How Outsourcing Jobs Affects the US Economy

What You Need to Know About Outsourcing Jobs

Updated February 20, 2021

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Job outsourcing is when U.S. companies hire foreign workers instead of Americans. In 2018, U.S. overseas affiliates employed 14.4 million workers. Four industries often affected include 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. Outsourced jobs are often more than the number of unemployed Americans. If all those jobs returned, it would be enough to hire millions 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.

Technology Outsourcing

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American companies send IT jobs to India and China because the skills are similar while the wages are much lower. Companies in Silicon Valley outsource tech jobs by offering H-1b visas to foreign-born workers.

Call Center Outsourcing

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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 U.S. and emerging markets.

Human Resources Outsourcing

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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.

NAFTA Job Losses

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President Reagan envisioned NAFTA to help North America compete with the European Union. Unfortunately, it also sent around 850,000 jobs to Mexico. Hardest hit were California, New York, Michigan, Texas, and Ohio.

Jobs in Mexico

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Mexico is now the seventh-largest auto manufacturer in the world. But did that growth come at the expense of U.S. auto workers? Or is something else the real reason? Like 11 free trade agreements with 46 countries?

India Attracting U.S. Companies

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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 U.S.

Jobs in China

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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 1.4 billion people if they manufacture there.

Perhaps the U.S. 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.

Robots

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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 U.S. 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.

Underpaid Workers

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In 2019, there were 34 million people living in poverty in the U.S. Meanwhile, the top 10% of workers earn more than nine times the income that the bottom 90% of workers earn. Outsourcing is just one reason. Technology, globalization, and a passion for "low prices" above all else are others.

Rise in the Freelance Economy

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The freelance economy means that companies are laying off full-time—often older—workers and replacing them with part-timers, temp help, and freelance workers. It makes it easier to outsource jobs to workers who are not full-time.

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:

Manufacturing
Technology
Call centers
Human Resources

Although U.S. outsourcing has risen, foreign companies have been outsourcing jobs to the U.S., too—it works both ways.

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.