Tuesday, September 19, 2006

Labor Market Issues - Outsourcing

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Today I am starting the posting of information relevant to one or all of the courses. These postings are an attempt to help you better understand the course and serve in place of the lecture I would give if this were a class that met in a classroom at a specific time every week. For today's update on the three classes click on the link above.

Outsourcing refers to paying someone else to do what you are currently doing. The term applies to businesses or other organizations (including government) that take work being done by their employees and contract with an outside firm to do the work instead. The current debate over outsourcing involves U.S. businesses closing down a division and contracting with a foreign firm in a foreign nation to do the work.

Domestic outsourcing (i.e., hiring a local firm to do the work) is commonly accepted today but was a hot topic a few years ago – Unions hurt when say, maintenance workers at XYZ corp are covered by the contract with the company and then the company outsources to a low bid company and lets its own maintenance workers go – Union now has to negotiate contracts with numerous small companies rather than one big one.


Domestic outsourcing benefits company by reducing costs (is also good bargaining chip when negotiating labor contracts), it is also more efficient for economy as a whole and can be beneficial to individual workers. Peter Drucker in 1970s Op Ed piece in The Wall Street Journal described hospital maintenance workers as having limited advancement potential since hospitals are geared toward doctors and nurses. Job advancement for maintenance people in a such a situation is limited to supervisory positions - middle and top management positions are beyond their reach. But when the work is outsourced, a worker, doing the same job in the same hospital, but as an employee of the maintenance company, now has potential to advance as company focused on just maintenance people.


Foreign outsourcing is criticized because of belief that jobs "lost" to foreigners. But companies outsource when demand for labor by other companies in other industries make wages too expensive in their industry. A couple of years or so ago, AOL in Tucson planned to outsource one of its tele-services lines and lay off a number of workers. There was big outrage in the local computer community in the weeks leadingup to the cut. However, when AOL went through with the plan and closed the line, only one or two people were laid off – the rest were assigned to other AOL divisions that were short of people. Also, creating jobs overseas means jobs and incomes for those people which translates into demand for more goods many of which come from the U.S. A recent entry in a tech blog illustrated this phenomonma of outsourcing creating more jobs in the U.S. A consultant was visiting a tele-services center in India and commented to his host that the operation was very good for India but had cost the U.S. jobs. The Indian manager immediately objected and began to point out that practically everything in this state of the art operation came from the U.S. The computers were made in the U.S., the design of the building was done by U.S. consultants, the phone lines and networking had been done by U.S. firms and even the bottled water was purchased from Coca Cola. The U.S. had "lost" the teleservices jobs but the need to build and support the operation in India had created more jobs in other U.S. industries. So foreign outsourcing is like domestic outsourcing in that it really results in new jobs being created in U.S. (i.e., more jobs than before) but not necessarily in the same companies, lines of work or geographic areas.

For More information on outsourcing and jobs in the U.S. see More Jobs Despite Outsourcing.

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