Globalization of markets and businesses’ desire to maximize profits has led to the outsourcing of labor overseas. Workers in countries such as India or China may be able to do the same work for a fraction of what domestic workers demand, which will cause jobs to be sent overseas.
At least according to economists, this is a good business strategy since labor is allocated to its most productive use. Ultimately, this should result in cost savings for consumers, as they will be able to pass on those savings to buyers, and shareholders will see their profits increase. As the world became an integrated global marketplace, the United States may not have maintained its status as an economic superpower without outsourcing.
Outsourcing causes some unintended negative consequences, as with most things.
Increasing competition and lowering entry barriers with outsourcing
Free markets promote increased competition, which is generally beneficial for consumers but hurts businesses that can’t keep up with it. A new entrant is able to join industries where labor is too expensive otherwise through outsourcing.
It is more likely for a startup company seeking to manufacture electronic devices to succeed if it can find cheap and eager foreign laborers, not American workers. It is possible to greatly reduce the barriers to entry that once existed because of high capital requirements at the start-up phase.
Initial industry leaders who outsource will enjoy a competitive advantage, but that advantage will slowly erode as more companies follow suit, and more new entrants are encouraged to join. As soon as everybody participates, the initial advantages are gone forever.
As a result of outsourcing, supply chains fragment and disintegrate, causing new competition. Thus, new entrants may emerge to exploit the fact that product design and customer support may take place in one region while manufacturing may be performed in another. Essentially, many parts of an organization are subcontracted, which means that any new company can hire the same contractors (or competitors of those subcontractors) to create identical products for around the same price as the big players.
Workers’ Loyalty Is Reduced by Outsourcing
Workers will become discouraged if they believe at any moment that their jobs will be outsourced to cheaper foreign labor. Increasingly, even employees at managerial levels don’t feel confident that their jobs are secure and safe as outsourcing has expanded from unskilled to administrative and intellectual positions. This can have negative effects on workplace productivity and employee satisfaction.
In addition, any employee or group of employees who feel unjustly treated or unfairly underpaid can leave a company and start a new one, which is in direct competition with their previous one. Due to the lower barriers to entry, outsourcing has a greater chance of becoming a reality than ever before.
Outsourcing can also deter consumers. Customer support and technical support are frequently outsourced to countries such as India. In some cases, customers may lose trust in an American company that answers the phone with a foreign accent and may even blame that company for the loss of American jobs. Medical or financial information must be shared with foreign strangers, which makes the situation even more sensitive. Social media may be used by customers to spread negative sentiments about these companies.
Domestic jobs may be eliminated by outsourcing
Although there is a lot of debate about whether outsourcing causes unemployment or actually creates jobs, it cannot be denied that it eliminates some types of work. It is likely that workers who lose those jobs move on to better jobs in new industries or as a result of better education and training.
A prime example of this is manufacturing jobs. Many American products are manufactured in foreign factories today. While it is true that manufacturing in America has not changed much as a percentage of gross domestic product (GDP), the types of jobs available in manufacturing today have changed.
Automation, precision machinery, and information technology dominate today’s U.S. factories. Most repetitive manual labor jobs involving low-skilled labor have been outsourced either to foreigners or to technology. Due to this, entire communities that once relied on factories and assembly lines are now almost ghost towns. One example of this is the Rust Belt. Throughout the Northeast, Mid-Atlantic, and Midwest, the shrinking industrial sector is primarily responsible for economic decline, population loss, and urban decay.
Insourced countries are affected by outsourcing
China’s rise as a global exporting powerhouse has been attributed to the rise of its middle class in the past several decades. Chinese workers will demand a higher wage as more work is outsourced to that country. Despite China’s competitive advantage in low wages, ripple effects predict that it will eventually lose that advantage, and this will cause a loss of economic production as well.
Furthermore, outsourcing takes laborers out of their own countries’ workforces and puts them to work on tasks that aren’t as crucial to their own country’s development but pay better anyway. A call center operator can earn more money in a city than in a rural area.
Where will the cheap labor regions go when they are no longer available? Consequently, companies will turn to technology to replace workers, resulting in the unemployment of unskilled labor at home and abroad.
Investing from abroad, especially for manufacturing, can lead to the construction of factories that discharge pollution and carbon dioxide into the air, posing a threat to workers’ health and the surrounding community. China is planning to implement a national emissions trading system, where CO2 credits will be traded with other countries in order to offset the increase in pollution.
It is a good business strategy for companies looking for low-cost labor to gain a competitive edge. The result is higher profits and lower consumer prices.
In addition to lowering the barriers to entry, outsourcing has unintended consequences such as raising the level of competition in an organization. As a result, both employee and customer loyalty and satisfaction are affected.
In addition to disruptions in the labor market, outsourcing can also result in entire communities being deserted. Outsourcing can ultimately lead to unanticipated consequences in the country where the work is sent.