Outsourcing and Its Effects on the U.S. Economy

Introduction

In the age of information, where the forces of globalization are in full effect and competition is fierce, outsourcing appears to represent a viable approach to keeping a company's operations streamlined and efficient. At first glance, outsourcing various aspects of a company's operations seems to provide a significant competitive advantage by allowing firms to concentrate on their core competencies. While these benefits have in fact accrued to some companies in the past, critics of the practice maintain that the United States is mortgaging its future — and the future of its workers — through such practices. To sort out the truth, this paper reviews the relevant peer-reviewed, scholarly, and popular literature to determine the effect of outsourcing on the U.S. economy, followed by a summary of the research in the conclusion.

Defining Outsourcing and Its Expanding Scope

According to Domberger (1998), "Outsourcing refers to the process whereby activities traditionally carried out internally are contracted out to external providers. Outsourcing is the search for and appointment of contractors for the provision of goods and services" (12). Although one of the primary reasons for outsourcing one or more internal functions — such as payroll or other human resources activities — is to reap the efficiencies of scale available from third-party providers, the trend in recent years has extended even to a company's core competencies. As Gottfredson, Puryear, and Phillips (2005) point out, "Outsourcing is becoming so sophisticated that even core functions like engineering, R&D, manufacturing, and marketing can — and often should — be moved outside. And that, in turn, is changing the way firms think about their organizations, their value chains, and their competitive positions" (132).

According to Khanna and Randolph (2005), "The decision [to outsource] is mostly driven by business objectives such as cost reduction, increasing flexibility, gaining access to particular technologies, or simply to concentrate management bandwidth on core activities" (37). This means that while American companies are cutting their domestic operations to the bone, American jobs are also being eliminated in favor of less expensive labor abroad in order to achieve these competitive advantages.

Effects on American Workers and Wages

During the first part of the twentieth century, American workers and management went through the sometimes-violent crucible of labor relations together, and the resulting labor unions and formal agreements that emerged during this period helped ensure that pay and benefit packages provided workers with a minimum living wage and a decent standard of living. If management got out of line, workers had a collective response available to them in the form of strikes and obligatory mediation.

By sharp contrast, this give-and-take negotiation between employers and employees is no longer the prevailing approach, because in many cases American workers are increasingly afraid that their jobs will simply be outsourced to companies overseas. According to Tonelson (2000), "It has become clear that foreign competitors do not even have to enter the U.S. market for liberalized trade arrangements to force down wages and reduce bargaining power. Even the possibility of greater import competition can alarm employers enough to cut costs and employees enough to swallow these cuts" (47). Today, strikes are becoming less commonplace and workers are becoming more docile in their demands — and for good reason: "American workers have learned that if they sought significant raises, their jobs would get imported or outsourced out of existence. Conventional imports and outsourcing are depressing U.S. living standards" (Tonelson 48).

Conclusion

An old adage suggests that a rising tide raises all boats, and this would appear to be the case with outsourcing as well. The research showed that in the short term, American consumers can reasonably expect to witness the continuing outsourcing of even high-paying professional jobs to regions of the world where labor is less expensive and production costs are more competitive. The research also showed that, given sufficient time, workers in emerging nations where American jobs are being outsourced will enjoy increased wages and standards of living and, in a reciprocal fashion, will become more active consumers of American goods and services — to everyone's mutual economic benefit.

This scenario is already playing out in countries such as China, where the cost of labor has increased to the extent that Chinese manufacturers are establishing lower-cost production facilities in Vietnam, for example. It is only a matter of time before workers in Vietnam likewise become more affluent and are able to shift their more labor-intensive jobs to other, less well-situated developing nations. Over time, in this best-case scenario, the tide will in fact rise and everyone will benefit; increased international commerce will create an environment where free trade and democratic ideals can spread widely.

Critics of this view, however, emphasize that much of this global expansion of trade will come at the expense of the American consumer, and that the long-term scenario will likely prove less attractive as foreign interests continue to buy up American property and companies with the money earned from American consumers in the first place. Only time will tell which scenario emerges, but outsourcing is clearly here to stay.

Works Cited

Challenger, John A. "Embracing Today's Global Economy." USA Today 134.2724 (2005): 16.

Domberger, Simon. The Contracting Organization: A Strategic Guide to Outsourcing. Oxford: Oxford University Press, 1998.

Gottfredson, M., R. Puryear, and S. Phillips. "Strategic Sourcing from Periphery to the Core." Harvard Business Review 83.2 (2005): 132–139.

Khanna, Shilpa, and J. Randolph. "An HR Planning Model for Outsourcing." Human Resource Planning 28.4 (2005): 37.

Krishnan, Jayanth K. "Outsourcing and the Globalizing Legal Profession." William and Mary Law Review 48.6 (2007): 2189–2190.

Tonelson, Alan. The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade Are Sinking American Living Standards. Boulder, CO: Westview Press, 2000.