The trend towards outsourcing of jobs to offshore locations was slowed by the global financial crisis, but is now re-accelerating.  Outsourcing/offshoring will transform both developed and developing country labour markets for years to come to a degree significantly greater than many people now foresee.

During the rise of outsourcing and offshoring during the past couple of decades developed countries mainly had to contend with the loss of low wage/low skill jobs, but this trend is changing - in the coming years any job that does not require boots on the ground and/or face to face interaction will be on the short list for transfer to a willing and able developing country worker.  Both China and India are churning out millions of relatively well educated professionals and scientists and tens of millions of highly educated workers from the former Soviet Union and Eastern European countries are hitting their stride, having joined the global competition for high skill jobs after the collapse of Communism.  Increasingly, these workers communicate at a high level in English, the language of global commerce, and those who do not often have functional English language skills sufficient to enter the global work force and move up the value chain as they learn.

Make no mistake, skilled workers in emerging and developing countries, as well as the local firms that employ them, do intend to move up the value chain.

- Where they perform call and help centre tasks, they are seeking to take up an increasing share of customer relationship management.

- Where they are doing back office administration, they are seeking to take over higher level management functions.

- Where they perform IT implementation and maintenance, they seek to perform IT development and project management.

- Where they perform supporting pharma research, they are seeking to become pharma developers in their own right.

- where the do medical transcription, the seek to perform diagnostics remotely, or, more ambitiously, build hospitals certified to U.S. standards for treating medical "tourists".

- where they perform low level legal work processing, they seek to take up lucrative M&A and crossborder work.

- where they maintain investment models for Wall Street analysts, they seek to undertake the research role.

I believe one result of outsourcing on developed country workers during the last three decades has been stagnant household wages for the average blue collar family, particularly in the U.S. and Canada.  In a world where the jobs of highly skilled workers will increasingly have to compete globally, we may be at an inflection point where the relative income gains of the developed world professional class will now also be subject to a growth cap due to competition from the globalization of many service, administration, management and research positions.  Studies by many sources indicate that 25% of U.S. jobs, for example, could be done overseas (see a study by Alan Krueger and Alan Blinder; the latter served on Bill Clinton's Council of Economic Advisors).  Note than only about 10% of U.S. jobs remain manufacturing sector, so this 25% cuts well into the white collar work force.  This could be an important turning point, as well educate white collar workers may increasingly come under the same strains blue collar workers have experienced for decades.   If 25% of jobs are directly at threat to outsourcing, a huge number in itself, the indirect impact on wages across the rest of the work force will be no less significant.

The early decades of outsourcing have provided employers with the learning experiences required for moving large swathes of jobs overseas. In some cases, many companies continued their offshoring strategies even in the face of mediocre results measured in terms of cost savings and quality to the bafflement of some researchers and observers. However, this learning experience was crucial for enabling outsourcers and their offshore service providers to improve the job transfer and planning process. New outsourcing projects can now be built on a broad learned-by-doing foundation of knowledge, potentially decreasing project risk and improving the outcome for company bottom lines. In addition, poor results from early outsourcing projects - bad customer service and poor work quality - have been remedied as offshore service providers have improved their processes, worker training and worker quality.  These learning experiences may enable outsourcing trends to speed up.

While 25% of developed country jobs may be at risk of outsourcing, this does not mean that we will in the near future see 25% of the labour force unemployed.  Just as when we transitioned from an economy where more than 50% of workers worked in manufacturing decades ago to where manufacturing workers now represent 10%-20% of workers and the service sector accounts for much of the rest (and less than 1%-5% remaining in agriculture), developed country economies will adapt.  Some workers in outsourced sectors will move to boots on the ground jobs, while others will move to yet higher skill jobs that will be subject to less outsourcing pressure until decades in the future.  In the very long term, aside from us all being dead, we will live in a world where virtually all jobs are knowledge and creative jobs that workers around the world compete to fill.  These will be jobs where automation is not possible and so cannot be done by computer.  It will be a world of inventors, where the word Inventor is taken in the very broadest sense - a person who produces or contrives something previously unknown through ingenuity and imagination (according to dictionary.com).  Basically, we're gonna live in a Star Trek universe!

While the transition to a full knowledge economy is going to create more economic dislocation for developed country workers, the process of globalization should not be halted - reversal would leave workers and consumers around the world worse off in the long term.  What's more, it's simply not practical to reverse the integration of the world economy.  However, there are many things developed country governments can do that would provide greater economic security to their citizens even as the process of globalization destabilizes their lives, in short a new Social Compact.  These actions will cost money, so the argument against will be that we cannot afford them, but I will discuss how to pay for the cost in the third part of this series.  In part II, I will discuss why developed countries need a new Social Compact with their citizens, what it would entail, and the potential consequences of not undertaking a new Social Compact.