Out-sourcing, Off-shoring, and how you benefit
The term “out-sourcing” is an unpopular term, especially during election years and I’m sure we’ll hear all about its various evils in months leading up to November. The fact is, out-sourcing has a bad rap. I must first make clear make clear the differences between out-souring and off-shoring. Out-sourcing is merely when a company chooses to farm out certain non-core operations to another firm. That firm could be down the street, across the country, or half-way around the world. It does not in any way imply shipping jobs to China or India. That’s where off-shoring comes in. Off-shoring is merely a specific form of out-sourcing where work is shipped overseas. This is where the controversy comes in. It should be noted that the VAST majority of out-sourcing is to domestic companies, not overseas.
Now that we’ve gotten that out of the way, let’s have an example to demonstrate the value of out-sourcing. Take our good friend Bob. He owns a small computer business that specializes in installing and maintaining computer and network equipment for other small businesses. He employs 10 other engineers to help him out and is himself always on the go at various customer sites doing what he does best: installing and maintaining networks. One thing he does not do well, however, is keep the books. Bob is no accountant. He couldn’t tell a debit from a credit if his life depended on it. Luckily, Bob doesn’t need to worry about that and why should he? He has two choices: hire a CPA full-time at $50,000 per year or farm out the work to a CPA firm for $5,000 per year just when he needs it. This way, Bob gets to focus all his attention on keeping his customers satisfied and attracting new ones rather than adding numbers all day. Bob is better off because he saves time and money. Not only does he get the job done for 1/10th the cost of hiring a full-time CPA, but he doesn’t have to waste his time dealing with it. The CPA firm is better off because it gains a customer and books revenue. Since accounting is what the CPA firm does all the time, they can do it far more quickly, efficiently, and cheaply than Bob can. Thus, the cost of accounting will be lower to Bob than it otherwise would be, allowing him to lower his prices and still make a healthy profit, which helps HIS customers (who remember outsourced their networking work to Bob to begin with) ad infinitum. Thought of this way, it is obvious how out-sourcing benefits society.
Now we come to the topic of off-shoring. Do the benefits of out-sourcing hold when the jobs are shipped overseas? The answer, according to Bill Clinton’s former economic advisor Martin Baily, is a qualified yes. Baily presents the case of medical technician that reads MRI scans. A technician in India can read and interpret the scan for a fraction of the cost of an American technician. Yes, in this case the American will likely lose her job, but the availability of lower-cost MRI scans will save countless lives in the long run. Of course, although society as a whole benefits from out-sourcing, not everybody will benefit equally, especially not in the short term. In this case, we will have a medical technician in search of a job that may or may not pay as well as the one she lost. The key to solve this problem, I believe, is education. Retraining and education programs could be provided to those who lose their jobs to teach them another trade or to utilize a particular tool or process to make them more productive. This way, they would soon rejoin the work-force in a new, more valuable role both to themselves and to society as a whole.
Just how big of a problem is finding new decent-paying jobs for the victims of globalization? Baily says that “on average, wages in the new jobs were about the same as the wages in the jobs that had been lost.” Furthermore, he points out that many of these off-shored jobs are jobs that could only exist in a low-wage environment. The fact that there may be 500,000 call-center jobs in India does not mean that an equal number of jobs were lost by Americans. To the contrary, these jobs would not have existed in America in either case. Instead of offering 24 hour phone support, companies would simply cut back or not offer it at all. Off-shoring allows companies to offer a valuable service to Americans they otherwise wouldn’t be able to offer with no real loss of domestic jobs.
In the end, Baily estimates the US economy gains between $1.12 to $1.14 for ever $1 spent on sending work overseas; a respectable gain. Sure, legislation to curb off-shoring would save some jobs in the short term, but only at the cost of long-term growth in productivity and innovation, which are the two essential ingredients of a robust economy and a higher standard of living for everybody. Rather than try to fight the losing battle of preventing off-shoring by US corporations, efforts should be made to cushion the fall and provide education opportunities so that victims of free trade can quickly get back in the work-force earning a reasonable wage. What’s your opinion? Are you for government intervention or do you feel it’s best to let economic problems resolve themselves? For an opposing viewpoint, check out The Myth of Free Trade: The Pooring of America
Update: Linked to Beltway Traffic Jam.
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I tend to agree with your thinking and think government intervention should be minimized. When you look at the entire picture, off-shoring and outsources has been one of the biggest factors in the last decade of increase in productivity and growth around the world. But, now that globalization has run its course, the global economy needs something else to create growth. Until something is found, it’s easy to look back and blame outsourcing because we have declining job growth. The reality is that if we didn’t export the jobs that we have, we would have to provide more aid to foreign nations because without the jobs – they wouldn’t be able to feed their people.
The global recession that is upon us was not caused by outsourcing. It is a direct result of America taking advantage of the fact that the dollar is the world reverse currency by borrowing and spending much more money than we are producing goods for. We were able to do this by increasing the supply of dollars and trading them for goods to the rest of the world. Otherwise known as OIU’s.