How Outsourcing Jobs Affects the U.S. Economy
Seven Things You Should Know About Outsourcing
Job outsourcing is when U.S. companies hire foreign workers instead of Americans. In 2015, U.S. overseas affiliates employed 14.3 million workers. The four industries most affected are technology, call centers, human resources, and manufacturing.
How It Affects the Economy
Job outsourcing helps U.S. companies be more competitive in the global marketplace. It allows them to sell to foreign markets with overseas branches. They keep labor costs low by hiring in emerging markets with lower standards of living. That lowers prices on the goods they ship back to the United States.
The main negative effect of outsourcing is it increases U.S. unemployment. The 14.3 million outsourced jobs are more than double the 5.9 million unemployed Americans. If all those jobs returned, it would be enough to also hire the 4.3 million who are working part-time but would prefer full-time positions.
That assumes the jobs could, in fact, return to the United States. Many foreign employees are hired to help with local marketing, contacts, and language. It also assumes the unemployed here have the skills needed for those positions. Would American workers be willing to accept the low wages paid to foreign employees? If not, American consumers would be forced to pay higher prices.
Donald Trump said he would bring jobs back during the 2016 presidential campaign. To do this, he renegotiated the North American Free Trade Agreement. He imposed tariffs on imports from Mexico and China. That started a trade war and raised the prices of imports from those countries. That benefits companies that make all their products in America. Without tariffs, it can be difficult for American-made goods to compete with cheaper foreign goods.
Imposing laws to artificially restrict job outsourcing could make U.S. companies less competitive. If they are forced to hire expensive U.S. workers, they would raise prices and increase costs for consumers.
The pressure to outsource might lead some companies to even move their whole operation, including headquarters, overseas. Others might not be able to compete with higher costs and would be forced out of business.
American companies send IT jobs to India and China because the skills are similar while the wages are much lower. A company only has to pay an entry-level IT worker $7,000 a year in China and $8,400 in India. Companies in Silicon Valley outsource tech jobs by offering H-1b visas to foreign-born workers.
In the past 20 years, many call centers have been outsourced to India and the Philippines. That's because the workers there speak English. But that trend is changing. Unlike technology outsourcing, there is a much smaller wage discrepancy between call center workers in the United States and emerging markets.
Thanks to the Great Recession, wages in India began catching up to those in the United States. Average call center workers only make 15% more than their counterparts in India. As a result, some of these jobs are coming back.
Human resources outsourcing reduces costs by pooling thousands of businesses. This lowers the price of health benefit plans, retirement plans, workers’ compensation insurance, and legal expertise. Human resource outsourcing particularly benefits small businesses by offering a wider range of benefits. Surprisingly, the recession may cause some human resource outsourcing firms to hire American workers.
India has three qualities that attract American companies. First, the labor force already speaks English. Second, its universities are among the highest-ranked in the world. Third, its legal system is similar to the United States, since both are rooted in the British system.
China is the world's largest exporter. But a lot of China's so-called "exports" are really for American companies. A lot of U.S. companies ship raw materials over, and the final goods are shipped back. One reason is that U.S. companies can only afford to sell products to China’s 1.37 billion people if they manufacture there.
Perhaps the United States should do the same thing. Imagine if all our imported products were partly manufactured in America? Other foreign companies should be required to follow the lead of Japanese auto makers, who already do this. Of course, if the United States did that, it would mean higher prices for consumers. U.S. workers need a higher salary to pay for the better standard of living.
Workers in many manufacturing industries have been replaced by robots. To get new jobs, workers need training to operate the robots.
Innovations in technology are what actually allowed U.S. companies to move call centers to India. If technology is the culprit, it is also the answer. It's made the United States more competitive as a nation. Education, rather than protectionism, is the best way to both take advantage of technology and create jobs for U.S. workers.
One-quarter of American workers make less than $10 per hour, or are living in poverty. Meanwhile, the top 1% of workers earned more in income than the bottom 40% of workers. This was in 2005, when the economy was still booming. Outsourcing is just one reason. Technology, globalization and a passion for "low prices" above all else are others. Find out why income inequality has dramatically risen in the last 20 years.
President Trump focused his campaign on ending outsourcing to become the greatest job-producing president in U.S. history. He promised to pressure China to reduce its subsidies and raise its currency value. He would renegotiate NAFTA to require Mexico to end the maquiladora program. He would lure companies back by reducing corporate taxes.
The Bottom Line
The phenomenon of job outsourcing in the United States provokes great economic contention. On one hand, this prevalent practice lowers costs for U.S. companies, enables global competitiveness, and allows them to provide reasonably-priced goods and services. The benefits also extend to countries on the outsourced end, many of which have grown their economies through U.S. outsourcing. On the other, it has hurt employment, raising the unemployment rate particularly in these hardest hit sectors:
- Call centers.
- Human Resources.
Although U.S. outsourcing volume has risen, foreign companies have been outsourcing jobs to the United States as well. Most of these jobs are from the United Kingdom. About 7 million Americans work for foreign businesses. In 2013, thirteen percent of manufacturing jobs and 18% of jobs in export comprise these outsourced work.
Outsourcing may not be the biggest threat to unemployment though. Technological growth in automated intelligence could very well replace many human jobs, enormously impacting the U.S. job market in the eminently near future.