Outsourcing Jobs – Does it Help or Hurt America?
Outsourcing or offshoring refers to a practice where companies based in one country make agreements with foreign affiliates where the firms allow their partners in other nations to carry out services that domestic workers would have provided. Outsourcing dates as far back as the 1880s when some New England textile plants started shifting their manufacturing to other states such as the Carolinas (Pearlstein 1). Through the practice, the companies that are carrying out the outsourcing are able to enjoy several advantages that they can only gain through foreign production. These advantages may include cheaper labor or affordable raw materials. For the past decade, outsourcing has been a controversial issue in the United States, especially as the government struggles to create enough employment for the entire population. President Obama recently raised the issue during the previous elections when he claimed that his opponent, Mitt Romney, had represented one of the companies that outsourced production, denying American thousands of jobs (Pearlstein 1). This argument fits similar sentiments of many Americans and analysts, that outsourcing is damaging the American economy by moving jobs to other areas. Offshoring hurts the United States in many ways, most of which revolve around the damage that it is doing to the job market.
Impact of Outsourcing Jobs on America
Offshoring in the United States started in the 1880s. Since then the practice has expanded to see American companies work with affiliates located in neighboring states such as Mexico and distant nations like China and India (Pearlstein 1). At the end of 2010, two thousand, three hundred American multinational companies were in operation. These firms had twenty-seven thousand affiliate companies working overseas in various sectors and countries. Comparatively, foreign firms only had six thousand affiliates operating within the United States (Jackson 5). The affiliates of these American firms employed thirteen million workers, while the parent companies had twenty-three million workers inside the United States. Conversely, the foreign companies in the United States only employed six million Americans (Jackson 5). There are various reasons why American companies are choosing to outsource many of their services to foreign affiliates. However, one of the most prominent reasons is that outsourcing provides these companies with the option of cheap labor in countries like India and China. This explains why companies prefer to shift only their manufacturing and production facilities to overseas locations. Despite these advantages, the practice of outsourcing has damaged the American economy in various ways.
Firstly, employees of affiliates are increasingly forming a larger proportion of the workforce of US multinational firms. Over the past decade, analysts have collected data indicating that the employees working through affiliate companies are increasingly forming a larger proportion of the workforce of American multinational firms (Jackson 12). Multinational companies increased the number of affiliates they were working with in the 1970s and 1980s when it became apparent that technological developments, particularly in the transport sector, would make it easier for them to outsource operations. During the nineties, the amount of operations that the companies were outsourcing increased steadily (Jackson 12). The fact that foreign-based workers are forming an increasingly large proportion of the employees of American firms is a cause for worry. In 1982, foreign workers formed only twenty-six percent of the workforces of American firms. This number has now grown to thirty-seven percent, implying that the companies prefer to work with foreigners rather than Americans (Jackson 12). This trend reflects negatively on the American job market, as it will become harder for Americans to find employment.
Outsourcing is also harming the American economy as affiliates of US multinationals are increasingly employing more workers than their parent companies. While employment within foreign affiliates and American parent companies tended to rise and fall in unison, the past few years have seen the trend change in favor of the foreign affiliates (Jackson 11). Jackson notes that the foreign affiliates of American companies employed more workers than their parent companies between 2002 and 2008. These firms were only able to reverse this trend in 2009 and 2010 after the recession struck many of the other countries (Jackson 11). The fact that American firms are employing more foreigners will hurt the American economy by making it more difficult for the nation to recover from the recent recession. This is because Americans will have a more difficult time finding employment, leaving many of them reliant on welfare. This situation will also reduce the number of Americans boosting their national economy by reinvesting in it.
The number of affiliates that American companies have and their workforces heavily outweigh the amount of foreign companies offshoring in the United States. Jackson states that American multinational companies work with twenty-three thousand affiliates. These affiliates employee thirteen million people overseas (Jackson 5). Conversely, there are only six thousand foreign-based companies working in the United States, employing just over six million Americans. Though the American affiliates operate in multiple countries, there is still an imbalance when it comes to outsourcing that seems to favor foreign companies over American ones. Additionally, the foreign companies in the US have a higher output per employee (Jackson 21). This implies that the outsourcing is not working well for the American economy as the country fails to recoup enough jobs from foreign firms wile affiliates fail to make adequate returns.
Outsourcing has also damaged the American economy in the past by helping foreign firms steal technological advantages of American companies. Pearlstein explains that outsourcing caused significant damage to the American economy and to domestic technology firms after they outsourced their production to Japan (1). Though the offer seemed lucrative at first, the costs increased after Japanese firms reverse-engineered the technology and used it to start their own companies. Eventually, the Japanese companies were able to grow fast enough to develop dominant brands that took over the industry. Accordingly, outsourcing exposes American firms to such situations where other companies steal their trade and technological secrets (Pearlstein 1).
Outsourcing is practice that has been in place since the
1800s. It has allowed American firms to exploit locational and comparative
advantages for decades but is now causing significant damage to the American
economy. Most of the damage related to outsourcing is occurring in the American
job market. Firstly, foreign affiliates are employing more people than their
American parent companies and their workforces are forming larger proportions
of the entire corporations. This is making it increasingly harder for Americans
to find employment. Secondly, the national economy is not benefiting as much
from foreign investment when compared to the way that American companies are
helping other countries. Lastly, other companies are taking advantage of
American firms and stealing technological secrets when outsourcing takes place.
Through these effects, offshoring is steadily wearing down the American economy
and it is vital that the government introduces various regulations before the
damage becomes irreparable.
Jackson, James K. Outsourcing and Insourcing Jobs in the U.S. Economy: Evidence Based on Foreign Investment Data. Washington, DC: Congressional Research Service, Library of Congress, 2013. Print.
Pearlstein, Steven. Outsourcing: What’s the True Impact? Counting Jobs is Only Part of the Answer. The Washington Post. The Washington Post, 2 July 2012. Web. 26 May 2014.