OUTSOURCING

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OUTSOURCING

• A Problem? What kind?

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Definitions

• Merriam-Webster Dictionary
• the practice of subcontracting manufacturing
  work to outside and especially foreign or
  nonunion companies
• Updated
• Not just manufacturing, now more often services,
  IT
• Outside but domestic as well as foreign
• - including runaway shops
• Nonunion or union
• Government as well as private sector

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Domestic Outsourcing Example

• University of Texas at Austin
• Fires its own janitorial workers
• Contracts to an outside firm to provide
  janitorial services
• Those workers have lower wages, fewer benefits
• Those workers are non-union
• Those workers have fewer on-the-job protections
• Those workers can be reorganized to intensify
  their work

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Offshore Outsourcing Example 1

• Older notorious example in manufacturing
• General Motors in Flint, Michigan
• Closes 11 plants
• Fires 40,000 unionized workers
• Opens new plants in Mexico
• non-union, brutal repression of efforts to
  unionize
• Showcased in Michael Moores film Roger Me
• Images of boarded up homes and businesses
• Interviews with fired workers
• Ducked by GM CEO Roger Smith

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Offshore Outsourcing Example 2

• More common contemporary example
• Dell Computer Co. Call Centers
• Fires a bunch of its own technical assistance
  workers in Austin, Texas
• Hires a bunch of new technical assistance workers
  in India
• Customer phone-in requests for technical
  assistance are re-routed to India
• Workers in India paid lower wages, have fewer
  benefits
• Dells costs are reduced, profits rise.

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Government Outsourcing Example

• Current notorious examples in government
• US Government, Department of Defense
• Invades Iraq
• Instead of mobilizing internal military
  resources,
• DoD gives non-competitive contract to Halliburton
  to provide meals to soldiers in the field, and
  hires mercenaries to torture Iraqi prisoners.

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Reason for Outsourcing

• Primary reduce costs
• Cheaper labor, products, services or government
  imposed costs such as taxes or environmental
  controls
• Reduced costs in private sector means higher
  profits
• Cost reduction via outsourcing
• Outsourced labor _at_ reduced wages, benefits,
  safety
• Reduced cost of services generated by such labor
• Cheaper than internal generation of new kinds of
  labor skills and capabilities

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Outsourcing Consumption

• Reduced costs may, or may not, be passed along to
  consumers in the form of reduced prices
• Depends on impact on profits
• Reduced prices might give larger market share
• Price fixing can keep prices high so lower costs
  only benefit profits
• Domestic Outsourcing that lowers wages benefits
  reduces domestic consumption directly
• Offshore Outsourcing that raises employment
  and/or wages overseas raises consumption overseas

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Objections

• 1 Outsourcing causes increased unemployment
• 2 Outsourcing causes reduction in wages
  benefits
• 3 Outsourcing provides private corporations
  with a means to escape government regulation
• 4 Outsourcing provides private corporations
  with a means to escape taxation
• 5 Reduces incentives for raising productivity

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1 Increased Unemployment? - I

• Domestic outsourcing may, or may not, increase
  domestic unemployment.
• Offshore outsourcing usually expected to increase
  domestic unemployment and offshore employment
• Might increase domestic employment depending on
  secondary effects, e.g., use made of increased
  profits, impact on international trade.
• Poor data to judge the size and net result of
  opposing effects

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1 Increased Unemployment? - II

• Has become an issue in presidential campaign
  amidst current jobless recovery
• John Kerry has attacked offshore outsourcing as
  resulting in fewer US jobs, proposed
  countermeasures
• Bush Administration, through Gregory Mankiw, has
• 1) Downplayed outsourcing as source of
  unemployment
• 2) Defended outsourcing as variation of trade
• Size of Effect on Employment?
• Large in absolute terms
• Small in relative terms

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1 Increased Unemployment? - III

• Absolute terms?
• Cutting Edge Information says value of offshore
  outsourcing was 350 billion in 2003 and growing
• Forrester Research says 3.3 million service
  sector jobs will be moved off-shore by 2015
• Another study says 14 million service jobs
  vulnerable
• Relative terms?
• January 2004, US had 108 million service sector
  jobs
• BLS estimates US will have 130 million by 2010

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2 Reduction in wages benefits? - I

• Domestic Results
• Reduction due to firings
• Reduction due to substitution of jobs with lower
  wages and lower benefits for better jobs
• Whether jobs of new workers, or
• New, less compensated jobs for old workers
• Reduction due to fired workers taking lower paid
  jobs with fewer benefits
• (Mankiw denies this in Economic Report of the
  President)
• Reduction due to acceptance of lower wages etc by
  workers afraid of being the next to be replaced

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2 Reduction in wages benefits? - II

• Offshore Results
• Possible increases in local wages and benefits
• Increases due to increased labor demand
• Direct in affected labor market
• Indirect as a result of increased demand

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3 Avoidance of government regulation

• Avoid environmental restrictions
• Avoid hours wages laws
• Avoid OSHA restrictions
• Avoid unions and labor rights generally
• Above issues key in debate over NAFTA
• Avoid restrictive laws
• Avoid enforcement of laws (bribes, etc.)

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4 Avoidance of taxation

• Kerry Campaign issue
• close tax loopholes that make it profitable for
  corporations to move overseas
• unpatriotic practice of U.S. corporations moving
  offshore simply to avoid paying their fair share
  of our nations tax burden (August 2003)
• Little data on degree to which this occurs

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5 Reduces incentives for raising productivity

• Outsourcing for cheaper labor supply reduces cost
  of labor vs. cost of capital
• Shift in relative factor costs shifts relative
  factor use
• Lesson of Keynesian period if business is forced
  to pay more for labor it will be led to
  substitute capital for labor and raise
  productivity
• If business can escape to cheaper labor, that
  incentive is reduced

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Historical Perspective - I

• Outsourcing understood broadly has been
  around throughout history of capitalism its not
  a new phenomenon
• Mankiw is right that offshore outsourcing is
  very much like trade. Its also like immigration.
• British outsourced their supplies of raw
  materials by getting cotton from US and later
  Egypt for textile industry
• US cotton plantation owners outsourced their
  labor by enslaving Africans

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Historical Perspective - II

• Attitudes depend on circumstances, protests grow
  in difficult periods
• Before protesting outsourcing, workers
  protested
• Uncontrolled waves of immigration (1920-30s)
• Runaway shops of multinational corporations
  (1960-70s)
• Apartheid and brutal labor conditions overseas
  (1980s)
• Offshore sweatshops (1980-90s)

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Outsourcing Viewed from the Top

• Outsourcing reduces costs to firms
• Outsourcing increases efficiency
• Outsourcing increases flexibility and
  adaptability
• Offshore outsourcing requires free trade
• Offshore outsourcing requires free capital
  mobility
• Offshore outsourcing, like trade and competition
  generally, is good for both country of origin and
  country of new source

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Outsourcing viewed from the Bottom

• Outsourcing raises costs to workers
• Increased efficiency and flexibility for firms
  means greater risk, uncertainty, anxiety, stress
  and ill-health for workers
• Free trade facilitates pitting weaker workers
  against stronger workers through substitution of
  foreign for domestic production
• Free capital mobility facilitates disinvestment
  to undercut workers, 1st at home, later abroad
• Offshore outsourcing pits workers in one country
  against workers in other countries.
• Competition is euphemism for pitting workers
  against each other, whether domestically or
  internationally.

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Policy Conclusions

• For business
• Do not restrict outsourcing or penalize companies
  for outsourcing, either domestically or
  internationally
• For workers
• Short run
• Domestic policy minimize costs to workers
• E.g., advance notice, full compensation,
  business as a whole should cover retraining and
  relocation costs (some of this in Kerry Campaign)
• Long run
• No domestic solution, which implies
• organize internationally (like business) to
  achieve leveling up instead of leveling down,
  as a step in moving beyond the endless
  subordination of life to work and the pitting of
  people against each other characteristic of
  capitalism.

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-End?-

• These slides were prepared by Professor Harry
  Cleaver, Department of Economics, University of
  Texas,
• Austin, Texas.
• He can be reached at hmcleave_at_eco.utexas.edu