Outsourcing is an inevitable market reality, however, adequate measures must be taken to support the displaced employees, and to retrain them for better employment prospects.
Outsourcing has become a highly controversial and much debated issue over the last few years. The economic dynamics of the 21st century have vastly altered the mode of business. While globalization has opened new markets for companies, at the same time, it has forced them to seek ways to be more productive and competitive. This drive for competitive advantage has resulted in many U.S. companies taking their non-core jobs (in some cases, core jobs as well) to offshore locations, which offer both cheap labor and quality output. Outsourcing is not a totally new concept, as companies have all along been outsourcing their training operations, clerical works, shipping and forwarding operations, etc. However, the surge in information technology has bought a paradigm shift in the way organizations operate, and outsourcing has emerged as a new business model. [Fred Luthans] While improving productivity and cutting costs for organizations, outsourcing has also created a big problem in the loss of jobs in the local economy. A brief overview of the subject and a discussion of the pros and cons surrounding the issue, would give us a better picture.
The one main argument pitted against outsourcing of jobs to overseas locations is the loss of jobs in the local environment. Of immediate concern is the loss of jobs that we see particularly in the IT and customer support sectors. Big corporations have started to shift their customer care centers to India, Philippines and China. It is also a growing fact that many major American corporations are shifting their research and developmental facilities to offshore locations. For example, software giants like Oracle and Microsoft have moved part of their research and developmental facilities to Indian units. Similarly, in the banking sector World Bank, ABN Amro and many others have shifted their back office and accounting operations to India. [Wharton School] The net effect is the loss of around 400,000 U.S. IT jobs to offshore locations.
While we cannot deny that outsourcing has resulted in loss of jobs for a small segment of the working population, we cannot also deny its positive impact on the U.S. economy on the whole. The open labor market conditions that prevail in the U.S. offer remarkable flexibility, which is reflected in the fact that every week more than a million workers either quit or get laid off and are replaced by other personnel. Displacements due to relocations of jobs within the U.S. results in more job losses than due to outsourcing. Further, the much-promised reinvestment of reaped profits is already beginning to be a reality. Last year Delta airlines managed to add over 1200 new positions in the U.S. from the cost savings it created by moving 1000 jobs to India. [Murray Weidenbaum]. Outsourcing has not only enabled companies to thrive in the face of high operating costs but also increased global competence. According to Nasscom, "U.S. banks, financial services and insurance companies have saved $6bn to $8bn in the past four years owing to IT outsourcing to India," "Helped by these savings, companies have prevented layoffs and instead added 125,000 more jobs." [Winston Chai]
As economists suggest, outsourcing will be an inevitable eventuality in this global competitive market. The law of comparative advantage operates in this age of global economic environment. Protectionist policies would not only drastically affect the competitive strength of our national entrepreneurs but also increase the price of commodities in the local market. Protectionists have to realize that more than 60% of the U.S. IT revenue is generated from overseas nations. [Murray Weidenbaum]. Chairman of the U.S. Federal Reserve, Mr. Greenspan says, 'These alleged cures would make matters worse rather than better. They would do little to create jobs; and if foreigners were to retaliate, we would surely lose jobs.' [Matt Hines]
Outsourcing is a global phenomenon and hence not to be perceived as a peculiar trend in the United States. Any attempt to hinder the open global market would definitely have serious economic repercussions for the United States, as it is both the world's largest exporter and importer of goods and services. [Alan Reynolds]. Further, the outcry against the movement of service industry jobs abroad is really exaggerated in that only 400,000 IT related jobs have gone overseas while during the same period (between 1993 and 2003) the U.S. employment roll increased from 129 million to 138 million particularly in the service industry. [Murray Weidenbaum] A study conducted last year by the General Accountability Office reports that the outcry against outsourcing is vastly overblown. The study revealed that outsourcing accounted for less than 1% of the 1.5 million job losses that occurred in 2003. Another study by the labor department also verified the fact, showing outsourcing related job loss for the same year at 150,000 from the total U.S. workforce of 137 million for that period. [The Detroit News]
The exaggerated concerns about the negative effects of outsourcing is again made clear from the fact that out of the total of $120 billion spent on IT services in 2003, only 1.4% was spent on outsourcing jobs. Also, the total import of business services for the same period (2003), which stood at $87 billion, was more than offset by the total export of business services, which was marked at $134 billion. [Murray Weidenbaum]. It is a well-known fact that some of our big companies like Nike, Reebok and others in the apparel industry do the designing part within the country and outsource the actual manufacturing process to units in China, Nepal and Java. These facts are presented not as a case of recommendation for outsourcing, but rather to indicate the economic market reality. As Michael A. Bettersworth, the associate vice chancellor of Texas state technical college states, "We rightly chose to have a minimum wage in this country and not to allow sweatshops. By doing so, we accept that we may not be able to compete in some industries where cheaper labor and lower costs of living can produce the same products at a fraction of the cost.." [Karen Guglielmo]
At the outset, it is difficult to endorse outsourcing especially when the personal feelings of people are involved. However, a broader economic perspective indicates that outsourcing is an inevitable part of the global economy and hence cannot be totally avoided. What needs to be done is regulation of outsourcing and proper assistance and training schemes for the displaced workers. The one concerning fact is the inefficient handling of the TAA (Trade Adjustment Assistance) program by the federal government. The number of approved candidates for the TAA is surprisingly on the decline in the last two years. The TAA regulations insist on decline of overall productivity or sales in the sector as essential criteria to qualify for the assistance program which bars many displaced IT workers as outsourcing has boosted the productivity of the IT firms. Another sensible alternative is for companies to have insurance programs that can provide financial security for employees displaced due to outsourcing. Corporations can also play a significant part in allaying the fears of employees by providing retraining programs. For example, IBM has earmarked $25 million for two years as part of its retraining program for its employees who are hounded by the outsourcing fears. [Daniel W. Drezner]
It is a fact that technology has resulted in more job losses while at the same time it has also created more new jobs. When computers started to invade the corporate market similar apprehensions were expressed. People were complaining about the loss of jobs due to the computerization and automation. [William V. Bandoch]. But now, computers have become so much a part of our lives, and have created…