Outsourcing American Jobs and How it Hurts the U.S. Economy

Outsourcing is the practice of a country taking jobs from its own shores and sending them abroad, where wages are often lower and other conditions are favorable because they lower a company's overhead (Colvin, 2005). Outsourcing typically involves the reallocation of menial/labor-oriented jobs, often production tasks, to another country, while administrative operations remain centralized in the U.S. Countries are chosen as sites for outsourcing because they offer a number of attractive and competitive benefits. Labor laws, wage laws, and tax laws all create favorable conditions that help a company lower its overhead and increase its profit (Colvin, 2005). Outsourcing in the United States began in the 1980s and has become increasingly popular, particularly in industries such as manufacturing (Colvin, 2005; Grossman & Helpman, 2005; Shao & Smith David, 2007), and has increased in popularity with the explosion of globalization (Mester, 2005).

As pioneer companies in the United States and other western nations began experiencing success with outsourcing in terms of the economy and their businesses, other industries and businesses began to establish operational branches abroad. The core industries that currently utilize outsourcing include phone-based customer service relations, production of material goods (such as clothing, shoes, and car parts), and accounting (Shao & Smith David, 2007). Despite its popularity as a 21st century business practice, outsourcing jobs to foreign countries hurts the U.S. economy, directly and indirectly (Hay & Fricker, 2004). Menial and technological jobs that are outsourced contribute to unemployment in the U.S., while foreign students who come here to study for degrees are returning to their home countries, where increasingly attractive employment packages are offered as incentives.

Companies that use outsourcing insist that there are many benefits that make outsourcing preferable to the centralization of business within the U.S (Shao & Smith David, 2007). Outsourcing lowers a company's overhead because it transfers operations to countries where operational costs tend to be lower (Shao & Smith David, 2007). This benefit is passed on directly to the consumer, who enjoys lower prices and thus has minimal incentive to complain about outsourcing unless it affects his or her community directly in terms of job loss (Shao & Smith David, 2007). The United States national economy benefits as consumers are stimulated to participate in the economy by increasing their purchases; however, this benefit is offset by negative economic variables, which be explored later in this paper. Outsourcing benefits other countries' economies as well, and it is not infrequent to see proponents of outsourcing lauding the fact that this practice results in productive employment for people living in economically and professionally depressed areas (Shao & Smith David, 2007). Outsourcing provides workers in other countries with a higher wage than they might receive normally, and it relieves the burden of another country's government to provide jobs for its workers.

Despite the alleged benefits of outsourcing, this practice also has negative implications, both for individuals and the U.S. economy. Outsourcing contributes to unemployment in the U.S (Hay & Fricker, 2004). As Hay and Fricker (2004) reported, in one California county, the estimated costs of just 2000 jobs outsourced to Europe, Asia, and Latin America will result in the county's economic losses in excess of $949 million annually. Personal losses will be felt as well; of the $949 million, $301 million represents lost wages (Hay & Fricker, 2004). When labor and manufacturing jobs are outsourced, individuals, families, and communities suffer economic losses due to limited job replacement (Hay & Fricker, 2004). Most people who work in these industry sectors are not academically or professionally qualified to work in other fields, so their job choices are severely limited, especially when the trend in a community is for industry to be outsourced. When there is massive unemployment, especially within single communities that lose manufacturing jobs, the entire economy of a region can be threatened, creating other social problems that result in economic costs (Hay & Fricker, 2004).

Such problems may include spiraling personal debt, the loss of one's car or home, and the inability to pay for a child's education, thus perpetuating the cycle of economic and vocational poverty. These are indirect but important economic impacts of outsourcing. Finally, another negative outcome of outsourcing is that jobs in certain sectors-especially technology-effectively lure foreign nationals educated in the U.S. back to their home countries, causing the United States to experience a phenomenon known as reverse brain-drain (Shao & Smith David, 2007). After offering generous scholarships, grants, and in-kind support to foreign nationals, increasing numbers of U.S. educated foreigners are returning to their home countries to pursue lucrative job opportunities offered by United States companies (Shao & Smith David, 2007). In many cases, foreign nationals may already have initiated the visa process that would allow them to remain in the United States to work, but their return to the home country aborts that process, resulting in unnecessary costs that cannot be recuperated by U.S. based employers.

Despite the clear economic disadvantages of outsourcing, it is unlikely that this practice will decrease in popularity or use anytime in the near future. U.S. companies are interested more in their own performance than the national economy, and will defend what they perceive to be the positive effects of outsourcing (Shao & Smith David, 2007). As Shao and Smith David (2007) assert, "profit motivation" drives the offshore outsourcing phenomenon (p. 90). The increasing trend of globalization will also support the continued use of outsourcing as a business practice. As political, legal, and economic boundaries begin to be relaxed, or to dissolve completely, the processes of outsourcing are likely to be facilitated, thereby increasing the use of this practice even more. Finally, it is unlikely that outsourcing will slow down anytime soon because, quite simply, there is limited research that substantiates the exact nature of the impact of this practice on individuals, industries, and the U.S. economy at large.

More research is needed, at an academic level and disseminated through popular media, to demonstrate that the effects of outsourcing are not wholly positive. There is a lack of information among the American public with respect to the pros and cons of outsourcing. The economic dynamics of outsourcing must be understood and strategies introduced so that companies can begin to use outsourcing more intelligently. Companies must understand that they have a responsibility not only to ensure their own profits, but to safeguard the national economy. When U.S. based operations are closed in favor of transferring operations abroad, the impact can be devastating. What the American public needs to know is just how devastating, in terms of actual numbers, the practice of outsourcing is.

References

Colvin, G. (2005). Outsourcing human capital. Change 37(6), 8.

Grossman, G.M., & Helpman, E. (2005). Outsourcing in a global economy. Review of Economic Studies 72(1), 135-159.

Hay, J., & Fricker, M. (2004, September 27). $1 billion impact: Effect in Sonoma County goes beyond jobs lost to offshoring. The Press Democrat, p. A.1. Retrieved April 22, 2007,
from Business Dateline database.

Mester, L.J. (2005). Challenges and opportunities in a global economy: Perspectives on

outsourcing, exchange rates, and free trade. Business Review, 36-48.

Shao, B.M., & Smith David, J. (2007). The impact of offshore outsourcing on IT workers in developed countries. Communications of the ACM, 50(2), 89-94.