Outsourcing

The Truth about Outsourcing:

You Think You Know, But You Have No Idea

In the Beginning

"Outsourcing entered the business lexicon in the 1990's and often refers to the delegation of non-core operations from internal production to an external entity specializing in the management of that operation. The decision to outsource is often made in the interest of lowering firm costs, redirecting or conserving energy directed at the competencies of a particular business, or to make more efficient use of worldwide labor, capital, technology and resources. Outsourcing involves transferring or sharing management control and/or decision-making of a business function to an outside supplier, which involves a degree of two-way information exchange, coordination and trust between the outsourcer and its client. Such a relationship between economic entities is qualitatively different than traditional relationships between buyer and seller of services in that the involved economic entities in an "outsourcing" relationship dynamically integrate and share management control of the labor process rather than enter in contracting relationships where both entities remain separate in the coordination of the production of goods and services. Business segments typically outsourced include information technology, human resources, facilities and real estate management, and accounting. Many companies also outsource customer support and call center functions, manufacturing and engineering" (wikipedia, 2006).

Labor Supply and Demand

Outsourcing and offshoring can be directly related to the theory of labor supply and demand. The theory of labor supply and demand states that as a person's wage increases so will the supply of labor given by that person toward a firm, consequently, as the wage rises, the amount of labor demanded by the firm will decrease. In a mirror effect, as a wage decreases, the amount of labor supplied will also decrease by the worker, but the labor demanded by the firm will increase. Since outsourcing and offshoring both send jobs to other locations, whether it is a different company located down the road or a firm located ten thousand miles away located in the Middle East, they have a deepening effect on labor supply and demand.

What is the Connection?

Outsourcing primarily targets the IT world, manufacturing, and call centers. With the shipment of these jobs to foreign countries, the theory of labor supply and demand would suggest that this would decrease the demand in labor and, in turn, have a negative effect on low skilled workers and their chances of obtaining higher wages. They would be unable to get these higher wages because if they are demanding less labor then they are not going to need quality workers and will not be willing to pay such labor when they can cut costs by going overseas. "Gene Grossman and Esteban Rossi-Hansberg of Princeton University argued that offshoring can lead to higher wages for unskilled U.S. workers. 'Things may be better than they would have been had there been no offshoring,' Mr. Grossman said. When a company offshores some work, its remaining workers become more productive. It can thus expand; hire more workers - perhaps even some of those whose work was offshored - to do jobs that can't be offshored, and it can pay at least some of them more" (Ip, 2006). Essentially what this is saying is that the threat of offshoring more jobs will force the employees who haven't lost their job to become more productive so that they will not lose them also. Sometimes the threat of potentially losing your job can be the greatest incentive for a worker. If you offer an entire manufacturing plant a million dollars to increase each individual worker's productivity by a certain percentage or you offer the same employees to have a chance at keeping their jobs and not being laid off as long as they increase their productivity by the same percentage as mentioned above, I would venture to say that there would be a stronger showing for the offer of keeping the job compared to the offer of a million dollars. Mostly because these workers would not have a true value for what a million dollars would mean to them but having a job is easily valued by the employee. This is the same kind of value that each employee who has not lost their job yet due to outsourcing feels as the rumors grow about potential job cuts. "Anthony Venables of the London School of Economics argues that when an industry in a well developed country like the U.S. starts trading with an underdeveloped country like Mexico, wages in the U.S. may actually pull further away from the lower wage levels in Mexico. Mr. Venables says that the reason this violates the standard economic theory is that the U.S. might rely on local inputs that its competitors in Mexico don't have - access to specialized workers or daily face-to-face contact with competitors and customers" (Ip, 2006).

What about the Supply?

Outsourcing can also affect the supply side of the theory of labor supply and demand. The theory for supply says that the more outsourcing occurs the more supply there will be in the local market since the labor is being moved elsewhere. This means that many employees will be willing to work for lower wages and poorer working conditions since they will be just happy enough to have a job.

Evidence in Support of and Against Outsourcing

There is much evidence surfacing in support of outsourcing our jobs overseas, offshoring. "The Bush administration stated recently in an interview that the movement of American factory workers and white-collar work to foreign countries as a part of a positive transformation that will enrich the American economy over time, even though short-term loss may be prevalent it will lead to a greater long-term gain" (Vieth and Chen, 2004). Outsourcing can serve as a new way of globalizing a countries economy and spreading international relations. The current short-term pain I speak of is the fact that many jobs are being lost right now at a rather harsh rate, but in the end, it will lead to a long-term benefit for American jobs. "According to the Council on Foreign Relations that four hundred thousand service jobs have been lost to offshoring since 2000.