John F. Helliwell Canadian Institute for Advanced Research and University of British Columbia

13

Are Offshoring and Immigration Substitutes for Canada?*

SUMMARY

I

NDUSTRY CANADA ORIGINALLY PROPOSED the

question in the title as the basis for a research paper. Because of the lack of data suitable for framing and testing a quantitative model, the resulting paper instead provides some tentative estimates of the relative sizes of immigration and offshoring in the Canadian context, specifically in the context of skilled services. Very approximate estimates suggest that immigration and offshoring each currently add in the neighbourhood of 20 000 to 25 000 full-time equivalent employees every year to the supply of highskill services in Canada. Substitutability between the two types of supply is suggested by evidence that the difficulties faced by recent immigrants in finding jobs in their intended occupations are especially prevalent in highly skilled engineering and IT services. These are activities where there have been significant increases in the level of offshoring. Over the longer term, continued growth of offshoring is likely to reduce the relative importance of immigration as a source of skills, while both immigration and offshoring are likely to proceed more efficiently and flexibly because of the existence and sizable scale of the other.

∗

This is the revised version, February 2007, of a paper prepared for the Industry Canada Offshoring Project. 13-1

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OVERVIEW OF ISSUES AFFECTING COMPARISONS OF OFFSHORING AND IMMIGRATION

T

HIS PAPER COMPARES OUTSOURCING AND IMMIGRATION as alternative ways of filling gaps between supply and demand in Canadian labour and product markets, especially those relating to the provision of skilled services. The evidence, limited as it inevitably is, shows that offshoring and immigration are substitutes in some ways — the same services can be provided by immigrants as by otherwise comparable workers employed in other countries, perhaps even the same countries from which the migrants are drawn. There is also an element of complementarity, as immigration flows and the resulting stocks of foreign-born Canadians provide ready-made networks capable of providing the high level of trust-based “reputational intermediation” (Kapur 2001) required to support successful offshoring. An important related issue, considered only in this overview, relates to the ways in which Canadian education, training and research opportunities affect the attractiveness of offshoring and immigration as alternative means of meeting Canada’s future labour requirements, especially those requiring high skills. Canadian universities and research institutions have made huge strides over the past three decades. Canada has changed from being almost entirely reliant on foreign universities as sources of highly trained researchers to being the dominant source of domestic research and graduate training and to becoming a major producer for the international market. This affects the interface between offshoring and immigration in several ways. Foreign-born graduate students may stay on to work in Canada, may return to their source countries or may move on to third countries for further research and employment. In especially the first two of these three possible cases, the result is a set of networks that can motivate and direct the structure of subsequent immigration and trade, including offshoring. Such networks are important for successful offshoring, especially for the provision of services with a high-skill component. Success in these cases is measured by the extent to which the offshoring melds smoothly with Canadian value-added in the venture, exploiting comparative advantage in ways that improve economic and well-being (more broadly defined) outcomes for all concerned.

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ARE OFFSHORING AND IMMIGRATION SUBSTITUTES FOR CANADA?

As with all cost-benefit analyses, it is important to establish a benchmark, an alternative situation to which the offshoring option can be compared. This is particularly tricky in the case of offshoring because of the rapid growth, both actual and forecast, in the extent of international service trade, especially between industrial and emerging economies. Since the analysis in the paper is mainly by analogy and comparison, it is less essential than normal to develop precise definitions of the offshoring and non-offshoring cases or to define the triggering circumstances and consequences that differentiate them. The paper integrates a selected body of research while also attempting to place the Canadian research and policy implications on offshoring into a broader international context. The paper also considers the extent to which public policies of various types purposely or inadvertently affect the nature and consequences of the interface between offshoring and immigration. Offshoring is not driven by specific policy intent, at least in the countries importing such services. It is better seen as an inevitable element in the internationalization of the service sector that is supported primarily by low-cost information transfer and a set of trust-supporting networks built on a base of prior international migration and education. Policy interest in offshoring, especially in the United States (for example, Garner 2004; Mankiw and Swagel 2006), has been driven chiefly by the perceived or actual employment consequences for domestic employees whose jobs are being “offshored.” This sort of reaction is a repeat, at a higher skill level, of earlier concerns raised about freer manufacturing trade with low-wage counties and about immigration. Canada, as a relatively trade-dependent and low-cost player in many of the key sectors, is in a position to see both sides of these issues. Canada is a cost-effective service supplier to the United States and other OECD markets while also purchasing such services from lowercost countries and playing an increasing entrepreneurial role in the global industry that is evolving to implement offshoring. These facts underlie a relatively laissez-faire Canadian policy stance with respect to offshoring in general. However, it is clear that there are ways in which existing policies may inadvertently affect outcomes, while there are also likely to be new ways in which policy frameworks can be altered to mitigate the costs and increase the benefits of both offshoring and immigration.

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PREVIOUS RELATED RESEARCH

I

N MY PAPER for the 2004 Jackson Hole Conference (Helliwell 2004b), I analyzed the extent to which international factor mobility, especially of capital and labour, would help to deal with the problems posed by foreseeable demographic transitions, especially the decline of the share of the population in the 20-to-64 age range in many countries. The surveyed evidence and new results in the paper together suggest three points relevant to the current topic. The first point is that migration remains a rare event, is supported by established pathways and reflects labour market imbalances only slightly and with long lags (based on the footprint effect from previous migration flows). Second, migration is costly. Third, outsourcing can be seen as an alternative to migration as means of dealing with labour market variations that may emerge in the course of demographic and other transitions. This last point is the focus of the current paper. How do these lines of research relate to the evaluation of outsourcing and immigration as alternative ways of providing timely Canadian matching of the supply of and demand for skills over the coming decades? First, as already suggested above, there is much evidence that migration is costly for the migrants, for the friends, family and colleagues they leave behind, and for their new communities. Many of these costs relate to the pace of migration and are likely to be lower where the pace is moderate enough to permit the necessary adjustments to be made in both the receiving and sending communities. This is true even in a narrow economic calculus but becomes much more apparent when the analysis is extended to broader measures of well-being (Helliwell 2004a, 2004b). This invites more explicit comparisons of the well-being effects of migration and of outsourcing as alternative ways of balancing domestic and global markets for skills. Second, research on well-being focused directly on the workplace (Helliwell and Huang 2005) shows that overall life satisfaction depends very much on the extent of workplace trust and on a number of other elements of workplace social capital. It thus becomes relevant to consider the extent to which these workplace characteristics are easier to build and maintain under different alternative patterns of immigration and offshoring.

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ARE OFFSHORING AND IMMIGRATION SUBSTITUTES FOR CANADA?

EMPIRICAL EVIDENCE

E

STABLISHING WHETHER, and to what extent, offshoring and immigration are related as sources of services, it is necessary to have some data on the scale of each. Ideally, the data would divide offshoring and immigration comparably by industry, occupation and skill level and record both in a time-series format. Unfortunately, these pre-conditions for conventional econometric analysis of interrelated factor demands are not met. How should we proceed in the absence of the basic data required for conventional modelling? I suggest the following strategy: first get some idea of the scale and growth of immigration and offshoring at an aggregate level; second, use informal methods to assess which industries or skills are likely to be important for either or both offshoring and immigration; and third, consider in theory how we might expect offshoring and immigration to be influenced by specific changes in policies or exogenous events. If the latter analysis produces some strong hypotheses for testing, then it might be possible to see what sorts of evidence might cast further light on the issue. If it turns out that there are some changes in policy that might alter the relative contributions of offshoring and immigration, and achieve more efficient Canadian labour markets, then it would be necessary to consider the economic and non-economic wellbeing consequences of the policy alternatives. How do the labour market and other consequences of migration and offshoring compare in likely scale? Perhaps the best estimate of the current and possible future scale of offshoring of services in major industrial countries, including Canada, is that by the McKinsey Global Institute (Farrell et al. 2005, Parts I, II and III). Using these data as a benchmark, it should be possible to compare the scale of the labour market consequences of these levels of offshoring with those of current and expected migration levels. More approximately, it might be possible to be specific by industry and skill and to make some rough estimates of the possible degree of substitutability. In 2003, offshoring of services in the eight sectors studied by McKinsey affected about 565 000 jobs or about 0.6 percent of developed country non-agricultural employment. IT services and packaged software comprise more than two thirds of the estimated global total in the eight key sectors analyzed (Farrell, Laboissière and Pascal et al. 2005, Part I, 19). The same authors forecast a likely annual growth rate of 20 percent from 2003 to 2008. This would amount to annual increases of 20 000 Canadian job-equivalents over the next 30 years. Canadian non-agricultural employment was about 15 million in 2003. To the extent that Canada was typical of the industrial countries surveyed by Farrell et al. (2005, Parts I, II and III), then the

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2003 level of offshored Canadian service jobs would have been about 90 000, increasing by about 18 000 per year to 2008, and about 20 000 per year over the following 30 years. How do these offshoring flows relate to Canadian immigration numbers for those with comparable skills? Table 1 shows the numbers of new landed immigrants with declared occupations for the years between 1980 and 2003. From a base of about 20 000 per year in 1980, the flows fell sharply in the early 1980s, followed by a fairly steady rise from 1985 on, reaching an annual flow of 50 000 at the turn of the century, and averaging slightly more than that through 2003. Even more remarkable increases were posted by the numbers of declared IT professionals and engineers, who totalled fewer than 500 immigrants per year in the middle 1980s, rising to more than 25 000 per year from 2000–2002. (It would be useful to know what part of these increases was made up of conversions from student visas to landed immigrant status.) Thus, after a very rough approximation, it would appear that, in the industries and occupations most relevant to both offshoring and immigration, current levels are of the same order of magnitude, with immigration currently being larger than offshoring.

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TABLE 1 ECONOMIC PRINCIPAL APPLICANTS – LANDINGS BY INTENDED OCCUPATION, 1980-2003 (SOURCE: PRDS) IT Professionals

Engineers

Other Professionals

1980

823

654

1981

1436

1315

1982

1699

1983

402

1984

220

1985

175

Total with Occupation Codes

Management

Service, Sales

Other Occupations

6268

1900

3708

8139

21492

7565

2170

4073

10022

26581

1383

6610

2238

3434

7799

23163

348

2523

1407

2580

4099

11359

213

2193

1087

3979

4841

12533

182

2245

1059

4200

4282

12143

1986

414

275

3266

1458

5263

7082

17758

1987

1221

733

8312

3406

7688

13828

35188

1988

1166

593

11418

3971

5104

7813

30065

1989

667

699

10520

4006

6433

8634

30959

1990

926

1000

9972

5038

6959

10395

34290

1991

1267

875

8304

3737

7828

13277

35288

1992

1902

887

7746

4508

8554

11598

35195

1993

3490

1434

9253

4768

9559

9171

37675

1994

4162

2120

12459

3882

7905

3797

34325

1995

5669

3192

16043

2285

6257

5743

39189 46251

1996

7394

4703

20277

2476

6212

5189

1997

8582

5682

21093

2252

6144

4132

47885

1998

8181

4930

15024

1941

4486

4018

38580

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ARE OFFSHORING AND IMMIGRATION SUBSTITUTES FOR CANADA?

NOC 4-3-2

H E IM PO R T A N C E O F IN N O V A T I O N F O R P R O D U C T IV IT Y T

NOC 4-3-2

IT Professionals

Engineers

Other Professionals

Management

Service, Sales

Other Occupations

Total with Occupation Codes

1999

11832

6648

15495

2200

4042

3939

44156

2000

15569

9218

18921

2995

4887

2895

54485

2001

17301

10148

21611

3808

5385

2990

61243

2002

14507

8896

20843

3201

4914

3000

55361

2003

11231

6967

14165

2293

3551

2310

40517

Engineers

As Proportion of Total

IT Professionals

Engineers 0.025

As proportion of total 1980

0.038

0.030

1992

0.054

1981

0.054

0.049

1993

0.093

0.038

1982

0.073

0.060

1994

0.121

0.062

1983

0.035

0.031

1995

0.145

0.081

1984

0.018

0.017

1996

0.160

0.102

1985

0.014

0.015

1997

0.179

0.119

1986

0.023

0.015

1998

0.212

0.128

1987

0.035

0.021

1999

0.268

0.151

1988

0.039

0.020

2000

0.286

0.169

1989

0.022

0.023

2001

0.282

0.166

1990

0.027

0.029

2002

0.262

0.161

1991

0.036

0.025

2003

0.277

0.172

Source: Citizenship and Immigration Canada Landing Records

HELLIWELL

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TABLE 1 (CONT’D)

ARE OFFSHORING AND IMMIGRATION SUBSTITUTES FOR CANADA?

HOW HAVE THE EDUCATED IMMIGRANTS BEEN FARING?

D

ID THIS SHARP INCREASE in the share of economic migrants with high levels of education and in high-skill occupations ameliorate the settling-in difficulties faced by recent cohorts of immigrants to Canada? If selective immigration has been helpful in meeting the joint needs of employers and immigrants, this would contribute to the case for using immigration as a cost-effective alternative to offshoring in meeting employment needs, at least in those fields where both options are feasible. On the other hand, if high-skill migrants have shared equally or more in the increased settlement difficulties of recent cohorts of immigrants, then this would appear to lessen the advantages of immigration relative to offshore purchase of services. The Longitudinal Administrative Database (LAD) and the Longitudinal Survey of Immigrants to Canada (LSIC) (Statistics Canada 2005) provide some data relevant to this issue. Picot et al. (2007) have used the LAD-IMDB file, which combines data from tax files and immigration records, to estimate the level and persistence of poverty among recent cohorts of immigrants compared with demographically similar groups of non-immigrants. They show that, for each of the cohorts entering in 1992–2003, the relative frequency of being below the low-income cut-off is about three times that of the comparison group in the year of entry. The figure falls to about double that of the comparison group after 10 years in Canada. There is no improvement in this pattern among more recent cohorts despite the fact that the percentage of immigrants with degrees rose from 18 percent in the 1993 cohort to almost 43 percent in the 1999 cohort. There is no corresponding improvement in average immigrant success because the incidence of low-incomes among degree-holding immigrants in these cohorts is almost as high as among immigrants with high-school education or less. The combination of these two circumstances explains why degree-holders made up about 12 percent of low-income immigrant families in 1993 and 36 percent in the 1999 cohort. This is in stark contrast to the situation in the rest of the economy, where the prevalence of low-income status is much lower among degree-holders. Picot and Hou (2003, Table 5) report low-income prevalence among non-immigrant males aged 25 and over at 4.8 percent for those with university degrees, compared with 18 percent among those with less than a high-school education. By contrast, for recent male immigrants in the same age and occupation group, the lowincome prevalence in 2000 was 28 percent for those with university

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degrees, compared with 35 percent for those with less than a highschool education. Focusing especially on workers in high-tech fields, Picot and Hou (2003, Table 7) report that in 2000 the prevalence of low-income status was 24.2 percent among recent immigrant male graduates aged 24 to 44 working in engineering and applied science technologies. In contrast, for Canadian-born male graduates of the same age and working in the same fields, the prevalence of low-income status in 2000 was at 3.5 percent, only one-seventh as great. Even for the subset of recent immigrant graduates speaking English or French at home and working in engineering and applied science technologies, low-income status in 2000 was at 19.4 percent, more than five times greater than among the Canadian-born. As might be expected, immigrants coming to Canada with higher education have higher expectations about their economic success than do immigrants with less education. Therefore, their actual experience has led to an even greater degree of disappointment. For example, the LSIC shows that skilled-worker immigrants were more likely than other immigrants to have entered the labour market (Statistics Canada 2005, Table 8.4) and to have used a broader range of job-finding techniques (Statistics Canada 2005, Table 8.1); nonetheless, they reported a greater degree of difficulty in finding employment (Statistics Canada 2005, Table 8.17). This gap between expectations and experience presumably also helps to explain why skilled workers and their families were more likely than other immigrants to find themselves dissatisfied with their experience in Canada (Statistics Canada 2005, Figure 10.1). Evidence from the Equality, Security and Community (ESC) survey provides life satisfaction measures suggesting that recent immigrants, even those who have found employment, have not fared as well as might be hoped. Appendix 1 of Helliwell, Huang and Putnam (2007) shows that, in the ESC sample of employed workers, life satisfaction among immigrants is significantly less than in the rest of the sample. This lower life satisfaction does not appear to originate in the workplace, however, as job satisfaction and trust in management are at least as high among immigrants as in the rest of the population. What explains this apparent contrast? Disaggregated analysis of the ESC data reveals that immigrant reports of lower life satisfaction are found only among more recent (post-1990) immigrants, while higher job satisfaction is found among immigrants of longer standing. The lower levels of life satisfaction among recent migrants (and the associated lower levels of social trust) may be related to the predominantly urban destinations of recent migrants, as the difficulties of building supporting social networks in a new environment are greater in an urban setting and repeated and sustained contacts often harder to 13-10

ARE OFFSHORING AND IMMIGRATION SUBSTITUTES FOR CANADA?

achieve in large cities. The ESC results further reveal that the lower life satisfaction of recent immigrants, compared with longer-standing immigrants and the Canadian-born, is much greater among those with university degrees. This is consistent with the Statistics Canada evidence reported previously — that disappointment among recent migrants is greater among those with higher levels of education and expectations.

OFFSHORING AND IMMIGRATION: SOME POSSIBLE HYPOTHESES

W

in underlying circumstances are immigration and offshoring likely to rise or fall together? The most likely sources of such co-movements are likely to include changes in underlying labour market conditions relating to services or skills provided by both. The anticipated demography-induced fall in aggregate labour force growth is perhaps the most commonly discussed situation of this sort. Under what circumstances is offshore purchase of services likely to be preferred to increasing immigration, either temporary or long-term? Offshoring is likely to be preferred where the shortage is of services that can be easily delivered electronically rather than face-to-face. Examples of easily transportable services include diagnostic radiography, software design and call centres. Examples requiring physical presence would include nursing care, home help, mine work and agricultural harvesting. Some of the latter group of services are sometimes provided by temporary migrants or guest workers. Where services require personal delivery, high language skills and acculturation, then immigration is likely to be preferred over either offshoring or temporary migration. In this latter case, the list of preferred options is likely to include early immigration, e.g., at the stage of graduate or post-graduate education, so that the language skills and local knowledge are available before the individuals enter the labour market. To complicate the analysis still further, the cohorts of foreignborn students in Canadian education or research institutes are likely to bolster not only the supply of locally trained potential migrants but also returnees to their home countries or migrants to third countries, who are then well-placed to facilitate subsequent offshoring. Immigration is likely to be preferred where the needs or niches are seen to be long-term in nature and are seen to aid geographic population pressures within Canada. Traditional waves of migration to Canada were associated with opening up new regions, for which the populations typically involved a mix of within-Canada and overseas ITH WHAT SORTS OF CHANGES

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migrants. There are still situations where immigration from abroad is seen to be the most effective means of filling far-flung spaces and positions. Examples include health care and other services in remote locations. However, in recent decades, this situation has been altered by two forces. First, and most important, Canada’s major metropolitan areas have been getting far more than their population share of immigrants from abroad. Second, even those immigrants who were selected and came with an eye to the delivery of far-flung services have often not stayed for long in the remote locations, suggesting that such targeting may not be the most effective long-term way to supply services to far-flung regions. Aside from being short-term, and subject to Charter challenge if attempts are made to make it last longer, targeted migration of that type is probably less effective than current experiments to entice and train locals (who have a revealed preference for living in their home regions), with as much of the training as possible delivered close to home. Another case where migration is seen by some as a preferred means (relative to offshoring) of obtaining skilled services is based on a view that, in the absence of either an upsurge in birth rates or a large growth in migration, the national population growth rate will shrink to levels that threaten Canada and Canadians in some ways. Some argument of this sort seems to underlie much discussion of demographic futures in many nations. Since substituting immigration for offshoring affects the size of the resulting Canadian population, any cost-benefit analysis comparing the two possibilities must depend to some extent on the evidence linking population size to welfare. What does the evidence show? If we consider national average data for 65 countries included in wave four of the World Values Survey, there is a significant (p