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Outsourcing: A Boon or Bane?

Outsourcing: A Boon or Bane?

Summary The increasing trend of outsourcing jobs from United States in recent years has created alarming unrest among American people. Politicians also believe that outsourcing has a negative impact on jobs, should this be allowed to continue, a prosperous future of all Americans is dim. These policy makers are exploiting this issue by introducing new protectionist policies. On the contrary, some economists have shrugged of the phenomenon as part of economic growth, as outsourcing benefitted U. S. economy by creating new jobs. In the article, the writer highlights the positive effects of outsourcing on the U.

S. economy, as well as politicians’ ignorance on the long run benefits from it. Outsourcing is to move jobs that are currently being performed by people of country to another country with cheaper labor costs. There is no denying to fact some jobs are lost overseas when companies choose to outsource. It seems cruel that some people who are working in factories or in highly skilled Information Technology positions will be out of job. The fact is the outsourcing save number of state side jobs. Moving some of this labor overseas could mean the difference between company staying in business or going out of business.

The option to lose some jobs lost in short run is better than losing all jobs due to company closure. Companies often take savings gained from outsourcing and reinvest these savings in order to expand and create better jobs in United States. Recent history Consider total employment spanning 1988 through 2007 (the most recent year of data available from the U. S. Bureau of Economic Analysis). Over that time, employment in affiliates rose by 5. 3 million—to 11. 7 million from 6. 4 million. Over that same period, employment in U. S. parent companies increased by nearly as much—4. 3 million—to 22 million from 17. million. Indeed, research repeatedly shows that foreign-affiliate expansion tends to expand U. S. parent activity. For many global firms there is no inherent substitutability between foreign and U. S. operations. Rather, there is an inherent complementarity. For example, even as IBM has been expanding abroad, last year it announced the location of a new service-delivery center in Dubuque, Iowa, where the company expects to create 1,300 new jobs and invest more than $800 million over the next 10 years. This is true in manufacturing, too. Procter & Gamble calculates that one in five of its U. S. obs—and two in five in Ohio—depend directly on its global business. Compared to the rest of the world, U. S. corporate tax rates are sky-high and our system of corporate taxation is highly complex. The current U. S. federal statutory corporate tax rate of 35% is the highest among all 30 Organization for Economic Cooperation and Development countries, far above the OECD average of about 23%. Raise the international tax burden on U. S. multinationals by limiting foreign-tax credits, for example, and you will further reduce their ability to compete abroad. This, in turn, will reduce employment and investment in U.

S parent companies. Making it harder for U. S. multinationals to create U. S. jobs would be bad policy at any time. But it would be especially detrimental now because of how dramatically the private sector of the U. S. economy has contracted in the face of this recession. Since the slowdown began in December 2007, private-sector payrolls have fallen precipitously. Today there are 2. 4 million fewer private-sector jobs than 10 years ago. Moreover, in all four quarters of 2009, gross private-sector investment fell so low that it did not even cover depreciation. For the first time since at least 1947, the U.

S. private capital stock shrank throughout an entire year. The major policy challenge facing the U. S. today is not just to create jobs, but to create high-paying private-sector jobs linked to investment and trade. Which firms can create these jobs? U. S. -based multinationals. They—along with similarly performing U. S. affiliates of foreign-based multinationals—have long been among the strongest companies in the U. S. economy. These two groups of firms accounted for the majority of the post-1995 acceleration in U. S. productivity growth, the foundation of rising standards of living for everyone.

They tend to create high-paying jobs—27. 5 million in 2007. Consider that in 2007, the average compensation per worker in these multinational firms was $65,248—about 20% above the average for all other jobs in the U. S. economy. These firms undertook $665. 5 billion in capital investment, which constituted 40. 6% of all private-sector nonresidential investment. They exported $731 billion in goods, 62. 7% of all U. S. goods exports. And these firms also conducted $240. 2 billion in research and development, a remarkable 89. 2% of all U. S. private-sector R&D. On the other hand: The unemployment rate is 9. % Recent studies and analyses predict dire consequences should current trends continue unabated. What these reports make clear is that any work that can be digitized and transmitted through cyber-space is a target for export: * Forrester Research Inc. predicts that American employers will move about 3. 3 million white-collar service jobs and $136 billion in wages overseas in the next 15 years, up from $4 billion in 2000. * Gartner Inc. , a high-tech forcasting firm, estimates that 10 percent of computer services and software jobs will be moved overseas by the end of this year. A survey by Deloitte Research found that the world’s 100 largest financial services firms expect to shift $356 billion worth of operations and about two million jobs to low-wage countries over the next five years. The study also revealed that one-third of all major financial institutions in the world are already utilizing offshore outsourcing, with 75 percent reporting that they would be doing so within the next 24 months. * A recent study by INPUT Research, a market research firm in Reston, VA, projects that outsourcing of state and local government technology contracts will grow from $10 billion last year to $23 billion in 2008. A report published by the University of California at Berkeley projects that some 14 million jobs are at risk of being outsourced overseas, and that job losses will likely exceed what the Forrester study reports. Forrester, the Berkeley study says, “translates to a little over 250,000 [lost jobs] per year, a number that seems conservative, based on the rate of outsourcing over the last few years, the experience of outsourcing in manufacturing, the increasing ability of an increasing number of countries to compete for these jobs, the higher tradability of services due to better communications, increasing use of English and U.

S. standards in business and commerce. ” To support this contention, tabulations by the authors of the Berkeley report of Indian newspapers and business journals for just the month of July 2003 estimated that 25,000 to 30,000 new outsourcing-related jobs were announced by U. S. firms. In the same month, there were 2,087 mass layoffs carried out by U. S. employers resulting in a loss of 226,435 jobs. Government intervention: One of principle of Economics government policy can improve the outcome. Do Politicians help? Politicians always claim to have answers to our problems and offer to come to our rescue.

The measures to restrict the outsourcing are undertaken by Congress. The government put price ceiling on H1-B and L1 visas by raising them. A new bill, “Creating American Jobs and Ending Off shoring Act “, though created to slow down outsourced jobs and create more jobs within America did not pass . What happened ? Let’s look at the bill. The bill would have ended tax deductions for expenses incurred when close U. S. operations and send work overseas. It would also have instituted a new tax on products manufactured by foreign workers that were previously made in United States.

Also, payroll tax holidays for companies that move jobs back to United States. Would be Impact of Bill: The most of companies operate in competitive market. They want to maximize the profits by getting labor at relatively cheaper rate. If this bill was passed many companies would be closed adding to existing unemployment. In short run, unemployment would have decrease but in long run the companies not making profits would have either shutdown or permanently exited the market leading to grater unemployment rate. Primary economic elements * Demand US labor * Demand foreign labor Price control * Elasticity of Demand Demand US labor Graphical Analysis Outsourcing of U. S. Computer Technical-Support Services * Question * How are U. S. workers affected? * Answers * If cheaper labor is available in other countries, this will dampen the demand for U. S. labor. * But as the volume of global commerce rises, there may be more of a demand by foreign firms to hire U. S. workers as well. * Labor outsourcing by U. S. firms tends to reduce U. S. wages and employment. Whenever foreign firms engage in labor outsourcing to the United States, however, U. S. ages and employment increase Outsourcing of Accounting Services by Canadian Firms Conclusion: Details Is outsourcing boon or bane? This is the central idea of the article American’s resentment: American jobs continue to be lost overseas. The statistics suggest that unemployment rate 9. 6%, is all time high. The people of United States are deeply hurt by the state of economy. People fear that future looks very bleak with all jobs being outsourced to improve profits by reducing the labor cost. This unseen fear has established roots in people’s mind as they fear that U.

S. is losing comparative advantage in its core competencies. Reasons for resentment: The core competency is an aspect of the business that forms the competitive advantage and allows the company to compete in various markets in which it operates. It needs to be the able to develop new products quickly, reliably in time. Also, it includes respected customer service. Without these competencies the company’s ability to compete effectively is at stake. What happens if the core competencies are outsourced? How does it affect business?

In short term, the companies enjoy improved profits and increased market share due to lower prices , but long term there will be reduction in business, as the customer base developed on your superior ability to deliver quality product on time get affected by lead times of importing product, and lower quality due to less dedicated workforce. If left too long, competitive edge will be hard to Achieve or might be lost forever. The anguish is building among people. Even the labor unions are giving statistics which establishes outsourcing as the source of widespread unemployment.

What people should do? They are looking to get refuge in the government policies. One of principle of Economics government policy can improve the outcome. Do Politicians help? Politicians always claim to have answers to our problems and offer to come to our rescue. The measures to restrict the outsourcing are undertaken by Congress. The government put price ceiling on H1-B and L1 visas by raising them. A new bill, “Creating American Jobs and Ending Off shoring Act “, though created to slow down outsourced jobs and create more jobs within America did not pass . What happened ?

Let’s look at the bill. The bill would have ended tax deductions for expenses incurred when close U. S. operations and send work overseas. It would also have instituted a new tax on products manufactured by foreign workers that were previously made in United States. Also, payroll tax holidays for companies that move jobs back to United States. Impact of Bill: The most of companies operate in competitive market. They want to maximize the profits by getting labor at relatively cheaper rate. If this bill was passed many companies would be closed adding to existing unemployment.

In short run, unemployment would have decrease but in long run the companies not making profits would have either shutdown or permanently exited the market leading to grater unemployment rate. Let’s look at Outsourcing, how it works: Outsourcing is to move jobs that are currently being performed by people of country to another country with cheaper labor costs. There is no denying to fact some jobs are lost overseas when companies choose to outsource. It seems cruel that some people who are working in factories or in highly skilled Information Technology positions will be out of job.

The fact is the outsourcing save number of state side jobs. Moving some of this labor overseas could mean the difference between company staying in business or going out of business. The option to lose some jobs lost in short run is better than losing all jobs due to company closure. Companies often take savings gained from outsourcing and reinvest these savings in order to expand and create better jobs in United States. Companies aren’t the only ones that benefit from outsourcing. The consumer equally gets benefitted by buying the outsourced products.

The labor cost is one of the inputs for production. Due to outsourcing the production cost decreases and companies operate at economies of scale as a result the consumer can buy a same product cheaper . 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 ishes 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. irms 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. The study by Mathew Slaughter suggests that outsourcing creates more jobs. Whenever the jobs are outsourced to other countries more people are hired back in the parent country to support expanded new foreign ventures. He suggests the foreign workers skill complements the domestic workers.

For example, Wal-Mart has opened many stores world-wide has outsourced jobs but paralleling created many jobs in US to support these new stores. Outsourcing of U. S. Computer Technical-Support Services * Question * How are U. S. workers affected? * Answers * If cheaper labor is available in other countries, this will dampen the demand for U. S. labor. * But as the volume of global commerce rises, there may be more of a demand by foreign firms to hire U. S. workers as well. * Labor outsourcing by U. S. firms tends to reduce U. S. ages and employment. Whenever foreign firms engage in labor outsourcing to the United States, however, U. S. wages and employment increase Outsourcing of Accounting Services by Canadian Firms * Short-run effects * Even in the best of times, workers experience short-run ups and downs in wages and jobs. * In the United States, after all, about 4 million jobs come and go every month. To be sure, in the near term, workers earn lower pay and experience reduced employment * Long-term benefits * Labor allows for more specialization, which enhances trade.

If goods are produced and services are performed in those countries where the opportunity costs are lowest, then global economic growth is enhanced * Expanded production and consumption possibilities made possible by outsourcing and other forms of international trade generate higher total revenues across U. S. firms. * Benefits for U. S. workers * Firms can outsource their labor needs and will operate more efficiently. * This means that the products they sell have lower prices. * In turn, each dollar in a worker’s paycheck has a greater purchasing power. In the long run, outsourcing helps boost the overall value of MRP in industries throughout the U. S. economy. * Consequently, the ultimate long-run effect of outsourcing is an increase in demand for labor in most industries. * Increased labor demand pushes up wages and boosts employment, and economists estimate outsourcing has created more jobs than it has destroyed. * International labor outsourcing is also known as “labor offshoring. ” One U. S. firm has found a way to literally engage in “offshore” outsourcing activities.