EC321-Topic #4: Outsourcing

It is usually reported that the U.S. is losing jobs to other countries like India and China for certain manufacturing and service jobs. However, recent reports have come out of India regarding their ‘outsourcing’ of outsourced jobs. This is unexpected at this point, but not unprecedented. When a cost of production become just slightly more expensive than it’s alternative, the incentive exists to switch means of production.

WiPro is one of the largest Indian companies, and they are one of the leaders of the movement of outsourcing to begin with. By studying the experience of firms who specialize in outsourcing we can improve our understanding of why firms outsource jobs. Stories of job movement around the world help provide some insight.

Questions you might try to answer:

  • Can you find any evidence of other companies or countries that are ‘outsourcing’ jobs that were initially outsourced?
  • Explain the justification for outsourcing from the U.S. to another country.
  • Why do we not outsource jobs to countries in Africa or the Caribbean?
  • Examine the rationale of protecting domestic jobs by punishing firms who decide to export jobs? If outsourcing of outsourcing has occurred so quickly, what might be the impact of this type of legislation?

Remember… I would like your statements to be as subjective as possible, or in jargon terms, positive and not normative in nature. Also, remember, I want you to keep your descriptions short, basic, and related to classroom content. Read other students comments before posting, and please leave your name with your posting.

6 thoughts on “EC321-Topic #4: Outsourcing”

  1. One of the primary reasons that firms choose to outsource is so that their cost of production decreases. Although cost of production may decrease per unit of labor – there is the chance that workers who are laid off or not hired to begin with in the firm’s country of origin have a better skill set and would produce more within a given amount of time than the cheaper labor that is hired elsewhere. For example, a company centered in Atlanta, Georgia produces microphones. They decide to outsource their labor to India because the hourly wage per worker is much cheaper there than in the United States. It’s possible however, that the average productive capability of the workers in India may be less than those that could have been hired in the United States. This leaves the homeland workers as having the potential to produce more microphone parts per hour than those in India, so even though the American workers may have a higher reservation wage – they still may be a cheaper means of production because they produce more per hour. Basically, outsourcing has a large potential to cause lots of job skill mismatches. Of course, there are still many other benefits such as the fact that due to time zone differences – production could be maintained 24/7. Also, if there is a need or desire to rush goods into the market, it can be done more easily with what seems like non-stop production capabilities. -Dan

  2. I think that the subject of outsourcing is one that is, to some extent, out of the control of government legislation. It seems it would be difficult to affectively punish a large multinational firm for outsourcing jobs from one country. I think situations like this speak to the argument that looks at the world as a transaction or flow of capital and labor rather than looking at the world as many nation states full of competing firms. Under this argument, I do not see how individual governments can institute strict policies without the backing of international legislation from the UN, Davos, or what have you. -Tadge

  3. The outsourcing of outsourcing movement has substantial implications in the mobility of labor – in the US and worldwide. The rationale for outsourcing is that labor in the US is significantly more expensive than the exact same labor in a developing country, like India. Therefore, companies like Dell can take advantage of these lower cost economies by setting up non-core operations there. Understanding this new (and unexpected) trend of outsourcing outsourced jobs back into the US is important because it is a direct result of an increasingly global free market and actually proves its efficiency. The fact that it becomes cheaper for Indian companies to send labor back to countries like the United States demonstrates a trend in world-wide wage convergence. Technology has contributed to the “flattening” of a global economy, and thus, the playing field has leveled. The world will not be able to sustain different wage rates in different countries since labor mobility has increased and become almost inherent. I believe this signals that there will soon be a global equilibrium of labor demand and supply – thus creating complete wage convergence and equal wage rates regardless of geographic location.

  4. From what Dan Cronin said, I believe that it won’t create as much of a job skill mismatch due to the fact that most of the jobs require very little skills and are heavily reliant on the available technology when outsourcing jobs to another country.Also I think the main reason that we do not outsource jobs to the Caribbean or to Africa is because the government of those countries are not as stable as India or China or Indonesia. With an unstable government, there could be an uprising and the companies who outsourced there could lose their entire investment.

  5. Like the article says, it was bound to happen. It seems that these Indian companies who specialize in information technology and communication have a competitive advantage over U.S. firms in organization and division of labor. This is really the only explanation because if these skills were the same in America, we wouldn’t be outsourcing anymore because the increase in wages has made it no longer cost effective. This outsourcing of outsourced jobs should be the stepping stone between rampant outsourcing and the realization that outsourcing isn’t really about costs but instead about productivity in specific areas such as communication and information technology. This should eventually lead us to retrain parts of our workforce so that we can bring outsourced jobs back to the U.S., which may actually result in lower costs.

  6. Outsourcing to India has long been blamed for taking jobs away from Americans. However, now Indian Outsourcing firms have started re-outsourcing their labor to wealthier, foreign nations including the U.S. This suggests that labor in America may still be able to provide these services at a competitive rate, meaning that outsourcing is not as much a threat as it once seemed. If Indian firms are profiting by outsourcing some of their labor to states like Idaho, Virginia and Georgia, then American firms follow suit and use the cheap domestic labor to provide these services that are currently being outsourced.-Luc

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