Effects of Job Outsourcing on the U.S. Economy and Workers

Introduction

Given today's globalized economy and the strongly competitive environment in which they operate, companies are forced to find ways to reduce their production costs in order to remain competitive and attractive to their customers. As a consequence, many companies — from large corporations to small businesses — choose to outsource parts of their operations to cheaper countries.

The most preferred outsourcing destination is India, followed closely by China and Malaysia. The advantages that make India such an alluring destination include low costs, a skilled workforce, and a favorable business environment. The most commonly outsourced operations include IT and back-office functions.

Some countries in Central and Eastern Europe were becoming more attractive as outsourcing destinations, but the economic and financial crises that affected these regions led large outsourcers to orient toward other countries, such as Egypt, Jordan, Vietnam, the United Arab Emirates, Tunisia, and Morocco. Several other countries in the Middle East and North Africa are likely to establish themselves as strong competitors for outsourcing business, due to advantages such as large and educated populations and geographic proximity to Europe (Shivapriya, 2009).

When evaluating outsourcing destinations, companies take into consideration a series of factors, including costs, risk, and market opportunity. Cost factors refer to compensation and wages, infrastructure costs, and tax and regulatory costs. Risk factors include geopolitical, human capital, economic, legal, and infrastructure risks. Market opportunity factors include current and future needs of the population, market growth rate, and related considerations (BioSpectrum, 2009).

Effects of Job Outsourcing on the Domestic Economy

The process of outsourcing jobs to cheaper destinations has several effects on the U.S. economy as a whole, as well as on the individuals directly affected by the state of the country's economy. Outsourcing carries both positive and negative consequences.

Some of the advantages include lower prices for products and services due to reduced production costs, and higher incomes for outsourcing companies, which can further drive economic growth. The negative effects include diminished or absent quality control over the production process, increased unemployment on the local market, reduced salaries for domestic workers, and others.

Outsourcing has grown significantly over the past two decades, and especially in recent years, as more and more jobs are relocated to cheaper destinations. In principle, any job that can be performed in another country at lower cost can be outsourced. Most manufacturing operations are among those being outsourced. Even for jobs such as construction, nursing, or childcare, organizations often prefer to employ personnel from other countries because they can hire them for considerably lower wages than local workers would accept.

When outsourcing first became a significant business strategy, many specialists believed that its intensification would benefit all parties involved. Practice has proven otherwise. One of the main problems with outsourcing is the absence of strict policies governing the activity. In other words, companies are not constrained to act in an ethical manner by any regulatory framework in this field [1]. This is partly because many companies feel they have no alternative. Where some companies could theoretically manage without outsourcing, they are practically forced to do so because competitors who outsource are able to offer lower prices, thereby gaining a significant competitive advantage.

Therefore, governments should take this situation and its consequences into consideration and adopt suitable measures. Although outsourcing may prove beneficial for some, it creates more problems for others, and it appears that governments have not been sufficiently focused on finding and applying solutions to these issues.

Another effect of outsourcing is its influence on national wealth. Several experts have observed that as the percentage of U.S. workers employed in industrial jobs declined significantly, the country's trade imbalance grew [3]. By expanding outsourcing, the country also loses monetary wealth. Although a large share of profits earned by outsourcing companies is repatriated to the U.S., these benefits are not sustainable in the medium or long term.

Impact on Workers and Employment Security

Because the majority of production jobs are being outsourced, the U.S. labor market will be compelled to focus increasingly on service-sector employment. Such jobs absorb the country's wealth rather than generating it. This significant decrease in domestic employment will lead to lower tax revenues for local, state, and federal governments — less income tax collected, lower contributions to social security and healthcare systems, increased payments for unemployment benefits, and other fiscal pressures.

The reduction in domestic jobs does not only affect individuals who lose their positions; it affects entire communities. Employees who have not yet lost their jobs are increasingly insecure about their futures, their career prospects, and their financial situations. This insecurity raises stress levels, which in turn affects professional performance. Lower performance and reduced efficiency lead to lower-quality products and services.

There are also companies for which outsourcing has created problems rather than solutions. The reasons for such failures include poor government management of the transition, defective communications, cultural barriers, the lack of clear policies, and other operational factors.

Another negative effect is that companies that outsource parts of their operations can find that their total expenditures have actually increased — sometimes without realizing it from the outset. This underscores the complexity and hidden costs of the outsourcing process.