Companies are always looking for new tactics to help increase their efficiency and decrease production costs. Such strategies result in increased productivity, thereby promoting organizational growth. One strategy that has become popular among American firms over the past decades is outsourcing. Outsourcing is the results-oriented relationship of a company with foreign-based external providers of activities that would otherwise have been performed in-house by US employees.
Technological advances experienced over the last three decades have contributed to the increase in outsourcing incidents. This practice has significant positive and negative impacts on the US economy. This paper argues that outsourcing of US jobs to foreigners is detrimental to the well being of US employees and the US economy. The practice should, therefore, be curtailed in order to ensure the future prosperity of the US.
Why Outsourcing US Jobs is Harmful
The most significant argument made against outsourcing is that it leads to high unemployment in the US. Currently, the US is facing high unemployment rates with the Bureau of Labor Statistics reports that the national unemployment rate is at 6.3% (par.2). While this is the lowest unemployment rate enjoyed by the US in 6 years, it represents 10.3 million Americans without a job.
For many Americans, international outsourcing is the main cause of job loss, and there is growing pressure on the government to do something about this. Pearlstein asserts that while outsourcing cannot be blamed for all the unemployment problems in the US, it is responsible for the “longer-term structural unemployment in the United States today” (par. 22).
The US Commerce Department notes that while some US-based multinational companies have managed to increase their labor force in the US, this increase is negligible compared to the increase they have made in their offshore employment.
Phillips reveals that while US-based multinationals have achieved a 0.1 percent increase in their US labor force over the last decade, they have expanded their offshore employment by 1.5 percent (28). If the US-based companies did not outsource, the employment growth would have been enjoyed by the US, therefore, reducing the unemployment rates.
Offshoring increases the length of the spell of joblessness experienced by many Americans who lose their jobs due to company layoffs. When a firm outsources some of its activities, the workers who were carrying out those tasks in the US are left without a job (Crino 1860). These workers often seek alternative employment immediately after being laid off. However, research indicates that offshoring makes it hard for them to obtain new employment.
Crino explains that the outsourcing trend leads to a decline in the number of employment opportunities while at the same time, increasing the number of people experiencing non-employment (1859). This temporary unemployment has an overall negative effect on the future employment of the worker.
In addition to causing joblessness, outsourcing has contributed to the wage decline experienced by displaced workers. In many cases, workers are forced to find work in new industries after displacement due to outsourcing by their original industry. Research by Crino indicates that the industrial reallocation after displacement is quantitatively large with up to 53% of workers being re-employed outside the manufacturing sector (1859).
Industry switching is becoming more prevalent as outsourcing becomes more prevalent, and more individuals are unable to find work in their core industries. This industry switching leads to a large drop in wages by the individual due to a loss in industry-specific human capital.
Outsourcing also contributes to the decline in full-time employment opportunities available to employees. Many Americans are forced to engage in part-time jobs to make a living. The wages obtained from part-time employment are significantly lower, and the worker does not enjoy the benefits that employers offer in full-time jobs. Lower wages translate to lower standards of living by the individual.
Outsourcing is likely to lead to the future stagnation of the US manufacturing industry. Currently, almost all major US companies that have an international presence outsource some aspects of their production. This practice is encouraged by the increased productivity exhibited by US companies that take advantage of the lower production costs enjoyed in foreign countries (Amiti and Wei 10).
As a result, companies have increased their capital spending offshore. Phillips warns that as US companies dedicate more resources overseas and neglect the home industries, the US manufacturing industry will stagnate (28).
The government suffers from reduced tax revenue due to outsourcing. Outsourcing leads to the loss of jobs or employment opportunities for potential taxpayers. While outsourcing was traditionally restricted to blue-collar jobs, it is increasingly affecting the white-collar job category. High-value knowledge-based services are being outsourced to developing countries (Horgos 5).
This has the effect of denying government taxes from high-paying jobs. Reduced tax revenue has a negative effect on society as a whole. It causes the government to invest less money in important areas such as education, health, infrastructure, and social security. The entire community, therefore, suffers from these negative impacts that can be traced to outsourcing.
Outsourcing has a devastating effect on the communities that were supported by the firms that later decide to outsource. Companies contribute to the economy in more ways than just creating direct employment (Agrawal 38).
Many towns benefit from the additional business created by the presence of a company. Businesses provide auxiliary services to the firms and their suppliers’ benefit. Outsourcing sometimes leads to the closure of entire branches of a business. This often has a catastrophic effect on the community that was being supported by the presence of the company.
A case for outsourcing
Proponents of offshore outsourcing argue that it will have a positive effect on the economy in the long run since it will lead to greater economic efficiency by US companies. Outsourcing enables a company to allocate its resources (Horgos 4) efficiently. This results in more goods or services being produced using the same set of scarce resources. As some services and production processes are outsourced, US firms will be able to deliver services more cheaply, and consumers will benefit from lower prices.
While it is true that the outsourcing benefit of efficient allocation of resources leads to lower prices for consumers in the US, this view discounts the fact that the consumers might not afford the products or services. The consumers need to have a steady income to afford the products obtained through outsourcing. However, outsourcing leads to the displacement of many US workers rendering them without an income. The low pricing of goods because of outsourcing is, therefore, not a benefit to most US citizens.
Supporters of outsourcing claim that it leads to the protection of US businesses that would otherwise be forced to shut down due to losses. Many businesses in the US face high production costs making it hard for them to compete favorably on the global market. Outsourcing makes it possible for the business to reduce their production costs and hence remain in business. Agrawal reveals that more companies are being motivated to move their labor-intensive service jobs to countries with low labor costs (36).
For many small and medium-sized companies in the US, outsourcing entails substituting expensive US labor with cheap foreign labor (Horgos 1). The businesses are, therefore, able to continue functioning and offering employment in the US. While it is true that outsourcing saves some business from being shut down, this does not necessarily benefit US citizens. Pearlstein documents that for every 2.4 million jobs that US-based multinationals move to foreign countries, 2.9 million jobs are lost in the United States (par. 31).
The Bureau of Labor Statistics reports that the frequency of mass layoff incidents is increasing with about 154,000 workers experiencing separations from their work in the first quarter of 2013 (par. 4). As such, while large companies can exploit the outsourcing strategy to foster growth, there are fewer jobs left in the country.
Outsourcing leads to increased productivity for US businesses, and this benefits the overall economy. Amiti and Wei note that a firm can “relocate its relatively inefficient parts of the production process to a country where they can be produced more cheaply” (204). This will enable the firm to expand its output in the production stages leading to comparative advantage. Pearlstein notes that the growth in profits translates to company expansion leading to an increase in the number of American jobs (par. 25).
There is no doubt that companies can enjoy increased profits due to outsourcing. This makes it possible for the company to reinvest and experience growth. However, most of the reinvestment is not undertaken in the US. Research indicates that the level of investment made by companies in the US is on a decline as focus turns to their offshore affiliates. Phillips documents that in 2009, the capital spending by US-based multinationals to their offshore branches rose by 8.6% while the capital spending in the US only rose by a modest 3.3% (28).
This paper set out to underscore the negative impacts that outsourcing is having on the US economy. It began by noting that outsourcing is becoming a prevalent trend in the US as more companies seek to exploit the benefits of this strategy. Outsourcing leads to unemployment problems as many US employees are laid off or miss out on employment opportunities as more jobs are moved to foreign locations. The community suffers from a decline in government services due to lower tax revenues.
The paper has taken care to highlight the positive impacts of outsourcing on the US economy. It has indicated that this practice has led to improved efficiency and productivity by US companies leading to higher profits. However, many firms do not weigh the benefits and costs of outsourcing before engaging in this activity.
Instead, they only consider the probability of maximizing their profits through outsourcing. Americans are already experiencing significant suffering because of rampant outsourcing. Action should be taken by the government and the business community to ensure that more jobs are retained in the US.
Agrawal, Vivek. “Who wins in offshoring.” McKinsey Quarterly 16.4 (2003): 36-41. Print.
Amiti, Mary and Shang-Jin Wei. “Service Offshoring and Productivity: Evidence from the US.” World Economy 32.2(2009): 203-220. Web.
Bureau of Labor Statistics. Employment Situation Summary. 2014. Web.
Crino, Rosario. “The Effects of Offshoring on Post-displacement Wages: Evidence from the United States.” World Economy 33.12 (2010): 1836-1869. Web.
Horgos, Daniel. “International Outsourcing and Wage Rigidity.” Global Economy Journal 12.2(2012): 1-26. Web. 7 May 2014.
Pearlstein, Steven. “Outsourcing: What’s the true impact? Counting jobs is only part of the answer.” The Washington Post 2012. Web.
Phillips, Phil. “US-based Multinationals Continue to Hire Offshore.” Coatings World 17.5 (2012): 28-28. Web.