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Offshore Jobs And Outsourcing

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How Excessive Job Outsourcing Affects on the U.S. Economy

By Jordan Hicks on 2016-12-10

The effect of job outsourcing on the American economy may not be so clear cut as once believed, reports suggest benefits in the short term may come alongside possible negatives in the long term.

        In November of 2016, the unemployment rate has hit its lowest point since 2008. We celebrate this as a boon to our economy, this means more people are working and more people are getting paid. All in all good news. However, lets take a closer look at some other variables to see how they may be influencing the American economy, specifically, outsourcing. In 2014, Tim Sturgeon, a senior research affiliate with Massachusetts Institute of Technology’s (MIT) Industrial Performance Center, suggested that outsourcing was creating a dual economic state. “The portrait that emerges is of two economies - an entirely domestic one made up of small firms and public organizations, and another one consisting of large firms with much deeper global engagement.” These large firms employ more than 20 percent of the country’s full-time workers, offering usually higher-quality jobs, and better wages and benefits than the average U.S. company. Just last year, a total of 2,382,000 jobs were outsourced from America to foreign nations. While many assume these outsourced jobs are going to developing nations with less than ideal working conditions and near-poverty level wages, that is not necessarily the case. Sturgeon was one of two researchers in a study, alongside Professor Clair Brown, at UC Berkeley and MIT who studied the effects of outsourcing and offshoring jobs on the American economy. They posited that the effect was both positive and negative on American jobs and wages. Specifically, they found most international outsourcing is to “high-cost locations such as Canada and Eastern Europe, reflecting a long history of U.S. companies participating in these markets.” Brown and Sturgeon expect offshoring and domestic outsourcing to expand with the growth of the economy, where instead of rehiring and returning to old practices as the economy picked up, they would choose to restructure and expand through offshoring and outsourcing. 

    Outsourcing benefits the companies in more than one way, they are not only moving the work to foreign soil, but gaining the skills of those whom they employ: the help with local marketing, contacts, and language skills. The number of outsourced jobs would be near triple the millions unemployed in the U.S., and would be enough to hire full-time all of the near 8 million who are currently part-time. This point states what many would argue, that the negative effect of outsourcing on employment is the loss of jobs filled by American citizens, however that assumes that the Americans would be capable of filling those jobs to begin with or that the jobs would be capable of being moved to the U.S. from where they are currently located. As we stated, those workers in outsourced jobs are not necessarily simple skilled laborers, they provide a benefit to the company which an American without those connections may not be able to provide. Recently, President Elect Trump said he would bring jobs back to America by imposing tariffs on imports from China and Mexico. That would indeed increase employment in America, but it would also raise consumer costs. In the long run, it may also cause U.S. companies to be less competitive in the global market. Some companies may choose to move jobs back to America at the cost of raising their consumer prices, while others may decide to move their entire operation overseas or may be forced to go out of business entirely. 

    There are number of possible threats to the U.S. economy caused by outsourcing. Firstly, the potential of higher semi-permanent unemployment. Jobs which are outsourced rarely return to the U.S. because operating costs and administrative requirements are so much lower in countries such as India and Russia. Without new jobs in America, the unemployment rate rises and a higher unemployment rate becomes the norm. It could be quite some time before foreign nations reach their saturation point for employment driving wages higher (to a point comparable to what they are in the U.S.). Secondly, the loss of intellectual capital. The outsourcing movement was intended to transfer low-skill jobs out and maintain high-skill jobs for American workers. In recent years, companies have begun to contract high-skill positions for accounting, engineering, and technology overseas for a far lower rate than Americans with the same skills would cost. The unfortunate effect is that once a job is moved out of the country, it is very difficult to reclaim, for example, if American publishers move book design primarily to Chinese firms, over a length of time, there would be fewer designers in the U.S. with that skill (and fewer students studying that skill due to lack of opportunity). 

    Thirdly, the loss of manufacturing capacity, which results when industry is moved overseas. Consider, America was at one time the leader in solar cell manufacturing, but most U.S. solar tech companies have moved plants to countries such as Germany which offer significant incentives. It would take quite an effort to recoup that industry should the U.S. wish to move those plants back to domestic soil, including developing the manufacturing equipment and engineer training. And lastly, the reliance on foreign relations. Companies that outsource are reliant on the good will of the nations in which they do business, should political alliances change or relations between counties become more difficult, such as they likely will in the next few years considering the effect of the United Kingdom’s exit from the European Union. Investors in foreign markets will need to keep a close eye on their portfolios as relations between the nations start to flex under the rearrangement of the European Union. In conjunction, these four threats add up to a resulting loss in jobs and expertise which make innovation in the U.S. difficult and at the same time build brain trust in foreign nations. Overall, it seems the long term effects of outsourcing on the U.S. economy could outweigh the short term benefits. It’s certainly something that should be watched carefully in the coming years.

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