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Testimony of
Robert Ward, Director of Research
Public Policy Institute/Business Council of New York State

New York State Labor Department
Forum on Offshoring
January 7, 2005

Thank you for inviting The Business Council to offer comments on offshoring and related policy issues.

We're always glad when our state government takes a pause from daily business to examine the availability of good jobs for working New Yorkers. And we always welcome the opportunity to talk about what policy steps could lead to more and better jobs for the working people of the state.

Whether the subject is a narrow one, such as the location of information technology jobs, or the broader topic of private-sector employment in general, we believe it's most helpful to start by recognizing this fundamental reality:

This country, and New York in particular, are blessed to have a dynamic private sector. Experience shows that's the best route to economic growth, more and better jobs, and an improved quality of life. In a dynamic economy, jobs come and jobs go. The goal is always to make sure the jobs we gain are more plentiful, and more valuable, than the jobs we inevitably will lose.

Those who study labor economics are probably familiar with the metaphor of the buggy whip. At one time, a certain number of Americans were paid to produce buggy whips. We don't have any of those jobs any more. But that doesn't mean American workers are worse off. Obviously, we're far better off than we were when a worker might find a job producing buggy whips. Today's jobs are more valuable to workers because they create more value in the marketplace.

Let me mention a more recent example. In 2000, the technology career web site, techies.com, listed skill in HTML as No. 4 in its rankings of most desired skills for job listings on the web site. By 2001, HTML skill had fallen to No. 6. By 2002, it was no longer among the top 10.

We're putting more information up on web sites than ever before. But, just as Americans are traveling more than ever before, the tools we use have changed. Even those of us who are somewhat technologically inept can post information on a web site using software such as Dreamweaver and Contribute. Today, on the list of most-desired techie skills, HTML has been replaced by higher-level abilities such as security analysis and programming for voice-over-Internet applications.

It's still possible to find a job based on HTML skill. But the value of those jobs in the marketplace is less than it used to be. If you are running a high-tech business, the amount of money you're able to charge in the marketplace for providing HTML programming is less than it used to be. Thus, many of those jobs have moved to lower-cost locations overseas. The good news is that the majority of those newer, now higher-paid jobs are here in the United States, including New York.

This is a roundabout way of getting to the specific topic of this hearing, the issue of information-technology jobs moving offshore. I hope it helps put the issue in a useful context for thinking about how we can maximize good job opportunities for working New Yorkers.

A year ago, when the Legislature was considering a requirement that the Labor Department prepare a report on today's topic, extensive media coverage suggested that many Americans were losing good jobs to IT offshoring. Most independent observers said consistently that the reality of such job losses was small compared to the media hype. But it is true that, as part of a recession in the broad technology sector, both New York State and the nation lost jobs in the sector known as computer systems design and related services (NAICS code 5415) in 2001, 2002 and 2003.(1)

Today, fortunately, the picture is quite different. We're gaining jobs, both here in the Empire State and nationwide. The bad news is that, in this sector as in most others, New York is not keeping pace in creating good new jobs.

During the year ending in November, sector employment nationwide rose by nearly 50,000, or 4.5 percent. New York gained an estimated 1,800 jobs in the sector. We're very glad to have those new jobs, but our gain was only 2.9 percent. That was significantly lower than the national increase.

Over the past 10 years, the disparity between New York and the nation is even more stark. Computer systems design and related services was one of the fastest-growing sectors, and here in New York State employment rose 40 percent. But nationally, employment in the sector more than doubled. In other words, our rate of increase was less than half the nation's. If we had gained jobs in this high-paid sector at the same rate as the nation over the decade, we'd have another 30,000 very good jobs statewide. As you know, that's a significant number even in a state as large as New York. And the discouraging picture if the same in our overall private-sector economy.

Clearly, the difference between New York and other states is not an issue of offshoring. We wish the sponsors of the legislation would ask the Labor Department, or their own staffs, to analyze why the Empire State consistently lags behind other states - including other northern, industrialized states - in creating jobs.

As The Business Council has pointed out repeatedly, it's more expensive to do business in New York than in most other states because of our taxes and other costs. Those higher costs bear directly on our ability to keep and create good jobs in every sector, including information technology.

This, we think, is where the question of policy recommendations enters the picture.

Before I get to some of our specific recommendations, let's be clear: New York can win in this competition.

The latest evidence came earlier this week, when Governor Pataki announced that IBM and other companies will invest almost $2 billion in a next-generation computer chip plant not far from here. We're thrilled that IBM, long one of the crown jewels of the Empire State's economy, will be investing not only in that production facility but in new research capabilities at the University at Albany's Center of Excellence in Nanoelectronics.

More to the point of today's forum, the corporations making these major new investments include leading-edge technology companies based not in New York but around the world. Sony, Toshiba and Samsung are among them. These companies are making investments and creating jobs in New York in large part because Governor Pataki and the Legislature have created the right policies to attract them, including the Centers of Excellence and Empire Zones. As the Governor said in his State of the State address this week, we need to make sure that our entire state benefits from such new opportunities.

Just as we have seen the benefit of capital investments from companies around the world, we are also enjoying the benefits of "insourcing" in the form of what some economists call human capital. Many of the best and brightest IT workers from around the world come to New York because of the great education and great enterprises they can find here. An example is the Albany Nanotech Center. There, and at other high-tech locations across New York State, a visitor immediately notices the many scientists, engineers and others who have come from overseas to pursue studies and careers here in New York.

It's been said that it's very difficult to make predictions, especially about the future. I don't envy those of you who undertake the very challenging job of attempting to predict the rate of growth for fast-changing occupations.

The occupational outlook estimates that the Labor Department prepares are valuable guidelines. But the people who prepare the occupational outlooks are smart enough to make clear in the technical notes that the projection models do not take into account unknown factors including immigration, emergence of new occupations, and relocation of employment opportunities.

For the same sorts of reasons, we won't attempt to predict in detail what will happen with information technology jobs in the future. The Information Technology Association of America's March 2004 report, The Impact of Offshore IT Software and Services Outsourcing on the U.S. Economy and the IT Industry, estimates that IT jobs in New York State will more than triple from 2003 to 2008, with many of those jobs in manufacturing, construction, education and health services, and other sectors. Another ITAA report, Adding Value...Growing Careers, issued in September, provides an excellent overview of recent trends and some observations about potential growth areas. Both are available via www.itaa.org.

What we do know is that, whatever the trends turn out to be, we want New Yorkers to have at least a fair share of IT jobs available nationwide.

How can we make that happen? By making our economic environment, our business climate, more competitive.

One factor affecting IT employment is the location of IT hardware. More than ever, of course, IT work can be done remotely. But it's still the case that where a major company places its mainframes, cluster servers and other computers will determine the location of at least some of its employees. The same is true of other major capital investments, whether used in cutting-edge telecommunications, modern manufacturing, digital broadcasting, or other industries.

For that reason, we have asked Governor Pataki and the Legislature to enact single-sales factor taxation. As the Governor has said, our current corporate tax code imposes a tax increase on corporate taxpayers when they create new jobs in New York. The Governor mentioned, in this week's State of the State address, that he will propose single-sales factor taxation for manufacturers. We would hope that the proposal will be a broad one encompassing software development, publishing, nanotechnology, and other major sectors that bring wealth and jobs into the state, such as financial services and broadcasting.

With all of our computers, Palm Pilots, Ipods and other technology, we have more computing power than ever before. That's one reason we're using more electricity than ever before. Our electric prices are higher than those in most competing states, especially in the downstate metropolitan region. We agree strongly with Governor Pataki and the Public Service Commission that New York needs more electric generation, both to meet rising demand and to create competition that in turn will lead to more competitive costs.

In fact, almost any business-climate issue affects information-technology jobs, just as the cost of doing business affects employment in general.

The final issue I'll touch on today gets back to something I touched on earlier, job skills.

I mentioned that HTML went from being one of the most sought-after IT skills, to one much less in demand, in the space of only a couple of years. That short of change is much more rapid than it used to be even a couple of decades ago, when a particular software skill would remain in high demand for as many as 10 years at a time. The pace of change in the marketplace is faster than ever, and that means the "shelf life" of many IT skills is shorter than ever.

Today, leading employers in information technology tell us that their clients are demanding more integrated, more customized knowledge to create competitive advantage in their own businesses. The most valuable IT workers will have what are called fusion skills, the ability to handle complex technical challenges combined with an understanding of particular client sectors such as manufacturing, transportation or finance. Any New Yorker with that combination of skills will be in great demand in the marketplace.

It's important that the public-policy approach to IT jobs and economic growth in general recognize the need for ever-higher skill levels. First, of course, we need to make sure our public schools give every student the opportunity for the excellent education they deserve and will need to compete in tomorrow's marketplace.

We also need to make our skills training programs as effective as possible. Some companies tell us that they are simply not aware of what training opportunities are available to them. One simple but useful step might be simply to expand outreach to employers who might take advantage of the very good training opportunities provided in New York.

We continually hear that there is greater need for incumbent-worker training. This is especially true in fast-changing industries, of which information technology may be the best example.

Thank you again for the opportunity to share these thoughts with you. I welcome any questions you may have.

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1. Numbers here are from the Current Employment Statistics series. The ITAA uses a different count, which includes IT jobs at non-IT companies. Trends reported by ITAA are similar to those discussed here.