How Outsourcing Jobs Affects the U.S. Economy

Job outsourcing occurs when U.S. companies hire foreign workers instead of Americans. In 2019, U.S. overseas affiliates employed 14.6 million workers. Four industries that are often affected are technology, call centers, human resources, and manufacturing. 

How Job Outsourcing 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 were to return, it would be enough to hire millions who are working part-time but would prefer full-time positions.

That assumes the jobs could, of course, return successfully 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.

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

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

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

Human resource 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. The Great Recession appears to have kicked off an increase in "domestic outsourcing," where companies outsource functions such as HR to American workers.

NAFTA Job Losses

President Reagan envisioned NAFTA to help North America compete with the European Union. Unfortunately, it also sent around 850,000 jobs to Mexico. California, New York, Michigan, Texas, and Ohio were the most impacted states. At the same time, however, NAFTA did succeed in lowering prices on many products for American consumers and boosted exports to Canada and Mexico. NAFTA's successor, the U.S.-Mexico-Canada Agreement, was renegotiated to change wage and labor rules and took effect in July 2020.

Jobs in Mexico

Mexico is the sixth-largest auto manufacturer in the world, as of September 2021. But did that growth come at the expense of U.S. auto workers? Or is something else the real reason? The truth is Mexico maintains 13 free trade agreements with 50 different countries.

India Attracting U.S. Companies

India attracts American companies because its labor force already speaks English. Plus, its universities rank in the top 20% of the world's best, and its legal system is similar to the U.S.

Jobs in China

China is the world's largest exporter as of January 2020. 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.

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 automakers, 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 a better standard of living.

Robots

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

In 2020, there were 37.2 million people living in poverty in the U.S. Meanwhile, the top 10% of workers earned almost 13 times the income that the bottom 90% of workers earned.

Rise in the Freelance Economy

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 pandemic saw a rapid rise in both remote workers and freelancers, with many businesses expected to sustain or increase their use of freelancers in the future.

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
  

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 immanently near future.

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