This paper explores the business practices of offshoring and outsourcing, defining each concept and tracing their growth as global strategies for cost reduction and efficiency. The paper focuses primarily on how these practices affect the U.S. labor market, drawing on data from the Bureau of Labor Statistics and academic research to analyze job losses and gains across IT-related occupations. It presents both negative effects — including domestic job displacement and wage pressure — and positive effects, such as new job creation and corporate cost savings. The paper ultimately argues that the impact of offshoring and outsourcing on U.S. employment is more nuanced than popular criticism suggests.
Outsourcing, as a business practice that began almost three decades ago, refers to delegating certain operations involved in a company's internal production to external parties that specialize in managing those operations. The entire process of outsourcing relies heavily on experts from outside the company who are able to manage the delegated operations on the company's behalf.
Outsourcing typically involves a contractual relationship between the company and a supplier — the external party — which is responsible for providing human resources, processes, technology, intellectual property, and assets. The main reason companies rely on outsourcing is that this practice helps them reduce production costs, save important amounts of time, energy, and other resources, and increase their overall efficiency. Major companies worldwide increasingly rely on outsourcing by dispersing "work among global networks of staff ranging from the U.S. to Asia to Eastern Europe" (BusinessWeek, 2006).
Offshoring is a type of outsourcing that refers to relocating a company's business processes. The business processes most frequently offshored include production, manufacturing, and services. As with outsourcing more broadly, the primary reason companies adopt offshoring is that it significantly reduces costs, which leads to competitive advantage. Other motivations include access to more skilled workers in other locations.
The locations most commonly used for offshore outsourcing are India, China, and certain regions in Eastern Europe — areas able to provide the significant human resources these companies require. However, these practices attract considerable criticism from both specialists and ordinary people who have been negatively affected by them. At the same time, offshoring and outsourcing have their advocates, who point to the positive effects that have emerged from practices that are now common worldwide.
These two practices, along with production relocation, are considered by some specialists to present mostly negative effects on the United States economy in general and on the U.S. labor market in particular. Other specialists are strong advocates of these practices, viewing them as providing significant advantages for both the U.S. companies that use them and for the broader U.S. economy. The following sections offer an objective analysis of offshoring and outsourcing by presenting both their negative and positive effects.
The most important negative effect identified by experts and by the U.S. Bureau of Labor Statistics is that many Americans have lost their jobs as a result of these practices. However, this argument is not considered straightforwardly valid by all specialists. Research indicates that "just under a million Americans lost their jobs as a result of unscheduled (excluding seasonal work and vacation periods) mass layoffs, and approximately 12% of these layoffs can be attributed to movement of work (domestic in-house relocation, outsourcing, offshoring, and offshore outsourcing). This 12% number is relatively large, although not as big a reason for mass layoffs as, for instance, contract completion (~25%) or downsizing (~16%) and roughly on par with layoffs due to bankruptcy and financial difficulty combined" (Kirkegaard, 2007). In other words, offshoring and outsourcing do contribute to domestic job losses, but the percentage falls within a range that is comparable to other economic phenomena responsible for even greater job losses.
Some key figures on U.S. domestic job losses from mass layoffs related to offshoring and outsourcing between Q1 2004 and Q4 2005 are presented below:
Total number of separations, excluding seasonal and vacation-related: 974,078. Total number of separations associated with movement of work: 116,205. Percent share of total separations: 11.9%. Total number of separations associated with movement of work for which employers were able to provide specific information: 83,683. Percent share of separations associated with domestic movement of work within company (domestic in-house relocation): 54.9% (6.5% of total separations). Percent share associated with domestic movement to a non-affiliated producer: 11.9% (1.4%). Percent share associated with international movement within company (offshoring): 26.3% (3.1%). Percent share associated with international movement to a non-affiliated producer (offshore outsourcing): 6.9% (0.8%). Values in parentheses represent the share of total separations (Kirkegaard, 2007).
These practices affect workers across many professions, but the IT sector has been particularly impacted. Between 1999 and 2005, U.S. IT-related occupations experienced significant shifts in workforce size. The percentage changes for key occupations over that period are as follows:
Telemarketers: −17.5%; Telephone operators: −42.4%; Switchboard operators: −21.6%; Computer operators: −34.9%; Data entry keyers: −43.0%; Word processors and typists: −43.4%; Desktop publishers: −19.2%; Electrical and electronic equipment assemblers: −46.5%; Semiconductor processors: +6.2%; Computer support specialists: +8.0%; Computer and information scientists, research: −1.5%; Computer programmers: −26.4%; Computer software engineers, applications: +58.5%; Computer software engineers, systems software: +53.4%; Computer systems analysts: +14.9%; Database administrators: −2.1%; Network and computer systems administrators: +32.1%; Network systems and data communications analysts: +88.3%; Computer hardware engineers: +30.1%; Electrical engineers: −2.9%; Electronics engineers, except computer: +21.7% (Kirkegaard, 2007).
From the data above, one can observe that offshoring and outsourcing result in the loss of certain jobs while simultaneously creating others. The most affected sector of the U.S. economy is IT and IT-related occupations. In fields such as telephone operations, computer operations, data entry, word processing, and electronic assembly, job losses are dramatic — approaching nearly half of total employment in those categories. On the other hand, substantial numbers of new domestic jobs are created in areas such as computer software engineering, computer hardware engineering, and network systems analysis. There is thus a roughly balanced trade-off between jobs lost and jobs created — or, alternatively, one might argue that some of these jobs are not lost entirely but rather transformed.
Several key indicators of U.S. labor market activity in 2007 are presented below:
The total civilian labor force in 2007 was 152,912 (thousands) in Q1 and 152,807 in Q2. Employment reached 146,044 in Q1 and 145,956 in Q2. Unemployment stood at 6,869 in Q1 and 6,851 in Q2. The number of persons not in the labor force was 77,927 in Q1 and 78,675 in Q2 (BLS, 2007).
The national unemployment rate for 2007 was 4.6%. The highest state unemployment rate that year was in Michigan at 7.2%, while the lowest was in Idaho at 2.3% (BLS, 2007).
"Job displacement and wage pressure on workers"
"Cost savings and new domestic job creation"
"Dollar-value savings and effects on new graduates"
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