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July 26, 2010

An Open Look at Outsourcing

“When it comes to outsourcing, don’t listen to the politicians, listen to the laws of economics.”
From 2002 to 2007, the outsourcing of U.S. jobs to overseas facilities was a mainstream discussion in the United States.  The housing crisis, financial panic, and subsequent recession have taken the focus away from outsourcing over the past couple of years.  Despite this, I believe that continued disappointment in the jobs market (coupled with unemployment benefits issues) will bring outsourcing back to the front lines.  With that, we will get all the economic fallacies and fantasies surrounding outsourcing as well.  Therefore, it’s time to set the record straight about outsourcing.
The liberal view of outsourcing is that it is a zero sum game.  For every job created by a multi-national company in India or China, one is taken away in the United States.  The other side of the liberal coin on outsourcing is that for every job lost in the U.S., at least one job is moved to China or India.  We hear this in union talk and on a variety of different television campaigns.
Another propaganda tool used by the left is one of exploitation.  They equate the wages paid to these overseas workers to the equivalent in the United States.  You will hear things like “workers are being paid less than half of what the minimum wage in the United States.”  This theory assumes that every economic factor in the U.S. is the same as an overseas country.
From the American consumer’s point of view, outsourcing allows for products to be produced at cheaper prices, therefore, consumers get more for less when buying products made overseas.  If the government were to step in and reduce the amount of imports under the guise of “protectionism,” consumer prices will rise.  Consumers facing higher prices will consume less.  In the current economic environment, protectionism would hurt the economy.  For more information on this, study any tariffs the U.S. has passed in the last 100 years.
From the overseas worker point of view, outsourcing represents an opportunity to build wealth and join the middle class.  Let’s take China for example.  As seen in this article, China’s middle class (or wealthier) population has gone from less than 1% in 1985 to a projection of over 76% by 2015.  Ask the middle class worker in China if they consider what is happening as “exploitation.”
There are drawbacks to outsourcing.  The first is that it takes six to seven outsourced employees to meet the productivity and efficiency of one U.S. worker.  Some of this is due to technological differences, however the differences in education and training also plays a role.  In some disciplines, it is actually more expensive to outsource the work than to keep it within the country.
The other issue is the cultural differences.  Employees in other countries have different views of what a management structure is and in many cases, how the organization functions on a basic level (considering regulations, intellectual property rights, etc as well).  These differences can create “snafus” in the communications between the different country locations.
Overall, when examining outsourcing, understand that there are costs and benefits to this economic practice.  Don’t listen to the politicians, listen to the laws of economics!

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