests that new ways of looking at jobs and economic development will be necessary for competitive enterprises and good jobs.

References

Flora, Cornelia Butler, Jan L. Flora with Susan Fey. 2004. Rural Communities: Legacy and Change 2nd Edition. Boulder, CO: Westview Press.

Friedman, Thomas J. 2005. The World is Flat: A Brief History of the 21st Century. New York: Farrar, Straus and Giroux.

Kane, Tim, Brett D. Schaefer and Alison Acosta Fraser. May 13, 2004. Myths and Realities: The False Crisis of Outsourcing. Backgrounder #1757. Washington, D.C.: The Heritage Foundation. http://www.heritage.org/Research/Economy/bg1757.cfm

Wheelan, Jack. 2005. “Right Brain Economics.” HartBeat, June 30. Bellevue, WA: The Hartman Group. http://www.hartman-group.com/products/HB/2005_06_30.html

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Last updated May 12, 2006 .