European companies have joined the growing trend to outsource service jobs to low-wage countries. But Western Europe's rigid labor and product markets, coupled with persistent unemployment and anemic job growth, could deprive its economies of much of the upside.
A recent survey1 shows that 40 percent of Western Europe's 500 largest companies have already begun moving their service operations abroad. This trend, made possible by the digital revolution and the dramatic fall in international telecommunications costs, is fueling protectionist sentiment while creating waves of anxiety among white-collar workers once protected from global competition.
Although outsourcing can create wealth both for the countries that send jobs offshore and for those that receive them,2 it might not do so in Europe. New research from the McKinsey Global Institute (MGI) reveals that every euro of corporate spending that German companies send offshore returns just €0.80 of value for Germany's economy. In contrast, the US economy gains more than $1 in new wealth for every dollar of corporate spending that US companies outsource abroad. Far from being a zero-sum game, offshoring can be a story of mutual gain. But to capture the benefits, German policy makers must raise the reemployment rate of...