Behind shrinking middle-class jobs: A surge in outsourcing

By Don Lee

June 30, 2016 5:58 AM PT

Reporting from Washington — For nearly 20 years Alfredo Molena made a middle-class living repairing bank ATMs in Los Angeles, despite being a high school dropout and immigrant from El Salvador.

By 2000 he was earning about $45,000 a year, enough to support his wife and two children in a spacious apartment and take periodic vacations to El Salvador and Hawaii. He had health insurance, a matching 401(k) plan, and a company-supplied cellphone and vehicle. But it all unraveled in 2005 after his employer, Bank of America, subcontracted the work to Diebold Inc., a firm specializing in servicing ATMs.

Today Molena drives a truck long-haul for about $30,000 a year, putting him in the bottom third of household incomes. He has no medical insurance. “I cannot afford it,” he snapped.

Globalization and the offshoring of U.S. manufacturing jobs to China and other cheap-labor countries are commonly blamed for driving down the wages and living standards of ordinary American workers, but there is another, less-known factor behind the shrinking middle class: domestic outsourcing.

From human resource workers and customer service reps to cooks, janitors and security guards, many occupations have been farmed out by employers over the years. No one knows their total numbers, but rough estimates based on the growth of temporary-help and other business and professional service payrolls suggest that one in six jobs today are subcontracted, or almost 20 million positions, said Lynn Reaser, economist at Point Loma Nazarene University in San Diego.

Separate Labor Department data show that some of these occupations have seen a significant decline in inflation-adjusted, or real, wages over the last decade.

In 2005, there were 138,210 workers nationwide who repaired ATMs, computers and other office machines, earning a mean annual salary of $37,640.

Ten years later, the number of such jobs had shrunk to 106,100, with most of them subcontracted at annual pay of $38,990. But after accounting for inflation, that’s a drop of about 15% from 2005.

By contrast, real wages for all occupations rose 1.3% between 2005 and 2015 – itself a tiny gain over the last decade, but still significantly more than those hit by domestic outsourcing.

“If a firm wants to save labor costs, outsourcing is just a way of resetting wages and expectations,” said Susan Houseman, a senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich.

Unlike the effect of offshoring, with its relocation of jobs and plants abroad, economists know relatively little about the extent and effects of decades of subcontracting production and services to third parties in the U.S. But what research has been done suggests the practice has played a significant role in the nation’s troubling trends of stagnating wages and rising inequality.

Rosemary Batt and other researchers at Cornell University found that large employers at subcontracted call centers, for instance, paid their workers about 40% less than comparable workers employed in-house at large firms, not including the value of health and retirement benefits.

That disparity is partly because large companies are often sensitive to what is called “internal equity” or fairness in pay among co-workers at the same company. They have far less concern about paying outside employees lower salaries. Unionization also plays a role.

In a recent paper, Houseman, Batt, Annette Bernhardt of UC Berkeley and Eileen Appelbaum of the Center for Economic and Policy Research said that while the data are limited, there are indications that domestic outsourcing is much more prevalent than generally recognized and that the trend is “profoundly affecting the quality of jobs and the nature of the employment contract for a significant portion of the American workforce.”

Cutting labor costs isn’t the only reason firms outsource. Outside vendors can bring unique capabilities – such as customer research – and help companies adapt to the spikes and dips in business by reducing staffing levels without undergoing expensive in-house layoffs.

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“Banks want to focus on core service and to be able to outsource all this other stuff,” said Ralph Spinelli, vice president at HTx Services who previously headed ATM support at Citigroup. Citigroup and BofA declined to comment for this story. Diebold wouldn’t comment beyond saying they pay competitively.

In years past, employers were reluctant to outsource because it meant losing control and risking harm to the corporate brand. But those concerns have been eased by advanced monitoring technologies and communication capabilities.

Outsourcing “has contributed to the breakdown of cultural norms in which companies had their own employees who reflected values of the companies,” said Appelbaum, who has studied subcontracting in healthcare.

As Molena’s case shows, the effect of domestic outsourcing has not been confined to unskilled – or temporary workers. After his layoff at BofA, he never worked in that field again, unable to find anything close to what he earned before.

“They were the beautiful years,” said Molena, 63, reminiscing inside his white semi cab as it rumbled along a Georgia highway.

People working in trades such as carpentry have taken a hit too. Recent years have seen the rise of outsourcing even in professional ranks, like accountants and lawyers.

“You have even doctors on demand,” Appelbaum said. The trend is growing, she said, because employers have become wary of adding employees and taking on the responsibilities that come with that, including training them and looking after their needs.

The growth of outsourcing partly explains why so many millions of Americans have tumbled down the economic ladder. As a result, the middle class no longer constitutes a majority.

Data compiled by the Pew Research Center shows that in the early 1970s, middle-income households accounted for 61% of the population. By last year, the proportion of middle-income households in the nation had slipped to a notch below 50%.

The call-center industry provides one of the starkest examples. At one time, providing telephone customer sales and service was done almost entirely by internal employees at big firms. Today much of the work has shifted overseas, primarily the Philippines, as well as to subcontractors in low-wage regions of the U.S.

Alexis Perez, 41, is one of the lucky ones. He works as a sales associate in New York for Verizon, making about $74,000 a year. That is more than double the average pay for customer service representatives nationwide. But’s he’s not sure how long it will last.

Earlier this year Perez and other members of the Communication Workers of America went on strike for nearly seven weeks, in part because Verizon sought to outsource and reduce its call-center staff.

While the union largely staved off that bid by Verizon, at least for the next four years of the contract, Perez said he was “absolutely concerned about the future….If the company outsources, there’s going to be no jobs left.”

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