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Tuesday, January 5, 2010

Does Outsourcing Benefit the U.S. Economy?

We hear it every day in the news as more American jobs continue to be lost overseas. Politicians always claim to have the answer to our problems and offer to come to our rescue promising to stop global outsourcing for good. Why shouldn’t they, right? If they succeed, then everyone who has a job will have the politicians to thank. When President Obama was on the campaign trail, he said “When I am President, I will end the tax giveaways to companies that ship our jobs overseas, and I will put money in the pockets of working Americans…” several times. (1) Many on the left as well as some moderates repeat rhetoric similar to this and only talk about the negatives of outsourcing. Language like this sounds great on the campaign, but is there any truth to it? Is outsourcing really a bad thing for our economy, and should it be stopped to save America? Nothing could be further from the truth, and in all actuality, outsourcing helps the U.S. economy in many ways. Why do politicians say things like this? They either do not understand how everything works themselves, or they do not think you are capable of understanding the truth about outsourcing. I think it is a little of both, and once you learn about outsourcing, they may lose your vote. These benefits help not only the companies that choose to outsource, but also employees and consumers. There are also some things you can do that can aid in protecting yourself should you run into an outsourcing situation at your company.

Let’s begin by addressing the myth surrounding the jobs lost as a result of outsourcing. There is no disputing the fact that some jobs are lost overseas when companies choose to outsource. To deny this claim would be absurd; the point of outsourcing is to move some jobs that are currently being performed by people in the United States to countries with cheaper labor costs such as India, China, or Poland. On the surface, this sounds cruel, as it does mean some people who are working in factories or in highly skilled Information Technology positions will be out of a job. The fact that critics leave out is the number of state side jobs that are saved as result of outsourcing. Moving some of this labor overseas could mean the difference between a company staying in business or going out of business. Losing some jobs in the short term is certainly a better option. Companies often take the savings gained from outsourcing and reinvest these savings in order to expand and create better jobs in the United States. For example, just after the North American Free Trade Agreement (NAFTA) was passed, Zenith Electronics Corporation sent over 10,000 jobs to Mexico. However, they continued to employ over 6,000 people in the United States. (2) Today, Zenith employs thousands of people in the United States because they were able to save some money by utilizing overseas labor. If Zenith could not take advantage of NAFTA, the likelihood of Zenith going out of business would have been very high. As a result, the job losses that would occur from Zenith’s bankruptcy would have had a much greater impact on jobs and the economy. The leveraging of capital also saves the government from having to bailout companies who are “too big to fail.”

Companies aren’t the only ones that benefit from outsourcing. You, the consumer, also benefit each time you purchase products. Many of the products sold at retailers such as Wal-Mart are assembled in factories overseas and can be sold at a cheaper price than if they were manufactured in the United States. Critics of outsourcing always like to talk about the loss of jobs and the ensuing problems, but they rarely factor everything into the equation. Opponents do not complain when it comes time to buy something at their favorite store that is cheaper as a result of outsourcing. During difficult economic times, people need a low cost option. In addition, outsourcing helps U.S. based companies take advantage of cheaper labor, which allows them to compete with companies overseas.

It has been established that the consumer and the company benefit from outsourcing, but what about the employee? Is it possible for employees to benefit from outsourcing? The employees who remain employed by the company can benefit from additional skills as a direct result of outsourcing. For example, some employees may take on more of a management role and work with employees abroad. This provides opportunity for the employee that would have been difficult to obtain if it were not for outsourcing. In some cases, the overseas labor will take on more of the “mundane” tasks, which will free up the state side employee to focus on more meaningful activities. Moving simple, repeatable tasks tend to be focus of outsourcing. These same tasks also inclined to be more of the everyday tasks that many domestic employees dislike. Why not move these tasks over to another team of people for a lower cost? What if I were to tell you someone else was going to do all of your simple and tedious tasks you hate doing in order to free you up for more interesting work?

Employees who are let go as a result of outsourcing also benefit. While they may have lost their job, this change will force many people to pick up new and improved skills, which will land them a better paying job. This applies to non-skilled labor as well as highly skilled labor and everything in between. While short-term job loss is never good, the long-term benefit of a more skilled workforce is more than an offset. In many cases, companies who are engaged in outsourcing are always in search of talent. In several instances, American based companies like IBM or Hewlett Packard (HP) will hire most of the people who were outsourced to work for them and their outsourcing efforts. A quick search on IBM or HP’s website will illustrate how they are constantly looking to fill open positions here in America even though they employ thousands of people overseas. How many of these jobs would be lost if IBM or HP could not leverage their assets by going overseas? Furthermore, what about the thousands of companies as well as new companies that are able to start up and survive as a result of outsourcing some of their information technology operations to IBM or HP?

Outsourcing also benefits other countries. One may ask why America would be interested in other countries benefiting from outsourcing and how another country’s prosperity is beneficial to the United States. To begin with, the shifting of some labor over to another country will benefit the economy of that country. Improved economies in foreign countries will improve their citizens’ way of life and expose the benefits of capitalism in their country. This has resulted in increased demand for U.S. products and services performed by people right here in America as well as overseas. For example, Coca-Cola has shown continued profits while domestic sales remain flat. In July of 2009, Coca-Cola announced their second-quarter profit rose 43 percent due to increased sales in China and India while domestic sales fell one percent. (3) Without overseas sales, Coca-Cola most likely would have had to lay people off or cut back on some employee benefits. Improving the lives of the people in these countries has allowed their citizens to have the extra income to spend on something like bottles of Coke. Poverty stricken countries are not going to have the improved lifestyle or the spare cash to spend on soft drinks without American help through outsourcing. Situations resembling the jobs saved at Coca-Cola as a result of outsourcing will never make headlines; however it happens quite frequently. One would think most people would embrace the idea of private companies making investments domestically as well as overseas to improve the lifestyles of millions of people all over the world – all without taxpayer dollars.

What about the retailers who hire people to sell these products? How many of the 2.1 million retail jobs would a massive retailer like Wal-Mart lose should they be forced to sell products at higher prices? (4) What would happen to the benefits a company like Wal-Mart is able to provide for all their U.S. based associates? One of the primary concerns in today’s political arena is people who do not have access to health insurance. Outsourcing has given many companies the ability to provide their employees with health insurance. This is a fact that protectionists fail to acknowledge. Wal-Mart was able to add $870 million dollars into employee profit sharing and 401K plans which are funded regardless of whether or not the employee chooses to fund their retirement account. (5) It would be highly unlikely this retailer would be able to provide these benefits if they were not a successful company. Wal-Mart thrives on their ability to be a low-cost provider which can only be achieved through selling many products made overseas. If we are seeing this kind of result from one single retailer, imagine what the effects would be for other retailers and suppliers who provide raw materials to overseas factories all over the world.

Regardless of how you feel about outsourcing, the statistics show outsourcing isn’t going away any time soon. Therefore, what can you do about outsourcing, and how can you protect yourself should your job become outsourced? You should acquire as many skills as possible both on and off the job, show up on time with a good attitude every day and learn as much as you can about the field in which you work. Additional skills and business knowledge will make it easier for the company to move you into different roles should your current role be lost to outsourcing. If the worst case scenario actually happens and you are laid off, you will have additional skills and business knowledge that could easily be taken with you to another company. Employees who learn new skills are helpful to themselves, their employers, and the economy as a whole.

What can our government do about outsourcing? Given the many benefits outsourcing provides, the government should do very little. Our government should allow private firms to decide whether or not outsourcing will be a good strategic move. In several cases, companies have cancelled outsourcing contracts and pulled their operations back to the United States on their own. One example is a decision made in 2009 by AT&T to bring over 4,000 jobs back to the states that had previously been outsourced overseas. (6) If our government is concerned about job losses as a result of outsourcing and wishes to provide better job opportunities for America, it should focus on the following:

  • Encourage business to succeed and allow poorly run companies to fail
  • Eliminate unnecessary and costly government regulations
  • Remove its pro-union stance which results in the high cost of labor
  • Provide a tax-friendly environment
  • Create an atmosphere that encourages investment and profit

There is no such talk from the Obama Administration. Instead, this administration has taken a more protectionist view by opposing companies who choose to outsource. The truth is protectionism has never worked throughout history and actually provides a motive for companies to outsource. Furthermore, these protectionist actions make a recession worse.

Finally, outsourcing is not easy to accomplish. There are many barriers which will always keep companies in line when they consider outsourcing. In many cases, there will be language barriers and cultural differences that will not positively impact the bottom line. There are also logistical issues with outsourced employees, as it becomes more difficult to manage and communicate. Companies also have to obey the labor and tax laws which exist in the country in which they choose to outsource. Some overseas labor laws are worse than the United States, and some companies could find themselves hiring U.S. employees for work that was initially intended to go overseas. Executing an outsourcing program requires careful planning and the assistance of many people stateside to accomplish. Many companies, such as AT&T, reconsider and scale back some or all of the work that had been outsourced. A study done in 2009 by oDesk, a company that assists with outsourcing, has found many U.S. firms have been outsourcing to American based companies using American labor instead of overseas, and wages for these employees have increased! They discovered while rates for U.S. employees tend to be higher, their feedback scores tend to be higher as well. This same study has shown work being done in the U.S. grew at a rate of 367 percent from 2007 to 2008. (7)

In conclusion, outsourcing will not destroy the American economy. These fears have been played out by useless politicians since America’s beginning back when states would outsource and move labor to other states that had a lower cost of living. We see how detrimental that was to the United States, right? History has shown us that the government’s attempts to prevent what the market is trying will only cost America more jobs and opportunity. You have a choice every day as a consumer to research and only do business with companies who minimize outsourcing. However, be prepared to pay more money and have less money to save should you decide to take on such an initiative. No one likes to see jobs go away, but our government’s attempts to stop it are just wasteful, protectionist nonsense. The market will always work in spite of what politicians do, and no one is bigger than the market itself. Our government needs to step back and let this play itself out. If our government would just assume the role intended for them by our country’s founders, then we will all be better off.



Joseph said...

While I'm reading this article, I still stick to my stand that outsourcing companies or
b2b telemarketing companies benefit the US economy. In reality, we all know that agents earn big bucks, but the fact is, they pay a high amount of tax. Since most government spending is paid for from tax, the income taxes of agents contribute in no small way. We can't also deny that the number of jobless people increased recently and many companies want to lessen their expenses. Actually, having outsource telemarketing services for companies open many opportunities for jobless people. Although they're not in-house employees, we should look at the positive side that despite the effects of recession, there are other options to finding a job.

ellan said...

Yes, I agree with Joseph.. There is more good in outsourcing then bad for the economy in a Macro point of view.

Custom software development company said...

This is the best blog,I think it is a little of both, and once you learn about outsourcing, they may lose your vote.

Charles said...

Your kidding right? This weak, inaccurate, unsubstantiated double-speak is just the bs Big business and the wealthy use to keep the naive and ignorant masses of American workers fooled to re-electing the same corrupt politicians who lax the laws to allow this to happen.

What kind of moron would believe outsourcing of American Jobs to other countries is helping our work force or the economy. Only thing its helping is Big Business bottom lines. Rich keeps getting richer. Modern day Rome. History repeats itself as it always does.

Dan said...

Charles, you're the moron who doesn't understand economics. Educate yourself...go read a book or take a class. Repeating what you hear others say is no substitute for actual knowledge.

Anonymous said...

And now that outsourcing has destroyed America by flushing millions of jobs thanks to the Bush tax cut that rewards companies that send high paying jobs overseas, I wonder what new fantasies supply side dungeon masters will concoct to support their parasitic destruction of our economy and society?

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