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Outsourcing U.S. Jobs Abroad: Why?

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Abstract

Although the United States is the worlds biggest proponent of capitalism and free trade, the time has come to address what global economic pressures have done to Americas labor force. From the Second World War to approximately the late 1990s, the U.S. labor market was robust and full employment without inflation appeared to be feasible. However, the rapid spread of global technology provided the means by which all resources, including labor, could be transferred or utilized around the world with ease. From the 1980s forward, the American government began to favor deregulation, less government regulation on business, as well as more favorable business taxes. From 2000 to the present, the U.S. government encouraged the exporting of American jobs to other countries that provided less expensive labor as well as other favorable political and economic incentives. This was done by passing favorable domestic tax legislation for those firms that wished to outsource production. This paper addresses the dilemma that the U.S. economy now faces with high unemployment and its contribution to slow economic growth. Some of the economic, legal, and political factors that have encouraged the outsourcing of jobs are also addressed. A brief review of some of the suggested ways to help reverse U.S. job losses due to outsourcing is also explored.
International Business & Economics Research Journal March/April 2014 Volume 13, Number 2
Copyright by author(s); CC-BY 253 The Clute Institute
Outsourcing U.S. Jobs Abroad: Why?
Jeffrey Schieberl, Pepperdine University, USA
Marshall Nickles, Pepperdine University, USA
ABSTRACT
Although the United States is the world’s biggest proponent of capitalism and free trade, the time
has come to address what global economic pressures have done to America’s labor force. From
the Second World War to approximately the late 1990s, the U.S. labor market was robust and
“full employment” without inflation appeared to be feasible. However, the rapid spread of global
technology provided the means by which all resources, including labor, could be transferred or
utilized around the world with ease. From the 1980’s forward, the American government began to
favor deregulation, less government regulation on business, as well as more favorable business
taxes. From 2000 to the present, the U.S. government “encouraged” the exporting of American
jobs to other countries that provided less expensive labor as well as other favorable political and
economic incentives. This was done by passing favorable domestic tax legislation for those firms
that wished to outsource production.
This paper addresses the dilemma that the U.S. economy now faces with high unemployment and
its contribution to slow economic growth. Some of the economic, legal, and political factors that
have encouraged the outsourcing of jobs are also addressed. A brief review of some of the
suggested ways to help reverse U.S. job losses due to outsourcing is also explored.
Keywords: Insider Trading; Congressional Stock Trading; Congressional Ethics
INTRODUCTION
n the aftermath of the Great Depression, the Second World War provided full employment for America’s
labor force. When the war concluded, the United States provided finished goods and services to most of
the free world and was blessed with the resources to do so. This reality lasted from approximately 1950
through 1980. The 1980’s saw the beginning of a broad-based creation and implementation of technology. This
improved economic productivity created an environment for less skilled labor. The American auto industry is a
classic example where assembly workers were paid wages and benefits at levels that could later be easily undercut
by lower cost automation. During the 1980’s, the American government established itself on the platform of less
government regulations, lower taxes for business and individuals, and the call for less government spending. This
public policy became known as “Reaganomics.” During this period, the federal administration also promoted
deregulation of America’s industrial economy and a stance against the membership of the air traffic controllers. This
appeared to mark the early beginning of a slow decline in union membership nationwide. The 1990’s was more or
less a magnification of the 1980’s with the U.S. economy reaching new heights of prosperity in productivity,
economic output, full employment, employment, as well as price stability. This was mostly encouraged by
significant advances in applied technology. The political tenor of the 2000’s was focused on further reductions in
taxes that “encouraged” the outsourcing of production and U. S. jobs, further business deregulations, and increases
in government spending. In addition, the economic volatility of the 2000’s was exacerbated by the 911 terrorist
attacks and the 2008 financial meltdown. The above events put additional negative pressure on corporate financial
statements and precipitate the need to further reduce production costs. Hence, the above events encouraged stepped-
up emphasis on exporting U. S. jobs abroad in an effort to reduce costs and attempt to improve business profits.
THE MACRO ECONOMY AND PRODUCTION COSTS
As was discussed earlier, the beginning of the last decade was riddled with a volatile U.S. economy. The
2008 recession caused many American companies to focus on cost cutting to salvage their profit margins. At the
I
International Business & Economics Research Journal March/April 2014 Volume 13, Number 2
Copyright by author(s); CC-BY 254 The Clute Institute
center of the production cost cuts was the domestic labor force where 500,000 American jobs were eliminated while
729,000 workers were hired overseas. Jack Welch, the past CEO of GE, was quoted as saying “. . . companies
should seek to lower costs and maximize profits by moving operations wherever is cheapest.” It is not just cheaper
labor costs that are motivating U.S. firms to exports jobs. Offshoring can reduce the level of workplace and
environmental regulations (The Week, 2011).
OUTSOURCING AND THE U.S. ECONOMY
In general, outsourcing that has become prevalent over the last several years has been the shifting of menial
U.S. jobs to China and other low labor cost countries, while domestic administrative jobs have remained (Colvin,
2005). Irrespective of the popularity of outsourcing, it is hurting the U.S. economy directly and indirectly. Not only
are many of the menial jobs being exported, foreign students that once opted to stay in America after graduation are
now going back to their home country (Shao & Smith, 2007). Outsourcing has contributed to the current high
domestic unemployment. According to J. Hay & M. Fricker, “when labor and manufacturing jobs are outsourced,
individuals, families, and communities suffer economic losses due to limited job replacement” (Hay & Fricker,
2004). According to Shao and Smith, we continue to see several cases where U.S. educated foreign nationals leave
America after graduation and accept work with a foreign-based U.S. firm. Martin Schmidt, associate provost at
Massachusetts Institute of Technology, stated the following about the American labor pool in reference to the skill
set needed to be employed at Apple Computer Corporation:
American companies say they need engineers with more than a high school education but not necessarily a
bachelor’s degree. Americans at that skill level are hard to find, executives contend. There are good jobs available,
but they require certain skills; however, the country doesn’t have enough skilled labor to feed the demand.
Lawrence Katz, an economics professor at Harvard, asks the following: “. . . will someone in his 40’s have
the skill for a middle class job, or will he be bypassed for a new graduate and never find his way back into the
middle class? (Katz, 2012) The questions and concerns are perplexing and suggest that the outsourcing of
American jobs is complex and not just about cheaper labor abroad. The authors argue that the low skill levels of
American high schools students is woefully subpar compared to other developed nations worldwide and is a
contributor to outsourcing. In the past, the lack of skilled American labor has caused some U.S. firms to hire skilled
foreign students who studied in the United States. However, it has been less convenient over the last several years
because those workers find better total compensation in their home country. In addition, it has become more difficult
for foreign job seekers to get U.S. work visas (Duhigg & Dradsher, 2012).
WHY OUTSOURCING IS POPULAR WITH AMERICAN BUSINESS
While lower wages is often used as the primary reason to outsource, there appears to be several other
reasons why American businesses are enticed to ship jobs abroad. Surveys from several data gathering sources
reveal that there are at least ten potential reasons why American business has become so enamored with outsourcing
jobs (and it is not just because of cheaper labor) to China, India, and South America. Seemingly prompted by the
evolution of globalization, a list was condensed and summarized by a survey researched by Billshrink - lower wages,
less regulatory costs, tax benefits, ability to downsize at will, risk management, quicker turnaround time, uncertainty
over political/business climate, accelerated time to market, commodification, and contractual certainty (Billshrink,
2011).
Lower Wages
Simply put, wages for manufacturing jobs in the U.S. are generally more expensive than the vast majority
of developing countries and are likely the most attractive rationale for outsourcing American jobs. It is estimated
that workers in China are willing to work for approximately one-fourth of the amount of comparable U.S. workers,
while workers in Mexico, on average, are paid $2.65 per hour. Disparities, as described above, encourage many
American companies to build their production plans around outsourcing. This is good business according to Milton
Friedman, a past senior economist at the University of Chicago. In his book Capitalism and Freedom, he states,
“there is one - and only one - social responsibility of business to use its resources and engage in activities designed
International Business & Economics Research Journal March/April 2014 Volume 13, Number 2
Copyright by author(s); CC-BY 255 The Clute Institute
to increase its profits so long as it stays within the rules of the game, which is to say, engage in open and free
competition without deception or fraud” (Friedman, 1970). While Friedman’s opinions may seem firmly stated and
subjective, many 21
st
century U.S. business executives seem to embrace Friedman’s general feelings and find cheap
labor and more profit a compelling reason to consider manufacturing overseas.
Less Regulatory Costs
The regulatory compliance cost for employing domestic labor can be a potentially bigger component of
total worker cost than wages, per se. Examples of these costs or taxes on business include social security, Medicare,
FICA, OSHA compliance, unemployment insurance, etc. When U.S. businesses consider outsourcing to China,
India, or Mexico, the above labor expenses can be avoided.
Tax Benefits
Several foreign countries, anxious to lure American jobs to their shores, offer enticing broad tax incentives
to U.S. multinational firms. In addition, large U.S. corporations with offshore subsidiaries can utilize the
“unrepatriated earnings” benefits or revenues left in the outsourced country. These earning are not taxed by the
United States government, which has allowed firms like Exxon, Apple, IBM and others to pay much lower income
taxes than they would have normally.
Ability to Downsize at Will
Downsizing or upsizing at will provides American business managers with flexibility when addressing
product demand. However, the Dallas Business Journal noted in 2007 that downsizing has the potential to increase
the amount of law suits brought about by laid-off American workers. Lawsuits can bring implicit and explicit costs
to corporate earnings which can be significantly reduced in foreign labor environments.
Risk Management
According to HorizonTech.com, outsourcing “enables management to turn over to its suppliers certain
classes of risks, such as demand variability and capital investments. This risk is most difficult with the
employment of “in-house” employees and also means that full-time American workers must be paid Social Security,
FICA, etc. not the case with outsourced workers. In addition, outsourced workers can be dropped immediately if
certain projects are not paying for themselves. By contrast full time “in house” employees usually cannot be laid off
as easily.
Quicker Turnaround Time
For business, in general, but especially for smaller firms, when a decision to expand has been made,
companies usually need to interview, hire, and train new employees. This takes time (and can provide slippage in
new product development and marketing). By contrast, outsourcing is often faster and less expensive (in terms of
time and money).
Uncertainty over Political/Business Climate
Uncertainty about the political/economic legislation coming out of Washington is frustrating for American
business and makes it difficult to pursue long-term capital expenditure. Information Weeks 2008 survey revealed
that 25% of American corporate CFOs believed that “uncertainty about the political and business climate” was why
they opted to outsource.
Accelerated Time to Market
Outsourcing allows U.S. companies to access workers who, for the most part, are already trained for jobs
that businesses may need. This could not only save money but it can allow American corporations to get to market
International Business & Economics Research Journal March/April 2014 Volume 13, Number 2
Copyright by author(s); CC-BY 256 The Clute Institute
earlier than if they attempted to interview, hire, and train domestic employees for the same job. The result is often an
accelerated time advantage for firms to be first to market.
Commodification
Large pools of outsourced venders can reduce labor costs or allow for the commodification of physical
resources. This has been one of the advantages that multinational firms have exclusively enjoyed, but it is now
available to smaller companies. In addition, this also provides an opportunity for small businesses to grow faster
than if they had to rely on hiring and training their force. Finally, according to SmallBizTrends.com, it saves small
business the potential costs of regulatory taxes as discussed earlier.
Contractual Certainty
Finally, outsourcing can provide an understood legal contract (which can compensate companies for
potential under-performance, negligence, and/or job failure) between the firm and the vender. This is difficult, if not
impossible, when “in-house” employees are utilized.
The above 10 reasons why American businesses find outsourcing attractive is referenced from Billshrink.
An important observation of the above is that the decision to outsource jobs abroad is complex and not just
based on the quest for less expensive wages, per se. It involves other factors that have simply evolved from the
evolution of globalization itself. Therefore, an attempt to reverse the outsourcing trend may be more intricate and
complex for the U. S. government than can be managed with legislation that has been passed thus far.
WASHINGTON’S RESPONSE TO OUTSOURCING
In President Obama’s recent State of the Union address, he provided a Blueprint for an America Built to
Last. The President’s speech was partially aimed at encouraging U.S. companies to create manufacturing jobs in the
United States, while discouraging outsourcing.
The President’s proposals for reversing American’s job drain consisted of six recommendations to
encourage job growth in the U.S. He further stated that his proposals for job growth would be fully paid for by
closing tax loopholes that encouraged manufacturing and revenue retention overseas. Finally, the President’s
proposals suggested an international minimum tax, lower tax rate for U.S. manufacturing at home, and a tax reform
for American business in general.
The revenue-neutral job creation recommendations provided by the President in his State of the Union
address to Congress are summarized below (Whitehouse, 2012):
1. Remove the tax deduction for companies that move their operations abroad, but offer a 20 percent tax
credit for the expenses of moving operations back to the U.S.
2. Provide a tax incentive specifically for manufacturing domestically.
3. Implement a manufacturing tax credit to encourage job creation in communities that were affected by job
loss.
4. Provide temporary tax credits that would be directed at creating new investments and increased jobs in
clean air manufacturing.
5. Create a tax incentive that would allow American businesses to expense the full cost of investments in new
plant and equipment which would provide tax relief of up to $50 billion for domestic business.
6. Eliminate any loopholes that encourage U.S. firms to transfer profits overseas.
If one compares the more popular reasons why American businesses outsource in the first place, to
Washington’s reaction to dissuading the exporting of jobs - especially manufacturing jobs - there are apparent gaps.
More specifically, President Obama’s proposals, while robust, seem to focus primarily on tax incentives. Of the ten
reasons why American businesses decide to move abroad for manufacturing, only a few are related to tax reasons,
International Business & Economics Research Journal March/April 2014 Volume 13, Number 2
Copyright by author(s); CC-BY 257 The Clute Institute
per se. Therefore, one must as ask, Are the core issues being addressed by Washington? The authors don’t think
so and believe that the focus should be broader in scope and must include education as a central focus. Simply put,
many of the current jobs available in the U.S. today, especially in high technology, go unfilled because American
firms can’t find qualified domestic workers. Hence, labor is sought elsewhere in the world.
IS THE LURE OF CHINA IN FLUX?
Data suggest that the wages for many Chinese workers, as well as shipping costs for goods back to the
U.S., have been rising. By contrast, wages for American workers have remained relatively flat. In addition, there
have been complaints from U.S. firms regarding poor quality and disregard for intellectual property rights from
China. The battle to preserve copy rights and property rights appears to be on-going and often a losing battle for
American companies. Farouk Systems, a major U.S. producer of hair dryers, states that the firm spends over
$500,000 per month to stave off Chinese counterfeiters during the manufacturing process. There is more concern
that if there is a problem with shipped goods from China, it can take a great deal of time to fix it. In addition, now
that the Chinese government has been allowing their currency to rise against the dollar, it can drive up the cost of
doing business in that country. Further, General Electric stated that it plans to bring certain types of manufacturing
jobs back to the U.S., citing rising labor costs in China and lower inventory expenses and faster potential deliveries
(Davidson, 2010).
UNSKILLED AMERICAN WORKERS AND OUTSOURCING
While it may be true that some U.S.-based firms have become disenchanted with the cheaper cost of doing
business in China, the fact remains that America’s labor force needs to be better educated if they are to compete in a
global market. Recent data are not encouraging for the future of the American labor force. It shows that nationwide
only 69 percent of students earn their high school diplomas. That is to say that 7,000 high school students drop out
every school day across America. A breakdown of groups shows that 77% of whites graduate, followed by 56%
Hispanics, 54% African Americans, and 51% American Indians. Hence, the ability for the U.S business sector to
fulfill their need for highly skilled workers - now and in the future - will be a challenge. Based on a recent study
conducted by the Council on Foreign Relations, “Americans going into the labor force today are less educated than
those retiring from it. This phenomenon is unique among developed countries.The report goes on to state that “. . .
as baby boomers (born in the generation after World War II) continue to leave the workforce, companies will have
trouble finding skilled workers to replace them” (Brown, 2013). Unless the U.S. begins to produce more skilled
workers to fill the current gap, American businesses will continue to seek workers elsewhere.
SUMMARY AND CONCLUSIONS
One can build an argument that after the mid-1980s, globalization set the stage for the mobility of resources
around the world. Through the process of free trade, this allowed certain countries to purchase all types of resources,
including labor from other countries, more cheaply than they could provide within their own country. As the
American markets became saturated with imports, it became difficult for U.S. firms to increase their prices to
maintain profit margins. Cost cutting, including job cuts and outsourcing, became a viable alternative. Job loss
continued to rise in the aftermath of the great recession of 2008.
While cheaper labor abroad is likely the center of the decision to outsource for many U. S. companies, it is
not the only reason. Countries like Ireland, China, and India entice American business to manufacture in their
country with specific tax and regulatory benefits that are not available in the U.S. In addition, the America
government, to some degree, encourages domestic firms to outsource by allowing outsourcing expenses to be
deducted from U.S. taxes. The U.S. government is aware of the problem and is trying to address it. However,
Washington’s, proposed solutions to reverse the outsourcing of American jobs appears to be focused on tax
incentives. In the authors’ opinion, Washington’s efforts to date are too focused on tax reductions and not enough on
the longer term solutions.
The authors believe that while tax and other incentives are important to business for the short to
intermediate term and can help reverse outsourcing, the longer term solution must include more education for
International Business & Economics Research Journal March/April 2014 Volume 13, Number 2
Copyright by author(s); CC-BY 258 The Clute Institute
America’s labor force. Because of the magnitude of the problem, it would need to necessitate the coming together of
labor, business, and government at a national conference level.
Federal government policy is currently embodied in a strategy of emphasizing education, infrastructure,
innovation, and existing benefits such as intellectual property protection (Mehlman, 2003). It is the authors view
that employers, as well as the state and federal governments, must stop advocating and supporting outsourcing of
U.S. jobs. Visa, immigration, and tax laws that support outsourcing must be rewritten.
AUTHOR INFORMATION
Prof. Marshall D. Nickles is a professor of Economics at Pepperdine University and has had experience teaching
economics to graduate students for over 40 years. He has served as a board member for profit and non-profit
organizations in the U.S. and China as well as consulted to various companies domestic and foreign. He is a frequent
guest on television and radio and has been quoted in magazines and newspapers domestically and abroad. He
frequently presents research at professional conferences and has published over 55 articles. E-mail:
marshall.nickles@pepperdine.edu
Prof. Jeffrey Schieberl teaches law, negotiations, ethics and management courses in the undergraduate, graduate,
online and executive programs at Pepperdine University. He has served as President/CEO of a corporation, Vice
President of Law and Government Relations of another corporation, Executive Director of an Industry Association
and as a gubernatorial appointee. In addition, Professor Schieberl maintains an active consulting practice. In those
capacities he has made numerous presentations to members of Congress, several state legislatures, and business
organizations. E-mail: jeff.schieberl@pepperdine.edu (Corresponding author)
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This is the report made for "International Trade Course" (National Chengchi University, Taipei, Taiwan) by Darren Tsung-jen Wu, the undergraduate student taking the class. Abstract From 2000 to 2007, 3.2 million numbers of jobs in U.S. have lost, most of which were believed to be the victim of the over-outsourcing occurred in U.S. manufacturing sector. The article is the breakdown to the relationship among outsourcing, production situation and labor union based on the data on U.S. manufacturing sector from 2000 to 2008. The conclusion demonstrates three points: 1) Not all the data of observation covering the time period can be used mainly due to the economic recession in 2000 to 2001 that was proved to be significant outliers by the author; 2) strong collinearity and multicollinearity exist among the explanatory variables i.e. union coverage, union membership, unit labor cost and multifactor productivity and therefore multiple regression model cannot be fitted; and 3) labor union including union coverage and union membership has positive relationship with outsourcing level, while as for relationship with outsourcing, national unit labor cost and multifactor productivity, it is not the case. Keywords: Outsourcing, Labor Union, Productivity
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Faced with rising costs, General Electric is moving production of its new energy-efficient water heater halfway around the world. The country it's leaving? China. The one it's bringing 400 jobs and a newly renovated factory? The United States. A small but growing band of U.S. manufacturers — including giants such as General Electric, NCR and Caterpillar— are turning the seemingly inexorable offshoring movement on its head, bringing some production to the U.S. from far-flung locations such as China. Others that were buying components overseas are switching to U.S. suppliers. Ford Motor said Wednesday that it's bringing nearly 2,000 jobs to its U.S. plants by 2012 from suppliers, including those in Japan, Mexico and India. Experts say the initiatives could moderate job losses that have dramatically shrunk the U.S. manufacturing industry. "I think we're going to start to see a slowing of lost jobs, and we'll see some jobs coming back," says Simon Ellis, an analyst for IDC Manufacturing Insights. "At some point, it will balance out, and we'll reach an equilibrium." There are myriad reasons for the shifts, often called "onshoring" or "reshoring." Chinese wages and shipping costs have risen sharply in the past few years while U.S. salaries have stayed flat, or in some cases, fallen in the recession. Meanwhile, U.S. manufacturers have been frustrated by the sometimes poor quality of goods made by foreign contractors, theft of their intellectual property and long product-delivery cycles that make them less responsive to customer demand.
Article
Offshore outsourcing is being viewed by management of various companies as an attractive operation alternative and as an opportunity to control costs to contract out its IT operations. An offshore outsourcing arrangement is a single decision, the evaluations to outsource and to go offshore are actually made separately. The offshore insourcers typically are multinational companies, which have the means to set up regional branch centers to exploit lower cost and other resource advantages in different countries. The major forces behind this model can be articulated along technological and economic dimensions. Different companies now can outsource various projects either locally or globally with the assistance of appropriate project management. Offshore outsourcing will remain a viable option on the corporate strategic agenda as global market dynamics keep driving companies to acquire IT services from locations that provide the most cost-effective solutions.
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