|
 |
OUTSOURCING:
LONG-TERM BOOST
OR
SHORT-TERM DEATH?
|
By Bryan Bezold
RCGA Director of Research and Chief Economist
In the past year, it has been easy to find articles or news reports
about American companies “outsourcing” or “offshoring” jobs to other
countries. This phenomenon has been widely blamed for the slower
than expected pace of job growth in the U.S. The debate seemed to
almost boil over in February, when the chairman of President George
W. Bush’s Council of Economic Advisers, N. Gregory Mankiw, made
remarks to the effect that outsourcing jobs overseas would have
a positive long-term effect on the U.S. economy.
Although Mankiw is a widely respected economist, he was assailed
by critics. But liberal commentators have made similar remarks in
the past. According to Robert Reich, former Secretary of Labor in
the Clinton Administration, “Outsourcing does not reduce the total
number of jobs in America.”
So it appears that we have two conflicting views. On the one hand,
we see disturbing reports of companies cutting jobs—sometimes to
move across the country or across the world. On the other hand,
apparent experts of varying political stripes claim that this outsourcing
isn’t a problem, but a long-term boost.
What is really happening?
Part of the vitriol surrounding the outsourcing debate stems from
the fact that U.S. employment isn’t growing as fast as we’d like.
Until the March 2004 employment report showed that the economy had
added over 300,000 jobs, the economic recovery was doubted by many
observers. And even though the recovery is underway, most major
metropolitan areas—as well as the country overall—are still at employment
levels far below their 2000 peaks.
During periods of weak economic growth, it’s easy to forget that
business cycles have always been with us. But the reality is that
outsourcing isn’t new. The U.S. economy has been the strongest in
the world for decades because American businesses constantly strive
to become more efficient. In many cases, companies accomplish this
by selecting the parts of their businesses that are important—but
not necessarily their specialty—and hiring an external firm to perform
those tasks.
Many of us have worked at firms where, for example, a third party
is hired to take care of payroll processing functions. A small company
that employs a few people may not be as efficient at payroll processing
as a large company that can reap the benefits of economies of scale.
This logic is what causes small and medium-sized firms to hire lawyers
or accountants on an as-needed basis, rather than retaining such
expertise on staff. The firm can reinvest those savings into their
primary business, either by purchasing new capital equipment, or
hiring new workers.
So outsourcing isn’t new, but it has changed. As the economy has
become more and more globally integrated, firms can compete for
projects anywhere in the world. And, because of the relentless pace
of innovation, yesterday’s specialized skill can become today’s
cheap commodity. The result? When companies seek bids on work they
decide to outsource, those bids can come in from around the world,
not just from the local metropolitan area or state. Today, companies
are able to outsource highly sophisticated or specialized work to
places such as Bangalore, India.
A commonly-heard sentiment is that it is bad for the U.S. economy
when firms outsource jobs to other countries. But that is by no
means a certainty. Indeed, there are two absolute, irrefutable benefits
to outsourcing. The first, as we’ve mentioned, is that firms that
outsource work realize a cost savings, which can be used to hire
more workers in other occupations or invest in more capital equipment
so that workers can be more productive. In many industries, these
savings are passed along to the consumer in the form of lower prices.
The second benefit is harder to visualize, but is nonetheless important.
When jobs move overseas, they provide additional income in foreign
countries. To some people that may seem like a net loss, but workers
in foreign countries will spend that money—sometimes on goods exported
from America, and maybe even St. Louis. After all, in 1998, St.
Louis-area firms exported $4.8 billion worth of goods and services
to foreign countries, including $124 million to China and $27 million
to India.
Furthermore, it isn’t hard to find examples of outsourcing here
in St. Louis that benefit the regional economy. Both QSAccess and
Ascent Corp. are St. Louis-area firms that provide specialized IT
services to firms which have no need for an IT staff. MRCT Benefits
Plus, a Clayton-based company, provides human resource services
to globally known St. Louis companies such as Anheuser-Busch Cos.,
Emerson, and Monsanto. In late 2000, Chesterfield-based Amdocs entered
into a seven-year agreement with Nextel Communications to provide
customer billing services. And, in 2001, GKN PLC, a British-based
manufacturing firm, acquired former assets of the McDonnell Douglas
Corp. so they could provide parts to The Boeing Company more efficiently.
Because GKN could have chosen to supply Boeing with parts made from
elsewhere in the nation—or the world—one could argue that GKN outsourced
jobs to St. Louis.
|
|
|
|
|
-
- - - -
- - - -
- - - -
- - - -
-
-
- - - -
- - - -
- - - -
- - - -
-
-
- - - -
- - - -
- - - -
- - - -
-
-
- - - -
- - - -
- - - -
- - - -
-
|
