Introduction

Off-shoring and outsourcing have become especially prevalent in recent years due to the shift in foreign labour markets becoming more competitive, and even favourable in some sectors. It should be noted that domestic examples of outsourcing do not shift the labour market because within the country itself, there are no structural changes. As a result, this paper will focus on outlining the various off-shoring and outsourcing implications and effects on international labour markets.

Outsourcing vs. Off-shoring

Companies have been able to implement off-shoring and outsourcing because of the phenomenon of lower transportation costs and instant communication across barriers of the world. Outsourcing and off-shoring are often grouped together and defined similarly, however they can be understood and interpreted in many ways. Outsourcing is a division of labour by contracting foreign third-parties abroad. In comparison, off-shoring is a more extreme form of outsourcing. It instead relocates key production sectors abroad, but not core innovative activities. Companies will often setup their own facilities which results in a decrease in foreign unemployment. Specific examples related to off-shoring and outsourcing will be discussed throughout the paper.

In a wider spectrum, firms use off-shoring and outsourcing to remain competitive with the ongoing globalization that is present. Both countries involved are able to raise their nation’s GDP by shifting labour output and wages to more affective markets.

Wages and labour

The graph in Appendix 1.1 on labour markets takes a home perspective. Because companies are choosing to solicit lower wages in foreign countries there is a drop in demand for home labour. This graph better depicts the unskilled labour of the home country because it does not explain the opening of new jobs in different sectors. The drop in demand causes a severe drop in wages in the short-run because there is no change to the supply of labour. Over the long-run, wages will rise as supply adjusts, but there will still be lower wages than the starting point at w1. The long-run shows a drop in quantity of labour demanded, which increases the unemployment rate.

As seen in Appendix 1.2, the graph takes a foreign perspective. When outsourcing takes place there is an increase in demand for foreign labour. This causes wages to increase dramatically in the short-run, due to the lack of change in the supply of labour. Over the long-run wages will level out and decrease somewhat, however, they will still be higher than the starting point at w1. The quantity of labour demanded will increase along with employment.

As wages in the home country decrease and wages in the foreign country increase, there will be equalization in the long term global labour price. Ideally with no trade barriers, or transportation costs, the wage for unskilled labour could theoretically become the same worldwide.

Between the graphs in Appendix 1.1 and 1.2 it appears that foreign countries benefit, and this is the evidence that protectionists will supply when looking to create barriers to trade. Although the graphs do depict the labour markets well they do not tell the full story, and need to be looked at in context. In the next section outsourcing and off-shoring with a more analytical view.

Drivers to Offshoring and Outsourcing

From the previous pretext, this analysis has implied a scenario of a developed country off-shoring or outsourcing to a developing country. After observing previous surveys (source McKinley), the popularity among company executives lies in this common trend that has been employed throughout the paper. In the case when developed countries off-shore to developing countries, the main drivers are labour costs and country environmental and/or worker rights regulations and policies. Non-labour costs are expected to fall by half in between 2000 and 2010, however, since 2000 labour costs in developed countries have doubled (Figure 2 in Appendix A).

However, it must acknowledge that there are three other alternatives in which offshoring and outsourcing can take place. In the scenario of a developed country off-shoring to another developed country, the motive is linked to greater proximity resulting in decreasing transportation costs and greater specialization. Additionally it is also a method to avoid a foreign nation’s tariffs or quotas on the company’s final products. This promotes market efficiency and improves competitiveness. This is exemplified by the fact that “Toyota Motor still make[s] Corollas in Silicon Valley ' one of the most expensive places on Earth to produce goods” (Ritter & Sternfels, 2004) because the company believes the high costs of labour are offset by the savings in transportation. Additionally, being close to competitors and partners forms clusters of technological innovation that stimulate company interaction and effectiveness. This type of offshoring process did not become popular until the benefits from low wages available in offshoring were combined with decreasing transportation costs, the dropping of international trade barriers, improved work quality and the advancement of technology (Stack, Downing, 2005).

The cases of developing countries outsourcing and offshoring to developed and/or developing countries are less common. When a developing country outsources to a developed country, the reasons are generally related to technological or sector innovations. Seeing as these countries are in a growth stage, they require greater technical support and stimulation. On the other hand, a developing country offshoring or outsourcing to another developing country would likely happen under the circumstances of specific available resources and transportation costs.

The following is positioned in a point of view where the ‘developed country’ is the home country, while the ‘developing country’ is the foreign country. The remainder of the paper will focus on the notion of a developed country offshoring or outsourcing to a developing country.

Home Perspective

In the last decade outsourcing and off-shoring have driven labour markets across the world to compete internationally. The overall purpose of outsourcing and off-shoring to a developed country is to cut costs due to the cheaper labour that is available. The targeted sectors are mainly manufacturing, indirect services, and non-core intelligent technology (IT) processes, while day-to-day services that require personal interaction have not been affected. However, more currently even higher educated professions are being off-shored, including accountants and lawyers. Additionally off-shoring or outsourcing negatively affects the companies’ support and supply chains and community businesses by customer and revenue loss.

In a parity situation, the labour markets are tangible and flexible in adjusting to changes, however, the short term reality is that many individuals are forced into unemployment. Governments and society have repeatedly practiced protectionism, only to discover it is inefficient and harmful to domestic markets.

Regardless, it must be noted that off-shoring and outsourcing does not apply to every business division or industry.

Targeted sectors

Off-shoring and outsourcing started in the manufacturing sector and initially gained momentum in the 1970’s and 1980’s due to low labour costs. This process did not become significant until these low wage benefits were combined with decreasing transportation costs, the dropping of international trade barriers, improved working standards and the advancement of technology (Stack, Downing, 2005). Off-shoring accelerated in the 1990’s when white collar jobs began to experience the effects. Service jobs, particularly call centers and bulk data processing, were being off-shored (Perry, 2005) to lower wage countries. With technology lowering previous communication barriers, proximity was no longer an issue. The business sectors, whether service or manufacturing oriented, targeted by off-shoring contain the same characteristics. A McKinsey analysis (Agrawal, Farrell, & Remes, 2003) listed out certain indicators of job loss related to off-shoring risks; including if the particular job only requires a high school education, if it can be broken down to smaller tasks that can be distributed to lower skilled workers, or if the company’s competition has lower costs, or does not require interpersonal skills. Product manufacturing like textile, electronics and automobiles are most common to be off-shored. Telephone customer services, telemarketing and data entry work are equally as common to be replaced in lower labour cost nations. Meanwhile, certain industries such as healthcare are not greatly affected due to the personal interaction that is necessary on a day to day basis and that cannot ultimately be easily transferred.

In the last decade especially, the information technology (IT) division has been frequently off-shored. The main reason is the abundance of low cost yet highly educated foreign workers. Although the off-shored positions are generally non-core activities, the IT industry is often criticized for damage to its innovation (Bhalla, Sodhi, 2007). To avoid the loss of core innovative procedures, the employees behind key internal development will not be off-shored. The trend has now turned to off-shoring IT management as home labour costs increases.

More recently, however, highly educated professions in law, finance and accounting are beginning to off-shore or outsource their work. In China alone, there has been a significant increase in the number of university students currently. In 1998 this number was 1.08 million and increase to 17 million in 2003. This indicates an overall increase in the skill level in foreign countries. An example of a company that requires highly skilled human capital is GE plastics and GE consumer finance, which has reported a savings of $2 million annually(source??).

Additionally, the effects are not limited to the businesses themselves. All supply chains, support work, and community businesses involved in the processes of a company will feel a negative outcome. Losing what could be majority clientele could cause greater unemployment. However, this is will force their businesses to become more competitive and attract additional customers. In the long term it would be more beneficial to their companies.

Ideally in an economy with perfect competition, the labour market is flexible and able to adjust on its own. When one industry is idling, labour is efficiently redeployed to a more dominant sector. However, realistically short term labour markets are rigid, resulting in a short term loss of employment. This raises a sense of protectionism, which has created unions and anti-off-shoring laws. Unfortunately, in the long term perspective, these actions only damage the market.

Protectionism

The growing concern of offshoring and outsourcing faces the challenge of job security. This has led to favouring protectionism, which is shown through the implementation of quotas, and tariffs. In the short run, it appears these measures will protect targeted industries from a loss of employment. Additionally by avoiding job loss, it does not raise speculations of economic woes. Although in the short term the targeted industry suffers unemployment, it would redeploy labour to more efficient sectors. By practicing protectionism, other industries will suffer from either trade disputes or the troubles rising from lowering international consumption. In the long run, protectionist measures mostly prove to be inefficient and damaging to the larger economic market.

Tariffs and Quotas (defined in Appendix) are protectionist policies used by governments to shelter their domestic companies from international competition. Both policies will increase domestic production and the prices of goods. Tariffs create revenue for the government and are easier to implement than quotas, and are therefore more favourable. View Appendix 1.3 and 1.4 for economic view.

Tariffs and quotas are the target of constant scrutiny by the World Trade Organization because they are not efficient. The consumer consistently loses in a world of protectionism and it does not allocate resources efficiently. In the current economic environment there could be the first drop in international trade since 1982 (1) because of the declining economies of the world implementing protectionist policies to try to save their economies and jobs. Unrestrained world trade maximizes efficiency and productivity and should not be overlooked to save jobs, or to develop industries in any economic environment.[i]

Example & Evaluation: A company that operates call centers around the world but still operates domestically in the US is Convergys Corporation. It has been hiring jobs at a far greater pace globally than in the US, and has caused demand for domestic jobs to increase. At a job fair hosted by Convergys, it is said that hundreds of people showed up looking for a job that is known to be demanding, but only pays $8.50 an hour. At the same time Convergys is financing an expansion into Latin America, hiring hundreds of new employees at lower prices. Although Convergys has not turned its back completely on American labour, there are far fewer jobs being offered had outsourcing had never occurred. This means that many of the Americans that went to the job fair that did not get positions will have to look elsewhere, and may have to realign themselves with different employment.

This is outsourcing a fairly unskilled position, and will push home labour to develop employable skills that are still in demand domestically. As an increasing number of jobs continue to be outsourced that require low skill levels, domestic citizens need to improve their own skills. This usually results in an increase to post secondary institutes’ applicants and an overall increase in skilled human capital in the long run. Many will find that the outsourcing of call center jobs is taking jobs away, but this is a very narrow minded view. It becomes necessary to outsource these unskilled jobs, so that the economy can specialize in a particular field or in a more dominant industry. The home country will therefore improve efficiency and productivity to compete internationally.

Foreign Perspective

Off-shoring and outsourcing creates high demand for foreign labour markets. This stimulates foreign economies which often results in higher employment and the development of new markets. Although there are benefits that improve foreign conditions, there are still negative implications which may lead to a loss of sovereignty and imposing economic policy onto the developing country.

A developing foreign nation earns a net benefit “in the form of government taxes, wages paid by [home companies] and revenue earned by [foreign] ventures of business process services and their suppliers”[1] in both short and long term periods. There are contrary views of what the developing country loses when it succumbs to firms offering their labour at a low cost. One view is that there is a loss to the foreign nation in any small domestic markets that tend to be dominated by the new off-shored firms. An additional disadvantage is that the reliance of foreign countries on off-shoring causes a vicious cycle in which the foreign country cannot independently sustain itself. The opposing view believes labour undergoes training by established companies that is invaluable. This means that strong multinational companies are allocating money to develop their foreign work force, which in turn creates skilled labour in the foreign countries.

Economic Foreign Affairs
The difference between the policies of China and India is a topic that is frequently discussed. China has dominated India over the past twenty years in terms of economic development; the reason being outsourcing and off-shoring. China has taken an open-door approach to the issue by allowing companies to operate factories manufacturing a variety of different products. As a result, China has seen a massive influx of foreign direct investment, which has resulted in its economy to prosper and grow at an incredible rate. China’s labour markets have been put to use and the influx of jobs led to an increase in the demand for labour and an increase in wages. Recently, economists believe that President Obama may try to control the factors of off-shoring in the hopes of providing more jobs to Americans during the current recession. However, the Chinese economy will stress if America demands less of its labour markets. In this case, it is possible that China could stop financing America’s debt with its massive budget surplus(4). This would push the US to the tipping point and cause a lose-lose situation (1). The final outcome would be China losing job employment from American companies outsourcing and off-shoring to China and the United States losing financing for its growing debt while they are trying to stimulate the economy out of recession.
China has expanded at a rapid pace due to the effects of off-shoring and outsourcing. However, India has lagged behind China more recently because of decisions it made many years ago with regards to its foreign policy. India’s route was significantly different as it took a closed-doors approach to many developed countries and chose a path of protectionism in an attempt to develop its own companies domestically before it tried to compete in the global markets. India currently has its doors wide open to foreign direct investment, but China is still the more favourable. India has not been experiencing the same rapid expansion as China and is currently situated in the shadow of China’s global presence. (2)

Example & Evaluation

Domestically, the criticism of off-shoring and outsourcing stems from the occurrence of exploits of workers in both the home and foreign country; however, this is not the case as seen in the example of Indian outsourcer Genpact. This company provides free transport, free meals and frequent entertainment for the staff working at their call centers (3). Though the employees may be making far less than what the job would pay in North America, the workers are paid incredibly competitive wages relative to other Indian workers. Since India has a significantly lower cost of living than Canada, it is not possible to compare wages nominally, but is possible if looked at realistically. The cost of living is one-fifth of that in Canada; getting paid one-fifth of the average Canadian wage is the ideal Indian wage. Call centers to India through Genpact, from the Indian perspective, are ideal as they are getting enhanced working conditions, higher wages, and learning new personable skills that will improve the labour markets productivity.

A negative consequence that could take place would be the Indian culture being challenged by multinational companies instilling new values and ideas in their employees. When American companies off-shore a process of their operations, they incur a decrease in costs and an increase in profits to match their forefront priority while conducting business. It is argued that the negative externalities may not be accounted for by the multinationals. In our example of Genpact, the Indian employees may be getting higher pay and subject to different working conditions, but their culture is not being challenged. When productivity increases, the economy thrives and develops at a more rapid pace.

APPENDIX?

The product of these new protectionist policies has taken three forms from US legislative to make global sourcing more troublesome and expensive. The first being state legislators restricting overseas call centers by regulating calls that involve residents of their states. This would make disclosure of the foreign call center mandatory, as Americans will hang up or protest when the call center operator discloses that he or she is a foreigner(?? And Need sources! And should we be focusing so much on the us). Secondly, legislation wanted to require that federal contractors perform work exclusively in the U.S. For example, no U.S. private company would be allowed to perform any of their work outside the U.S. Thirdly, bills have restricted U.S. companies from using visas to relocate visa holders to another country but still within the company under the belief that some have been involved in outsourcing that affected jobs within the U.S. Legislation is operating under the belief that “free trade in services is bad and protectionism is good and without cost”. (http://www.networkworld.com/news/2005/112905-offshoring-legislation.html) (so what is the result of this ' cant just state it) '

Tariffs and Quotas

As seen in the graph in Appendix 1.3 a tariff is imposed and the domestic price rises from the world price (P*) to the world price plus the tariff (P*+t). This allows the domestic producers to manufacture more of the good at the new price because they have shelter from foreign competition. If government revenue is greater than the deadweight loss the country benefits from the tariff, but if the deadweight loss is greater there is a net loss on the tariff. Whether it benefits or loses is dependent on the country’s elasticity of demand for the given product. Producers gain from the protection, but domestic consumers lose because they can no longer buy the foreign products at a cheaper price.

As seen in the graph in Appendix 1.4 a quota is imposed and the domestic price rises from P* to the domestic price plus the quota. The difference between the quota graph and the tariff graph lies in triangle C as every other change is very similar. If the import agreements are auctioned by the government the extra revenue of triangle C is taken by the government. If the import agreements are distributed freely, the foreign producers take the extra revenue from selling their product at an inflated price in the domestic market. In this case the producers gain from a lower level of competition, and the consumers lose because they can no longer buy at the world price.

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[1] ^expo 1

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[i] http://web.worldbank.org/external/default/main?contentMDK=20665751&menuPK=3023135&theSitePK=612501&pagePK=2904583&piPK=2904598